All Related Questions of Financial Management

Q: Home mortgage rates are determined by market forces and individual borrowers can't

Home mortgage rates are determined by market forces and individual borrowers can't do much about them. The time it takes to pay off a mortgage loan, however, varies a great deal with the size of the...

Q: The Paragon Company has sales of $2,000 with a

The Paragon Company has sales of $2,000 with a cost ratio of 60%, current ratio of 1.5, inventory turnover ratio (based on cost) of 3.0, and average collection period (ACP) of 45 days. Complete the f...

Q: You are given the following selected financial information for The Blatz Corporation

You are given the following selected financial information for The Blatz Corporation. Calculate accounts receivable, inventory, current assets, current liabilities, long-term debt, equity, ROA, a...

Q: Companies often use ratios as a basis for planning. The technique

Companies often use ratios as a basis for planning. The technique is to assume the business being planned will achieve targeted levels of certain ratios and then calculate the financial statement amo...

Q: Explain the following terms: privately held company, publicly traded company

Explain the following terms: privately held company, publicly traded company, listed company, OTCBB, NASDAQ, BATS, IPO, prospectus, and red herring.

Q: Tribke Enterprises collected the following data from their financial reports for 20X3

Tribke Enterprises collected the following data from their financial reports for 20X3: Complete the following abbreviated financial statements and calculate per share ratios indicated. (Hint: Start...

Q: Milford Inc. has the following summarized financial statements ($000):

Milford Inc. has the following summarized financial statements ($000): Milford’s equity investors have typically demanded an expected return of at least 25% before they will buy t...

Q: Prahm & Associates had EBIT of $5M last year. The

Prahm & Associates had EBIT of $5M last year. The firm carried an average debt of $15M during the year on which it paid 8% interest. The company paid no dividends and sold no new stock. At the begi...

Q: Slattery Industries reported the following financial information for 20X2:

Slattery Industries reported the following financial information for 20X2: The firm expects revenues costs, expenses (excluding depreciation), and working capital to grow at 10% per year for the nex...

Q: Epsom Co. manufactures furniture and sells about $40 million a

Epsom Co. manufactures furniture and sells about $40 million a year at a gross margin of 45%. a. What is the maximum inventory level the firm can carry to maintain an inventory turnover (based on CO...

Q: Norton Industries recorded total cost of goods sold for 20X2 of $

Norton Industries recorded total cost of goods sold for 20X2 of $6.5 million. Norton had the following inventory balances for the months indicated (end of period balances): a. Compute inventory turn...

Q: A group of investors is considering buying the Wheelwright Corporation, but

A group of investors is considering buying the Wheelwright Corporation, but does not want to contribute to the company’s financial support after the purchase. Wheelwrightâ€...

Q: Axtel Company has the following financial statements: /

Axtel Company has the following financial statements: In addition, Axtel retired stock for $1,000,000 and paid a dividend of $1,727,000. Depreciation for the year was $1,166,000. Construct a State...

Q: Fred Klein started his own business recently. He began by depositing

Fred Klein started his own business recently. He began by depositing $5,000 of his own money (equity) in a business account. Once he’d done that his balance sheet was as follows:...

Q: The Blandings Home Construction Company purchased a new crane for $350

The Blandings Home Construction Company purchased a new crane for $350,000 this year. They sold the old crane for $80,000. At the time it had a net book value of $20,000. Assume any profit on the s...

Q: Define the following terms: primary market, secondary market, capital

Define the following terms: primary market, secondary market, capital market, money market.

Q: The Dalmatian Corporation expects the following summarized financial results this year ($

The Dalmatian Corporation expects the following summarized financial results this year ($000) Use the EFR relation to estimate Dalmatian’s external funding requirements under the f...

Q: The Waterford Wax Company had the following current account activity last year

The Waterford Wax Company had the following current account activity last year. a. Calculate and display the current account detail required for the Cash From Operating Activities section of the Sta...

Q: Lytle Trucking projects a $3.2 million EBIT next year

Lytle Trucking projects a $3.2 million EBIT next year. The firm’s marginal tax rate is 40%, and it currently has $8 million in long-term debt with an average coupon rate of 8%. Management is project...

Q: Use the interest rate model to solve the following problem. One

Use the interest rate model to solve the following problem. One-year treasury securities are yielding 12% and two-year treasuries yield 14%. The maturity risk premium is zero for one-year debt and 1%...

Q: Inflation is expected to be 5% next year and a steady

Inflation is expected to be 5% next year and a steady 7% each year thereafter. Maturity risk premiums are zero for one-year debt but have an increasing value for longer debt. One-year government debt...

Q: Economists have forecast the following yearly inflation rates over the next 10

Economists have forecast the following yearly inflation rates over the next 10 years: Calculate the inflation components of interest rates on new bonds issued today with terms varying from one (1) t...

Q: The Owl Corporation is planning for 20X2. The firm expects to

The Owl Corporation is planning for 20X2. The firm expects to have the following financial results in 20X1 ($000). Management has made the following planning assumptions: Income Statement Revenue w...

Q: Assume that interest rates on federal government bonds are as follows:

Assume that interest rates on federal government bonds are as follows: Do the theories of the shape of the yield curve offer any insights into this rate pattern? Discuss the expectations, liquidity...

Q: What interest rates are implied by the following lending arrangements?

What interest rates are implied by the following lending arrangements? a. You borrow $500 and repay $555 in one year. b. You lend $1,850 and are repaid $2,078.66 in two years. c. You lend $750 and are...

Q: How long does it take for the following to happen?

How long does it take for the following to happen? a. $856 grows into $1,122 at 7%. b. $450 grows into $725.50 at 12% compounded monthly. c. $5,000 grows into $6724.44 at 10% compounded quarterly.

Q: Working capital spontaneously finances itself because it's being turned over all the

Working capital spontaneously finances itself because it's being turned over all the time. Is this statement true, false, or a little of both? Exactly what is meant by spontaneous financing? Does w...

Q: Briefly describe the interest-debt planning problem and the approach that

Briefly describe the interest-debt planning problem and the approach that leads to its solution. (Use a few brief sentences. Don't list the procedural steps or give a numerical example.)

