Question: What are the advantages of a free

> How does the availability of capital influence the theory of optimal capital structure for a multinational enterprise?

> As debt in a firm’s capital structure is increased from no debt to a significant proportion of debt (say, 60%), what tends to happen to the cost of debt, to the cost of equity, and to the overall weighted average cost of capital?

> Answer the following questions: a. What is the “cost of debt” and how is it determined? b. What is the “cost of equity” and how is it determined?

> What, in simple wording, is the objective sought by finding an optimal capital structure?

> a. What is a private equity fund? b. How do they differ from traditional venture capital firms? c. How do private equity funds raise their own capital, and how does this action give them a competitive advantage over local banks and investment funds?

> Answer the following questions: a. What is SEC Rule 144A? b. Why might a foreign firm choose to sell its equity in the United States under SEC Rule 144A?

> Define what is meant by a “Euroequity public share issue.”

> Apart from improving liquidity and escaping from a segmented home market, why might emerging market MNEs further lower their cost of capital by listing and selling equity abroad?

> What is the central problem involved in consolidating the financial statements of a foreign subsidiary?

> Answer the following; a. What is an equity risk premium? b. What is the difference between calculating an equity risk premium using arithmetic returns compared to using geometric returns? c. In Exhibit 13.3, why are arithmetic mean risk premiums always

> Define the following terms: a. Systematic risk. b. Beta (in the Capital Asset Pricing Model).

> What are the differences in the cash flows used in a project point of view analysis and a parent point of view analysis?

> Global integration has given many firms access to new and cheaper sources of funds beyond those available in their home markets. What are the dimensions of a strategy to capture this lower cost and greater availability of capital?

> The “Riddle” The riddle is an attempt to explain under what conditions an MNE would have a higher or lower debt ratio and beta than its domestic counterpart. Explain and diagram these conditions.

> Theoretically MNEs should be in a better position than their domestic counterparts to support higher debt ratios, because their cash flows are diversified internationally. However, recent empirical studies have come to the opposite conclusion. These stud

> It has been suggested that firms located in illiquid and segmented emerging markets could follow Novo’s proactive strategy to internationalize their own cost of capital. What are the preconditions that would be necessary to succeed in such a proactive st

> a. What was Novo’s strategy to internationalize its cost of capital? b. What is the evidence that Novo’s strategy succeeded?

> Novo believed that the Danish capital market was segmented from world capital markets. Explain the six characteristics of the Danish equity market that were responsible for its segmentation.

> Answer the following: a. Why do unexpected exchange rate changes contribute to operating exposure, but expected exchange rate changes do not? b. Explain the time horizons used to analyze unexpected changes in exchange rates.

> What reasons can you give for the observation that intrafirm trade is now greater than trade between nonaffiliated exporters and importers?

> For what reason might an exporter use standard international trade documentation (letter of credit, draft, order bill of lading) on an intrafirm export to its parent or sister subsidiary?

> Why might different documentation be used for an export to a nonaffiliated foreign buyer who is a new customer, as compared with an export to a nonaffiliated foreign buyer to whom the exporter has been selling for many years?

> Various governments have established agencies to insure against nonpayment for exports and/or to provide export credit. This shifts credit risk away from private banks and to the citizen taxpayers of the country whose government created and backs the age

> Assume that Great Britain charges a duty of 10% on shoes imported into the United Kingdom. Swishing Shoe Company, in question 11, discovers that it can manufacture shoes in Ireland and import them into Great Britain free of any import duty. What factor

> Swishing Shoe Company of Durham, North Carolina, has received an order for 50,000 cartons of athletic shoes from Southampton Footware, Ltd., of Great Britain, payment to be in British pounds sterling. The shoes will be shipped to Southampton Footware und

> In the context of evaluating foreign investment proposals, how should a multinational firm evaluate cash flows in the host foreign country that are blocked from being repatriated to the firm’s home country?

> Inca Breweries of Lima, Peru, has received an order for 10,000 cartons of beer from Alicante Importers of Alicante, Spain. The beer will be exported to Spain under the terms of a letter of credit issued by a Madrid bank on behalf of Alicante Importers. T

> List the steps involved in the export of lumber from Portland, Oregon, to Yokohama, Japan, using a confirmed letter of credit, payment to be made in 120 days.

> List the steps involved in the export of computer hard disk drives from Penang, Malaysia, to San Jose, California, using an unconfirmed letter of credit authorizing payment on sight.

> Why would an exporter insist on a confirmed letter of credit?

> Define the following terms: a. Operating exposure b. Economic exposure c. Competitive exposure

> Identify each party to a letter of credit (L/C), and indicate its responsibility.

> What is the major difference between “currency risk” and “risk of noncompletion”? How are these risks handled in a typical international trade transaction?

> Explain the difference between a letter of credit (L/C) and a draft. How are they linked?