Q: Sam Lawson is a vice president at a large communications firm.

Sam Lawson is a vice president at a large communications firm. His compensation includes a salary of $400,000, a bonus of $200,000 and a stock option package that allows him to purchase 30,000 shares...

Q: Branson Inc. has sold product to the Brandywine Company, a

Branson Inc. has sold product to the Brandywine Company, a major customer, for $20,000. As a courtesy to Brandywine, Branson has agreed to take a note due in two years for half of the amount due, and...

Q: Paladin Enterprises manufactures printing presses for small-town newspapers that are

Paladin Enterprises manufactures printing presses for small-town newspapers that are often short of cash. To accommodate these customers, Paladin offers the following payment terms: 1/3 on delivery...

Q: Charlie owes Joe $8,000 on a note which is

Charlie owes Joe $8,000 on a note which is due in five years with accumulated interest at 6%. Joe has an investment opportunity now that he thinks will earn 18%. There’s a chance, however, that it w...

Q: John Cleaver's grandfather died in 2015 and left him a trunk that

John Cleaver's grandfather died in 2015 and left him a trunk that had been locked in his attic for years. At the bottom of the trunk John found a packet of 50 U.S. Savings Bonds that had never been c...

Q: The Hardigree Hamburger chain is a closely held corporation with 400,

The Hardigree Hamburger chain is a closely held corporation with 400,000 shares of common stock outstanding. The owners would like to take the company public by issuing another 600,000 shares and sell...

Q: The Protek Company is a large manufacturer and distributor of electronic components

The Protek Company is a large manufacturer and distributor of electronic components. Because of some successful new products marketed to manufacturers of personal computers, the firm has recently und...

Q: At the close of 20X3, the financial statements of Northern Manufacturing

At the close of 20X3, the financial statements of Northern Manufacturing were as follows. In addition, Northern paid dividends of $1.2M and sold new stock valued at $1.0M during 20X3. Use the CASHF...

Q: Comparative historical financial statements for Northern Manufacturing of the preceding problem are

Comparative historical financial statements for Northern Manufacturing of the preceding problem are as follows. a. Use the ANALYS program to prepare common size statements and a set of financial ra...

Q: Blanchard Inc. would like to borrow $12 million for 20

Blanchard Inc. would like to borrow $12 million for 20 years through a bond issue but has been having difficulty finding lenders willing to advance that much. The firm’s investment banker has advised...

Q: Your friend Sally just returned from a trip to New York where

Your friend Sally just returned from a trip to New York where she was very impressed by a visit to the stock market. Is it correct to say that she visited the stock market? What exactly did Sally vi...

Q: Lap Dogs Inc. is planning for next year and has the

Lap Dogs Inc. is planning for next year and has the following summarized results so far ($000): The firm pays interest of 12% on all borrowing and is subject to an overall tax rate of 38%. It paid...

Q: Ralph Renner just borrowed $30,000 to pay for a

Ralph Renner just borrowed $30,000 to pay for a new sports car. He took out a 60-month loan and his car payments are $761.80 per month. What is the effective annual interest rate (EAR) on Ralph’s lo...

Q: Latigoe Inc. has the following financial statements for 20X8. In

Latigoe Inc. has the following financial statements for 20X8. In addition, the company paid stockholders dividends of $2.9 million and received $4.8 from the sale of new stock. No fixed assets were...

Q: Fitch Inc’s financial statements are as follows: /

Fitch Inc’s financial statements are as follows: Fitch also sold stock for $2.5 million and paid dividends of $3.1 million. No fixed assets were retired during the year. (Hint: Th...

Q: The Libris Publishing Company had revenues of $200 million this year

The Libris Publishing Company had revenues of $200 million this year and expects a 50% growth to $300 million next year. Costs and expenses other than interest are forecast at $250 million. The firm...

Q: Calculate the rate Nu-Mode in the last problem should expect

Calculate the rate Nu-Mode in the last problem should expect to pay on a two-year loan. Assume a 4% default risk premium and liquidity and maturity risk premiums of ¾% due to the longer term. Inflat...

Q: Keena is saving money so she can start a two-year

Keena is saving money so she can start a two-year graduate school program two years from now. She doesn’t want to take any chances going grad school, so she’s planning to invest her savings in the lo...

Q: Adams Inc. recently borrowed money for one year at 9%.

Adams Inc. recently borrowed money for one year at 9%. The pure rate is 3%, and Adams’ financial condition warrants a default risk premium of 2% and a liquidity risk premium of 1%. There is little o...

Q: A bond that pays 10% interest compounded annually on a $

A bond that pays 10% interest compounded annually on a $1,000 face value will mature in 20 years. The interest rate is now 12%. What should the bond’s market price be?

Q: Daubert, Inc. planned to issue and sell at par 10

Daubert, Inc. planned to issue and sell at par 10-year, $1,000 face value bonds totaling $400 million next month. The bonds have been printed with a 6% coupon rate. Since that printing, however, Moo...

Q: Describe the process that occurs when an investor places an order with

Describe the process that occurs when an investor places an order with a broker to buy or sell stocks under the market maker/specialist system.

Q: Smithson Co.'s Class A bonds have 10 years to go

Smithson Co.'s Class A bonds have 10 years to go until maturity. They have a $1,000 face value and carry coupon rates of 8%. Approximately what do the bonds yield at the following prices? a. $770? b...

Q: Hoste Corp. issued a $1,000 face value 20

Hoste Corp. issued a $1,000 face value 20-year bond seven years ago with a 12% coupon rate. The bond is currently selling for $1,143.75. What is its yield to maturity (YTM)?

Q: The interest rate outlook for Montrose Inc., a large, financially

The interest rate outlook for Montrose Inc., a large, financially sound company, is reflected in the following information: (1) The pure rate of interest is 4%. (2) Inflation is expected to increase...

Q: Ernie Griffin just purchased a 5-year zero coupon corporate bond

Ernie Griffin just purchased a 5-year zero coupon corporate bond for $680.60 and plans to hold it until maturity. Assume Ernie has a marginal tax rate of 25%. a. Calculate Ernie’s after-tax cash fl...

Q: Apollo's Beta bond has just reached the end of its period of

Apollo's Beta bond has just reached the end of its period of call protection, has 10 years to go until maturity and has a face value of $1,000. Its coupon rate is 16%, and the interest rate is curren...

Q: Sally Guthrie is looking for an investment vehicle that will double her

Sally Guthrie is looking for an investment vehicle that will double her money in five years. a. What interest rate, to the nearest whole percentage, does she have to receive? b. At that rate, how l...

Q: Your friend Marvin is excited because he believes he’s found an investment

Your friend Marvin is excited because he believes he’s found an investment bargain. A broker at Quick Cash Investments has offered him an opportunity to buy a bond issued by Galveston Galleries Inc....

Q: Pacheco Inc. issued convertible bonds 10 years ago. Each bond

Pacheco Inc. issued convertible bonds 10 years ago. Each bond had an initial term of 30 years, had a face value of $1,000, paid a coupon rate of 11%, and was convertible into 20 shares of Pacheco stoc...

Q: Fix-It Inc. recently issued 10-year, $

Fix-It Inc. recently issued 10-year, $1,000 par value bonds at an 8% coupon rate. a. Two years later, similar bonds are yielding investors 6%. At what price are Fix-Its bonds selling? b. What would t...

Q: The Mariposa Co. has two bonds outstanding. One was issued

The Mariposa Co. has two bonds outstanding. One was issued 25 years ago at a coupon rate of 9%. The other was issued 5 years ago at a coupon rate of 9%. Both bonds were originally issued with terms...

Q: What is meant by transparency in the context of trading stocks on

What is meant by transparency in the context of trading stocks on an exchange?

Q: Mountain Sports Inc borrowed money for two years last week at 12

Mountain Sports Inc borrowed money for two years last week at 12%. The pure rate is 2%, and Mountain’s financial condition warrants a default risk premium of 3% and a liquidity risk premium of 2%. T...

Q: John Wilson is a conservative investor who has asked your advice about

John Wilson is a conservative investor who has asked your advice about two bonds he is considering. One is a seasoned issue of the Capri Fashion Company, which was first sold 22 years ago at a face v...

Q: Softek has two potentially big-selling products under development. Alpha

Softek has two potentially big-selling products under development. Alpha, the first new product, seems very likely to catch on and is expected to drive the firm's growth rate to 25% for the next two...

Q: General Machine Works Inc. (GMW) has been losing money

General Machine Works Inc. (GMW) has been losing money for some time but has managed to maintain an annual dividend of $1.. The company’s strategy is to restructure by getting smaller while working o...

Q: Sudsy Inc. recently paid an annual dividend of $1.

Sudsy Inc. recently paid an annual dividend of $1.00 per share. Analysts expect that amount to be paid for three years after which dividends will grow at a constant 5% per year indefinitely. The sto...

Q: Apollo's Alpha bond was issued 10 years ago for 30 years with

Apollo's Alpha bond was issued 10 years ago for 30 years with a face value of $1,000. Interest rates were very high at the time, and the bond's coupon rate is 20%. The interest rate is now 10%. a. A...

Q: Apollo’s Alpha-1 bond was issued at a time when interest

Apollo’s Alpha-1 bond was issued at a time when interest rates were even higher. It has a coupon rate of 22%, a $1,000 face value, an initial term of 30 years, and is now 13 years old. Calculate its...

Q: The following preferred stocks are returning 8.5% to their

The following preferred stocks are returning 8.5% to their owners: Calculate the prices at which they were issued.

Q: A $1,000 par value, 30-year bond

A $1,000 par value, 30-year bond is 5 years old. It pays interest once a year at an annually compounded coupon rate of 12% The market is returning 8% on comparable bonds. What is the bond’s market p...

Q: The Rollins Metal Company is engaged in a long-term planning

The Rollins Metal Company is engaged in a long-term planning process and is trying to choose among several strategic options, which imply different future growth rates for the company. Management fee...

Q: What problems does an institutional investor face when it places a very

What problems does an institutional investor face when it places a very large buy or sell order for a block of stock through an exchange.

Q: Jake Cornwall just bought a $1,000 par value,

Jake Cornwall just bought a $1,000 par value, 8% coupon rate, 30-year bond of the Pristine Corp. Interest rates had risen somewhat between the time the coupon rate was set and the bond was issued, so...

Q: Lindstrom Corp. reported earnings after tax of $2,160

Lindstrom Corp. reported earnings after tax of $2,160,000 last year along with basic EPS of $3.00. All of Lindstrom’s bonds are convertible, and if converted, would increase the number of shares of t...

Q: Harvester Inc. has net income of $75,000,

Harvester Inc. has net income of $75,000,000 and 15,000,000 shares of common stock outstanding. Several years ago it issued 10,000, 8% coupon, 30 year convertible debentures at a par value of $1,000....

Q: Caruthers Inc. is a small manufacturing firm and has the following

Caruthers Inc. is a small manufacturing firm and has the following summarized balance sheet. The firm is interested in acquiring a fleet of ten company cars for its sales staff. The cars have an ec...

Q: Henderson Engineering Ltd. just leased a computer aided design system for

Henderson Engineering Ltd. just leased a computer aided design system for five years with annual payments of $12,000 payable at the end of each year. The lease contains a provision that allows Hender...

Q: Taunton Manufacturing Inc. is a machine shop in Taunton Massachusetts.

Taunton Manufacturing Inc. is a machine shop in Taunton Massachusetts. The firm recently leased a drill press for a 20-year term at payments of $9,000 per year payable at year-end. No residual value...

Q: The Altoona Company issued a 25-year bond 5 years ago

The Altoona Company issued a 25-year bond 5 years ago with a face value of $1,000. The bond pays interest semiannually at a 10% annual rate. a. What is the bond's price today if the interest rate on...

Q: Wings Inc. is a commuter airline that serves the Boston area

Wings Inc. is a commuter airline that serves the Boston area. Wings plans to lease a new plane through Nantucket Capital Inc. The lease term is fifteen years, and no residual value is expected at it...