> What methods might the U.S. Internal Revenue Service use to determine whether allocations of distributed overhead are being fairly allocated to foreign subsidiaries?

> What is the difference between a “management fee”, a “technical assistance fee”, and a “license fee for patent usage”? Should they be treated differently for income tax purposes?

> Should the anticipated internal rate of return (IRR) for a proposed foreign project be compared to (1) alternative home country proposals, (2) returns earned by local companies in the same industry and/or risk class, or (3) both? Justify your answer.

> What are the differences between a “license fee” and a “royalty fee”? Do you think license and royalty fees should be covered by the tax rules that regulate transfer pricing? Why?

> Subsidiary Alpha in Country Able faces a 40% income tax rate. Subsidiary Beta in Country Baker faces only a 20% income tax rate. At present each subsidiary imports from the other an amount of goods and services exactly equal in monetary value to what eac

> In the context of unbundling cash flows from subsidiary to parent, explain how each of the following creates a conduit. What are the tax consequences of each? a. Imports of components from the parent. b. Payment to cover overhead expenses of parent manag

> What does this term mean? Why would unbundling be needed for international cash flows from foreign subsidiaries, but not for domestic cash flows between related domestic subsidiaries and their parent?

> Each of the following factors is sometimes a constraint on the free movement of funds internationally. Why would a government impose such a constraint? How might the management of a multinational argue that such a constraint is not in the best interests

> Answer the following: a. How can an MNE diversify operations? b. How can an MNE diversify financing?

> What is the difference between a foreign branch and a foreign subsidiary of a home-country bank?

> During the era of the French franc, France imposed a rule on its banks and subsidiaries of international companies operating in France that precluded those subsidiaries from netting cash flow obligations between France and non-French related entities. Wh

> Electro-Beam Company generates and disburses cash in the currencies of four countries, Singapore, Malaysia, Thailand, and Vietnam. What would be the characteristics you might consider if charged with designing a centralized cash depository system for Ele

> The operating cash cycle of a multinational firm goes from cash collection from customers, cash holding for anticipated transaction needs (the transaction motive for holding cash), possible cash repositioning into another currency, and eventual cash disb

> Capital projects provide both operating cash flows and financial cash flows. Why are operating cash flows preferred for domestic capital budgeting, but financial cash flows given major consideration in international projects?

> Explain the difference between the “transaction motive” and the “precautionary motive” for holding cash.

> Merlin Corporation of the United States imports raw material from Indonesia on terms of 2/10, net 30. Merlin expects a 36% devaluation of the Indonesian rupiah at any moment. Should Merlin take the discount? Discuss aspects of the problem.

> Why might the time lag for intramultinational firm accounts receivable and payable (that is, all received or paid to a parent or sister subsidiary) differ substantially from the time lags reported for transactions with unaffiliated companies?

> Japanese industry is often praised for its “just-in-time” inventory practice between industrial buyers and industrial sellers. In the context of the “Day’s Receivables” turnover in Exhibit 19.5, what is the comparative impact of the “just-in-time” system

> Roberts and Sons, Inc., of Great Britain has just purchased inventory items costing kroner 1,000,000 from a Swedish supplier. The supplier has quoted terms 3/15, net 45. Under what conditions might Roberts and Sons reasonably take the discount, and when

> Merck is an MNE that has undertaken contractual hedging of its operating exposure. a. How do they accomplish this task? b. What assumptions do they make in order to justify contractual hedging of their operating exposure? c. How effective is such contra

> Assume a firm purchases inventory with one foreign currency and sells it for another foreign currency, neither currency being the home currency of the parent or subsidiary where the manufacturing process takes place. What can the firm do to reduce the am

> Is any accounting exposure created during the course of a firm’s operating cycle?

> Is any operating exposure created during the course of a firm’s operating cycle?

> Financial strategies are directly related to the OLI Paradigm. a. Explain how proactive financial strategies are related to OLI. b. Explain how reactive financial strategies are related to OLI.

> Assuming the flow illustrated in Exhibit 19.1, where does transaction exposure begin and end if inputs are purchased with one currency at t1, and proceeds from the sale are received at t5? Is there more than one interval of transaction exposure?

> As a financial manager, would you prefer that the accounts payable period end before, at the same time, or after the beginning of the accounts receivable period? Explain.

> Exhibit 19.1 shows the accounts payable period to be longer than the inventory period. Could this be otherwise, and what would be the cash implications?

> The operating cycle of a firm, domestic or multinational, consists of the following four time periods. For each of these periods, explain whether a cash outflow or a cash inflow is associated with the beginning and the end of the period. a. Quotation per

> In the context of unbundling cash flows from subsidiary to parent, why might a host government be more lenient in its treatment of fees than its treatment of dividends? What difference does it make to the subsidiary and to the parent?