Q: Suppose Wings and Nantucket of the last problem agree to assume a

Suppose Wings and Nantucket of the last problem agree to assume a $300,000 residual value for the plane at the end of the lease. How much will wings have to pay monthly to give Nantucket its 12% retu...

Q: Calculate the market price of a $1,000 face value

Calculate the market price of a $1,000 face value bond under the following conditions.

Q: Describe the sectors into which economists divide an industrialized economy and outline

Describe the sectors into which economists divide an industrialized economy and outline the financial flows between them.

Q: Paul Dargis has analyzed five stocks and estimated the dividends they will

Paul Dargis has analyzed five stocks and estimated the dividends they will pay next year as well as their prices at the end of the year. His projections are shown below. Compute the dividend yield,...

Q: Charles Jackson, the founder and president of the Jackson Company is

Charles Jackson, the founder and president of the Jackson Company is concerned about his firm’s image in the financial community. The concern arose when he went to the bank for a one-year loan and wa...

Q: Threads Inc. manufactures stylish clothing for teenagers. The firm has

Threads Inc. manufactures stylish clothing for teenagers. The firm has a beta of 1.4 and earned a return on equity of 20% last year. However, a new financial crisis has just hit the stock market and...

Q: The stocks in the problem 11 have the following betas.

The stocks in the problem 11 have the following betas. Calculate Laurel’s portfolio beta for last year and for this year. Assume that the changes in investment (value) come from...

Q: Garrett Corp. has been going through a difficult financial period.

Garrett Corp. has been going through a difficult financial period. Over the past three years, its stock price has dropped from $50.00 to $18.00 per share. Throughout this downturn, Garrett has manag...

Q: The Charming Co. manufactures decorating products. Treasury bills currently yield

The Charming Co. manufactures decorating products. Treasury bills currently yield 5.4%, and the market is returning 8.1%. a. Calculate the Charming Co.'s beta from its characteristic line as depicted...

Q: The return on Holland-Wilson Inc. (HWI) stock

The return on Holland-Wilson Inc. (HWI) stock over the last three years is shown below along with the market’s return for the same period. Plot HWI’s return again...

Q: You have recently purchased stock in Topical Inc. which has returned

You have recently purchased stock in Topical Inc. which has returned between 7% and 9% over the last three years. Your friend, Bob, has criticized your purchase and insists that you should have inves...

Q: Erin Behlen has a three-stock portfolio and is interested in

Erin Behlen has a three-stock portfolio and is interested in estimating its overall return next year. She has $25,000 invested in Forms Corp., which has a beta of 1.3; $75,000 in Crete Corp. with a b...

Q: The CFO of Ramekin Pottery Inc. is concerned about holding up

The CFO of Ramekin Pottery Inc. is concerned about holding up the price of the company’s stock. He’s asked you to do an analysis starting with an estimate of the return investors are likely to requir...

Q: Describe the underlying meaning of compounding and compounding periods. How does

Describe the underlying meaning of compounding and compounding periods. How does it relate to time value? Include the idea of an effective annual rate (EAR). What is the annual percentage rate (APR)?...

Q: Seth Harris is an avid investor who likes to speculate on stock

Seth Harris is an avid investor who likes to speculate on stock price changes. Lately he’s become bored with the slow movement of most stock prices and thinks options might be more exciting. He’s be...

Q: Whole Foods Inc. paid a quarterly dividend of $0.

Whole Foods Inc. paid a quarterly dividend of $0.47 recently. Treasury bills are yielding 4%, and the average stock is returning about 11%. Whole Foods is a stable company. The return on its stock r...

Q: Seattle Software Inc. recently paid an annual dividend of $1

Seattle Software Inc. recently paid an annual dividend of $1.95 per share and is expected to grow at a 15% rate indefinitely. Short term federal government securities are paying 4% while an average s...

Q: Bergman Corp. has experienced zero growth over the last seven years

Bergman Corp. has experienced zero growth over the last seven years paying an annual dividend of $2.00 per share. Investors generally expect this performance to continue. Bergman stock is currently s...

Q: Weisman Electronics of the previous problem is considering acquiring an unrelated business

Weisman Electronics of the previous problem is considering acquiring an unrelated business. Management thinks the move could change the firm’s stock price by moving its beta up or down and decreasing...

Q: Broken Wing Airlines just paid an annual dividend of $2,

Broken Wing Airlines just paid an annual dividend of $2, has a beta of 1.3, and a growth rate of 6% for the foreseeable future. The current return on the market is 10% and Treasury bills earn 4%. If...

Q: Lipson Ltd. expects a constant growth rate of 5% in

Lipson Ltd. expects a constant growth rate of 5% in the future. Treasury bills yield 8% and the market is returning 13% on an average issue. Lipson's last annual dividend was $1.35. The company's be...

Q: Wayne Merritt drives from Cleveland to Chicago frequently and has noticed that

Wayne Merritt drives from Cleveland to Chicago frequently and has noticed that traffic and weather make a big difference in the time it takes to make the trip. As a result, he has a hard time plannin...

Q: Suppose dice had four sides instead of six, so rolling a

Suppose dice had four sides instead of six, so rolling a single die would produce equally likely numbers from one to four, and rolling two dice would produce numbers from two to eight. a. Compute th...

Q: Nu-Mode Fashions Inc. manufactures quality women’s wear, and

Nu-Mode Fashions Inc. manufactures quality women’s wear, and needs to borrow money to get through a brief cash shortage. Unfortunately, sales are down, and lenders consider the firm risky. The CFO h...

Q: How does High Frequency Trading (HFT) work? How do

How does High Frequency Trading (HFT) work? How do regulators feel about HFT?

Q: The Anderson Pipe Co. just paid an annual dividend of $

The Anderson Pipe Co. just paid an annual dividend of $3.75 and is expected to grow at 8% for the foreseeable future. Harley Bevins generally demands a return of 9% when he invests in companies simila...

Q: Cavanaugh Construction specializes in designing and building custom homes. Business has

Cavanaugh Construction specializes in designing and building custom homes. Business has been excellent, and Cavanaugh projects a 10% growth rate for the foreseeable future. The company just paid a $...

Q: Hamstring Inc. is considering a project with the following cash flows

Hamstring Inc. is considering a project with the following cash flows: The company is reluctant to consider projects with paybacks of more than three years. If projects pass the payback screen, the...

Q: Project Alpha requires an initial outlay of $35,000 and

Project Alpha requires an initial outlay of $35,000 and results in a single cash inflow of $56,367.50 after five years. a. If the cost of capital is 8% what are Alpha's NPV and PI? Is the project acc...

Q: The Sampson Company is considering a project that requires an initial outlay

The Sampson Company is considering a project that requires an initial outlay of $75,000 and produces cash inflows of $20,806 each year for five years. Sampson's cost of capital is 10%. a. Calculate...

Q: Tutak Industries is considering a project requiring an initial investment of $

Tutak Industries is considering a project requiring an initial investment of $200,000 followed by annual cash inflows of $45,000 for the next six years. A second six-year project has an initial outla...

Q: Provide the missing information for the following projects using the present value

Provide the missing information for the following projects using the present value of an annuity function [time value of money (TVM) keys rather than the cash flow (CF) function keys]. (Hint: The pre...

Q: Koski and Hass (K&H) just paid a $

Koski and Hass (K&H) just paid a $2 dividend which is expected to grow at 5% indefinitely. The return on comparable stocks is 9%. What percent of the intrinsic value of K&H stock is derived from div...

Q: Huron Valley Homes is considering a project requiring a $1 million

Huron Valley Homes is considering a project requiring a $1 million initial investment. Expected cash inflows will be $25,000 in the first year, $100,000 in the second year, and $200,000 per year for...

Q: Clancy Inc. is considering a project with the following cash flows

Clancy Inc. is considering a project with the following cash flows. a. Clancy has a policy of rejecting all projects that don’t pay back within three years outright, and analyzing...

Q: Discuss mortgage loans in terms of the time value of money and

Discuss mortgage loans in terms of the time value of money and loan amortization. What important points should every homeowner know about how mortgages work? (Hint: Think about taxes and getting the...

Q: Calculate the NPV at 9% and the IRR for the following

Calculate the NPV at 9% and the IRR for the following projects: a. An initial outlay of $69,724 and an inflow of 15,000 followed by four consecutive inflows of $17,000. b. An initial outlay of $25,424...

Q: Gander, Inc. is considering two projects with the following cash

Gander, Inc. is considering two projects with the following cash flows. Gander uses the payback period method of capital budgeting and accepts only projects with payback periods of 3 years or less....

Q: The Miller Milk Company has just come up with a new lactose

The Miller Milk Company has just come up with a new lactose free dessert product for people who can’t eat or drink ordinary dairy products. Management expects the new product to fuel sales growth at...

Q: Oxbow Inc. is contemplating a new venture project and has done

Oxbow Inc. is contemplating a new venture project and has done a detailed five-year cash flow estimate with the following result ($000): The firm’s cost of capital is 12%. a. Use a...

Q: Sam Dozier, a very bright computer scientist, has come up

Sam Dozier, a very bright computer scientist, has come up with an idea for a new product. He plans to form a corporation to develop the idea and market the resulting product. He has estimated that i...

Q: The Leventhal Baking Company is thinking of expanding its operations into a

The Leventhal Baking Company is thinking of expanding its operations into a new line of pastries. The firm expects to sell $350,000 of the new product in the first year and $500,000 each year thereaf...

Q: Calculate the IRR, NPV, and PI for projects with the

Calculate the IRR, NPV, and PI for projects with the following cash flows. Do each NPV and PI calculation at costs of capital of 8% and 12%. Calculate IRRs to the nearest whole percent. a. An initia...

Q: Island Airlines, Inc. needs to replace a short haul computer

Island Airlines, Inc. needs to replace a short haul computer plane on one of its busier routes. Two aircraft that satisfy the general requirements of the route are on the market. One is more expensi...

Q: Bagel Pantry Inc. is considering two mutually exclusive projects with widely

Bagel Pantry Inc. is considering two mutually exclusive projects with widely differing lives. The company's cost of capital is 12%. The project cash flows are summarized as follows: a. Compare the...

Q: Callaway Associates, Inc. is considering the following mutually exclusive projects

Callaway Associates, Inc. is considering the following mutually exclusive projects. Callaway’s Cost of capital is 12%. a. Calculate each project’s NPV and IRR. b...

Q: Discuss the idea of capitalizing a stream of earnings in perpetuity.

Discuss the idea of capitalizing a stream of earnings in perpetuity. Where is this idea useful? Is there a financial asset that makes use of this idea?

Q: The Catseye Marble Co. is thinking of replacing a manual production

The Catseye Marble Co. is thinking of replacing a manual production process with a machine. The manual process requires three relatively unskilled workers and a supervisor. Each worker makes $17,500...

Q: Blackstone Inc manufactures western boots and saddles. The company is considering

Blackstone Inc manufactures western boots and saddles. The company is considering replacing an outmoded leather-processing machine with a new, more efficient model. The old machine was purchased for...

Q: The Rapscallion Company’s stock is selling for $43.75.

The Rapscallion Company’s stock is selling for $43.75. Dave Jones has done some research on the firm and its industry, and thinks it will pay dividends of $5 next year and $7 the following year. Aft...

Q: Tomatoes Inc. is planning a project that involves machinery purchases of

Tomatoes Inc. is planning a project that involves machinery purchases of $100,000. The new equipment will be depreciated over five years, straight line. It will replace old machinery that will be so...

Q: Should the project being considered in the previous problem be accepted or

Should the project being considered in the previous problem be accepted or rejected based on IRR? (Hint: Start by guessing 11% for IRR) Does the IRR method seem to give a more definite result? If so,...

Q: Resolve the previous problem assuming Voxland uses the 5-year Modified

Resolve the previous problem assuming Voxland uses the 5-year Modified Accelerated Cost Recovery System (MACRS) with no salvage value to depreciate the computer. Continue to assume the machine is sol...