> The OLI Paradigm is an attempt to create an overall framework to explain why MNEs choose FDI, rather than serve foreign markets through alternative modes. Explain what is meant by the O, the L, and the I of the paradigm.

> A strongly competitive home market can sharpen a firm’s competitive advantage relative to firms located in less competitive markets. Explain what is meant by the “competitive advantage of nations.”

> Explain briefly how economies of scale and scope can be developed in production, marketing, finance, research and development, transportation, and purchasing.

> In deciding whether to invest abroad, management must first determine whether the firm has a sustainable competitive advantage that enables it to compete effectively in the home market. What are the necessary characteristics of this competitive advantage

> MNEs strive to take advantage of market imperfections in national markets for products, factors of production, and financial assets. Large international firms are better able to exploit such imperfections. What are their main competitive advantages?

> What is the essence of the theory of comparative advantage?

> As a firm evolves from purely domestic into a true multinational enterprise, it must consider (1) its competitive advantages, (2) its production location, (3) the type of control it wants to have over any foreign operations, and (4) how much monetary cap

> The United States has a law prohibiting U.S. firms from bribing foreign officials and business persons, even in countries where bribery is a normal practice. Some U.S. firms claim this places the United States at a disadvantage compared to host-country f

> a. What are the traditional methods for countries to implement protectionism? b. What are some typical non-tariff barriers to trade? c. How can MNEs overcome host country protectionism?

> a. Why should a foreign project be evaluated from both a project and a parent viewpoint? b. Which viewpoint, project or parent, gives results closer to the traditional meaning of net present value in capital budgeting? c. Which viewpoint gives results c

> Respond to the following: a. Define protectionism and identify the industries that are typically protected. b. Explain the “infant industry” argument for protectionism.

> What is the primary difference between losses from transaction exposure, operating exposure, and translation exposure?

> Identify and explain the main types of cultural and institutional risks, except protectionism.

> Define the following terms: a. Transfer risk. b. Blocked funds.

> The following operating strategies, among others, are expected to reduce damage from political risk. Explain each, and how it reduces damage. a. Local sourcing. b. Facility location. c. Control of technology. d. Thin equity base. e. Multiple-source borro

> Answer the following questions: a. What is OPIC? b. What types of political risks can OPIC insure against?

> An investment agreement spells out specific rights and responsibilities of both the foreign firm and the host government. What are the main financial policies that should be included in an investment agreement?

> Answer the following questions: a. What is meant by the term “governance risk”? b. What is the most important type of governance risk?

> The term “cross-border strategic alliance” conveys different meanings to different observers. What are the meanings?

> What are the advantages and disadvantages of serving a foreign market through a greenfield foreign direct investment compared to an acquisition of a local firm in the target market?

> Capital budgeting for a foreign project is considerably more complex than the domestic case. What are the factors that add complexity?

> What are the advantages and disadvantages of forming a joint venture to serve a foreign market compared to serving that market with a wholly owned production subsidiary?

> What are the advantages and disadvantages of licensing and management contracts compared to producing abroad?

> What is hyperinflation, and what are the consequences for translating foreign financial statements?

> What are the advantages and disadvantages of limiting a firm’s activities to exporting compared to producing abroad?

> The decision about where to invest abroad is influenced by behavioral factors. a. Explain the behavioral approach to FDI. b. Explain the international network theory explanation of FDI.

> The currency risk associated with international diversification is a serious concern for portfolio managers. Is it possible for currency risk ever to benefit the portfolio’s return?

> How, according to portfolio theory, is the risk of the portfolio measured exactly?

> What types of risk are present in a diversified portfolio? Which type of risk remains after the portfolio has been diversified?

> How does the diversification of a portfolio change its expected returns and expected risks? Is this in principle any different for internationally diversified portfolios?

> When you are constructing your portfolio, you know you want to include Cementos de Mexico (Mexico), but you cannot decide whether you wish to hold it in the form of ADRs traded on the NYSE, or directly through purchases on the Mexico City Bolsa. a. Does

> Explain how currency swaps can hedge foreign exchange operating exposure. What are the accounting advantages of currency swaps?

> Firms with operations and assets across the globe, true MNEs, are in many ways as international in composition as the most internationally diversified portfolio of unrelated securities. Why do investors not simply invest in MNEs traded on their local exc

> As the newest member of the asset allocation team in your firm, you constantly find yourself being quizzed by your fellow group members. The topic is international diversification. One analyst asks you the following question: Security prices are driven

> Conceptually, how do the Sharpe and Treynor performance measures define risk differently? Which do you believe is a more useful measure in an internationally diversified portfolio?

> The key to managing operating exposure at the strategic level is for management to recognize a disequilibrium in parity conditions when it occurs, and to be prepositioned to react most appropriately. How can this task best be accomplished?

> The benefits of portfolio construction, domestically or internationally, arise from the lack of correlation among assets and markets. The increasing globalization of business is expected to change these correlations over time. How do you believe they wil