Q: Calculate the NPV at 12% and the IRR for the following

Calculate the NPV at 12% and the IRR for the following projects. Find IRR's to the nearest whole percent. a. An initial outflow of $10,000 followed by three inflows of $4,000. b. An initial outflow...

Q: Hudson Furniture specializes in office furniture for self-employed individuals who

Hudson Furniture specializes in office furniture for self-employed individuals who work at home. Hudson’s furniture emphasizes style rather than utility, and has been quite successful. The firm is n...

Q: Segwick Corp manufactures men's shoes that it sells through its own chain

Segwick Corp manufactures men's shoes that it sells through its own chain of retail stores. The firm is considering adding a line of women's shoes. Management considers the project a new venture bec...

Q: Kneelson and Botes Inc. (K&B) is a

Kneelson and Botes Inc. (K&B) is a construction company that does road and bridge work for the state highway authority. The state government solicits bids on construction projects from private co...

Q: What generates the supply of and the demand for foreign exchange?

What generates the supply of and the demand for foreign exchange? Why do the supply and demand curves have the shape they do? What makes the supply and demand curves and hence the exchange rate ...

Q: When an annuity begins several time periods into the future, how

When an annuity begins several time periods into the future, how do we calculate its present value today? Describe the procedure in a few words.

Q: The Highland Instrument Company has revenues of about $300 million per

The Highland Instrument Company has revenues of about $300 million per year. Its management is interested in expanding into a new type of product manufactured primarily by Lowland Gauge Inc., a firm...

Q: Hostile acquisitions create real animosities between the stockholders of the acquired and

Hostile acquisitions create real animosities between the stockholders of the acquired and acquiring companies. Comment on the truth of this statement.

Q: When you want to buy something from another country, you have

When you want to buy something from another country, you have to find a seller who's willing to take dollars, but that isn't too hard because the U.S. dollar is widely accepted. Comment on this state...

Q: Exchange transactions between two currencies neither of which is the U.

Exchange transactions between two currencies neither of which is the U.S. dollar have to be made by changing one currency into dollars and then changing the dollars into the other currency. This proc...

Q: What's the difference between a direct and an indirect transfer of money

What's the difference between a direct and an indirect transfer of money between investors and firms?

Q: What is the primary purpose of financial markets?

What is the primary purpose of financial markets?

Q: Why are time value concepts crucial in determining what a bond or

Why are time value concepts crucial in determining what a bond or a share of stock should be worth?

Q: The risk added by financing is small and insignificant relative to the

The risk added by financing is small and insignificant relative to the inherent risk in most businesses. Is that statement true or false? Discuss.

Q: In a retail store a discount is a price reduction. What's

In a retail store a discount is a price reduction. What's a discount in finance? Are the two ideas related?

Q: Is the IPO Pop experienced by most new stocks likely to be

Is the IPO Pop experienced by most new stocks likely to be a reflection of market forces driving shares toward their intrinsic values?

Q: You're a new member of the planning staff within the finance department

You're a new member of the planning staff within the finance department at Bertram Enterprises, a large manufacturer of household goods. The firm does an annual operating plan and a long range plan e...

Q: What information are we likely to be interested in that’s contained in

What information are we likely to be interested in that’s contained in a loan amortization schedule?

Q: Explain the idea of breakeven analysis in a brief paragraph.

Explain the idea of breakeven analysis in a brief paragraph.

Q: Describe the concept of the breakeven point in words by using the

Describe the concept of the breakeven point in words by using the concept of contribution and fixed costs. (Short answer.)

Q: Factoring may involve interest even though it isn't a loan. How

Factoring may involve interest even though it isn't a loan. How can this come about?

Q: Define term and maturity. Is there a difference?

Define term and maturity. Is there a difference?

Q: What, in general, is meant by off balance sheet financing

What, in general, is meant by off balance sheet financing?

Q: What do we mean when we say businesses spend two kinds of

What do we mean when we say businesses spend two kinds of money? Where does each kind come from? How is each used?

Q: What argument was made against adopting FASB 13?

What argument was made against adopting FASB 13?

Q: You're the cash manager for Huge Inc., which has factories and

You're the cash manager for Huge Inc., which has factories and stores all over the country. Each operation has several bank accounts to receive deposits and pay vendors, so the company's cash is spre...

Q: Describe insider trading. Why is it illegal?

Describe insider trading. Why is it illegal?

Q: Why does stock-based compensation create a moral hazard for executives

Why does stock-based compensation create a moral hazard for executives?

Q: Outline the costs and benefits involved in the trade-off between

Outline the costs and benefits involved in the trade-off between a tighter versus a looser receivables policy.

Q: Inventory management is a shared responsibility between finance and manufacturing just as

Inventory management is a shared responsibility between finance and manufacturing just as receivables management involves both sales and finance. Right or wrong? Explain.

Q: Because of the advances in computer technology, inventory management is a

Because of the advances in computer technology, inventory management is a precise science, and there's no excuse for not having the optimal quantity on hand at all times. Is that statement true or fa...

Q: The payback technique is criticized for not using discounted cash flows.

The payback technique is criticized for not using discounted cash flows. Under what conditions will this matter most? That is, under what patterns of cash flow will payback and NPV or IRR be likely...

Q: Interest is said to drive the stock market. But interest is

Interest is said to drive the stock market. But interest is paid on bonds and loans while stocks pay dividends, never interest. It would seem that interest has nothing to do with the stock market. Ex...

Q: What is the general (in words) relationship between risk and

What is the general (in words) relationship between risk and return?

Q: Capital budgeting is based on the idea of identifying incremental cash flows

Capital budgeting is based on the idea of identifying incremental cash flows, so overheads aren't generally included. Does this practice create a problem for a firm that over a long period of time ta...

Q: Why is inflation important to lenders? How do they take it

Why is inflation important to lenders? How do they take it into consideration?

Q: Summarize the effect of operating leverage on EBIT.

Summarize the effect of operating leverage on EBIT.

Q: There’s a fundamental difference between the rules one, two, and

There’s a fundamental difference between the rules one, two, and four for qualifying an operating lease and rule three. What is it?

Q: The following issues are related to the accuracy and reliability of financial

The following issues are related to the accuracy and reliability of financial plans. Explain the processes/issues related to each. Top-down vs. bottom-up planning Plans as statements of goals vs. p...

Q: Explain the ideas of a risk-free rate and the real

Explain the ideas of a risk-free rate and the real rate of interest. Are either of them approximated by anything that exists in the real world?

Q: Given the importance of dividends to the well-being of equity

Given the importance of dividends to the well-being of equity investors, why do they put up with the fact that dividends are discretionary?

Q: In leases with no residuals, lessors calculate the lease payments they

In leases with no residuals, lessors calculate the lease payments they must charge as if the lease was a loan. How does the presence of a residual change the calculation?

Q: What bank problems does securitization solve?

What bank problems does securitization solve?

Q: Depreciation is a noncash charge. Why then is it important in

Depreciation is a noncash charge. Why then is it important in Lease-Buy analysis? (Very short answer.)

Q: Why are time value concepts important in ordinary business dealings, especially

Why are time value concepts important in ordinary business dealings, especially those involving contracts?

Q: Because companies always have inventory and accounts receivable, most banks are

Because companies always have inventory and accounts receivable, most banks are happy to make long term loans to support those assets. Either refute or support that statement.

Q: Why is it desirable to construct capital budgeting rules so that higher

Why is it desirable to construct capital budgeting rules so that higher risk projects become less acceptable than lower risk projects?

Q: Relate the idea of cost of capital to the opportunity cost concept

Relate the idea of cost of capital to the opportunity cost concept. Is the cost of capital the opportunity cost of project money?

Q: Industry A is dominated by ten large firms each with sales of

Industry A is dominated by ten large firms each with sales of approximately $500 million per year. A proposal to merge two of these firms was approved by the Justice Department as not violating the a...

Q: List the traditional qualifications for a mortgage loan and describe how each

List the traditional qualifications for a mortgage loan and describe how each protects the lender.

Q: The Nelson Sheet Metal Company has current assets of $2.

The Nelson Sheet Metal Company has current assets of $2.5 million and current liabilities of $1.0 million. The firm is in need of additional inventory and has an opportunity to borrow money on a shor...

Q: The Cambridge Cartage Company has partially completed its forecast of next year's

The Cambridge Cartage Company has partially completed its forecast of next year's financial statements as follows. The firm pays interest at 10% on all borrowings and pays a combined state and feder...

Q: Read Business Analysis Case 3. Henderson Industries Inc.’s stock

Read Business Analysis Case 3. Henderson Industries Inc.’s stock is currently selling at $22.40 per share. Sharon Jacobs, the CEO, has options to buy 250,000 shares at $25.50 per share that expire at...

Q: Joe Ferro's uncle is going to give him $250 a month

Joe Ferro's uncle is going to give him $250 a month for the next two years starting today. If Joe banks every payment in an account paying 6% compounded monthly, how much will he have at the end of t...

Q: If Sharon Henderson of the previous problem is also a founder of

If Sharon Henderson of the previous problem is also a founder of the company and has retained 8 million shares of its stock, how much of a difference will the auditors’ decision make in her personal w...

Q: The management of Coker Corp is doing a quick forecast of 20X9

The management of Coker Corp is doing a quick forecast of 20X9 using the modified percentage of sales method in preparation for a more detailed planning exercise later in the month. The estimate is t...

Q: Larime Corp is forecasting 20X2 near the end of 20X1. The

Larime Corp is forecasting 20X2 near the end of 20X1. The estimated year-end financial statements and a worksheet for the forecasts are shown below. Management expects the following next year: &ac...

Q: The Tower family wants to make a home improvement that is expected

The Tower family wants to make a home improvement that is expected to cost $60,000. They want to fund as much of the cost as possible with a home equity loan, but can afford payments of only $600 per...

Q: The Eagle Feather Fabric Company expects to complete the current year with

The Eagle Feather Fabric Company expects to complete the current year with the following financial results ($000). Forecast next year using a modified percentage of sales method assuming no dividend...

Q: Fleming, Inc. had a dividend payout ratio of 25%

Fleming, Inc. had a dividend payout ratio of 25% this year that resulted in a payout of $80,000 in dividends. Return on sales (ROS) was 8% this year and is expected to increase to 9% next year. If F...

Q: What is a tranche and how was its risk estimated before the

What is a tranche and how was its risk estimated before the crisis?

Q: The Lineberry Golf Cart Co. sold 7,400 carts this

The Lineberry Golf Cart Co. sold 7,400 carts this year at an average unit price of $3,000. The firm produced the carts at a 42% cost ratio, which is calculated as cost of goods sold (COGS) divided by...

Q: How much would you have to save each year to have $

How much would you have to save each year to have $65,000 in 10 years if the interest rate is expected to be 7%?

Q: What are the annual payments on a loan of $350,

What are the annual payments on a loan of $350,000 to be repaid over 10 years at 8%?

Q: Sweet Tooth Cookies, Inc. has the following ratios

Sweet Tooth Cookies, Inc. has the following ratios What percentage of its assets are financed by equity? (Hint: Substitute into the Extended DuPont Equation.)

Q: Sam Rothstein wants borrow $15,500 to be repaid in

Sam Rothstein wants borrow $15,500 to be repaid in quarterly installments over five years at 16% compounded quarterly. How much will his payment be?

Q: How much would you have to put in the bank today to

How much would you have to put in the bank today to have $42,800 in 9 years if the interest rate is 7%?

Q: If you invest $8,000 at 12%, how long

If you invest $8,000 at 12%, how long will it take to triple?

Q: Tutak Industries issued a $1,000 face value bond a

Tutak Industries issued a $1,000 face value bond a number of years ago that will mature in eight years. Similar bonds are yielding 8%, and the Tutak bond is currently selling for $1,291.31. Compute...

Q: What interest rate will make $7,500 per year accumulate

What interest rate will make $7,500 per year accumulate to $279,600 in 15 years?

Q: The Lexington Property Development Company has a $10,000 note

The Lexington Property Development Company has a $10,000 note receivable from a customer due in three years. How much is the note worth today if the interest rate is a. 9%? b. 12% compounded monthl...

Q: What was the trigger that started the crisis? If it didn’t

What was the trigger that started the crisis? If it didn’t happen would the crisis have been averted?

Q: Amitron Inc. is considering an engineering project that requires an investment

Amitron Inc. is considering an engineering project that requires an investment of $250,000 and is expected to generate the following stream of payments (income) in the future. Use the TIMEVAL program...

Q: The Centurion Corp. is putting together a financial plan for the

The Centurion Corp. is putting together a financial plan for the company covering the next three years, and needs to forecast its interest expense and the related tax savings. The firm's most signific...

Q: Lapps Inc. makes a gift product that sells best during the

Lapps Inc. makes a gift product that sells best during the holiday season. Retailers stock up in the fall so Lapps’ sales are largest in October and November and drop dramatically in...

Q: How much will $175 grow into if it is invested at

How much will $175 grow into if it is invested at 16% for 30 years?

Q: Timberline Inc. has the following current accounts last year. ($

Timberline Inc. has the following current accounts last year. ($000) In addition, the company had sales revenues of $9,453,000 and costs and expenses (including interest and tax) of $7,580,000. De...

Q: If you deposit $207.86 in an account that pays

If you deposit $207.86 in an account that pays 4% and leave it there for 12 years how much will you have in the account?

Q: How much is a guaranteed promise of $15,750 to

How much is a guaranteed promise of $15,750 to be received in 12 years’ worth today if interest is 14%?

Q: What is the current yield on each of the bonds in the

What is the current yield on each of the bonds in the previous problem?

Q: At what interest rate will $1,000 grow into $

At what interest rate will $1,000 grow into $3,642.50 in 15 years?

Q: What is the FV of $1,250.63 for

What is the FV of $1,250.63 for 3 years at 7%?

Q: Why is planning for a new business harder than planning for an

Why is planning for a new business harder than planning for an existing operation? In which do you have to make more assumptions? Why? What implicit assumption provides a short cut in one situation?...

Q: How much will $650 per year deposited at 12% be

How much will $650 per year deposited at 12% be worth in 8 years?

Q: Softek has two potentially big-selling products under development. Alpha

Softek has two potentially big-selling products under development. Alpha, the first new product, seems very likely to catch on and is expected to drive the firm's growth rate to 25% for the next two...

Q: What would you pay for an annuity paying $3,000

What would you pay for an annuity paying $3,000 per year for 12 years if the interest rate is 10%?

Q: Snyder Mfg. issued a $1,000 face value 30

Snyder Mfg. issued a $1,000 face value 30-year bond 5 years ago with an 8% coupon. The bond is subject to call after 10 years, and the current interest rate is 7%. What call premium will make a bond...

Q: Refer to the Microsoft stock quotation on page 194. Demonstrate that

Refer to the Microsoft stock quotation on page 194. Demonstrate that the price earnings (P/E) ratio is consistent with other information in the listing.

Q: Broxholme Industries has sales of $40 million, equity totaling $

Broxholme Industries has sales of $40 million, equity totaling $27.5 million and an ROS of 12%. The sustainable growth rate has been calculated at 10.9%. What dividend payout ratio was assumed in this...

Q: The Spinnaker Company has paid an annual dividend of $2 per

The Spinnaker Company has paid an annual dividend of $2 per share for some time. Recently the board of directors voted to grow the dividend by 6% from now on. What is the most you would be willing t...

Q: The Pancake Corporation recently paid a $3 dividend, and is

The Pancake Corporation recently paid a $3 dividend, and is expected to grow at 5% forever. Investors generally require an expected return of at least 9% before they'll buy stocks similar to Pancake....

Q: How long will it take $5,000 invested at 14

How long will it take $5,000 invested at 14% to double?

Q: At what interest rate will $750 grow into $3,

At what interest rate will $750 grow into $3,132.83 in 15 years?

Q: Why is it important that physical assumptions precede financial results in the

Why is it important that physical assumptions precede financial results in the planning process? For example, what's wrong with assuming that you want a business that sells $50 million a year earning...

Q: Longly Trucking is issuing a 20-year bond with a $

Longly Trucking is issuing a 20-year bond with a $2,000 face value tomorrow. The issue is to pay an 8% coupon rate, because that was the interest rate while it was being planned. However, rates have...

Q: A portfolio consists of the following four stocks. /

A portfolio consists of the following four stocks. What is the expected return of the portfolio?

Q: The stock of Sedly Inc. is expected to pay the following

The stock of Sedly Inc. is expected to pay the following dividends: At the end of the fourth year its value is expected to be $37.50. What should Sedly sell for today if the return on stocks of sim...

Q: You are a junior treasury analyst at the Palantine Corporation. The

You are a junior treasury analyst at the Palantine Corporation. The treasurer believes the CAPM gives a good estimate of the company's return to equity investors at any time, and has asked you to pre...

Q: The Aldridge Co. is expected to grow at 6% into

The Aldridge Co. is expected to grow at 6% into the indefinite future. Its latest annual dividend was $2.50. Treasury bills currently earn 7% and the S&P 500 yields 11%. a. What price should Aldridg...

Q: The Wintergreens are planning ahead for their son's education. He's eight

The Wintergreens are planning ahead for their son's education. He's eight now and will start college in 10 years. How much will they have to set aside each year to have $65,000 when he starts if the i...

Q: The probability distribution of the return on an investment in Omega Inc

The probability distribution of the return on an investment in Omega Inc.'s common stock is as follows: Graph the probability distribution. Calculate the expected return, the standard deviation of...

Q: Calculate the expected return on an investment in Delta Inc.'s

Calculate the expected return on an investment in Delta Inc.'s stock if the probability distribution of returns is as follows. Plot the distribution on the axis with Omega Inc. of the previous probl...

Q: The Duncan Company's stock is currently selling for $15. People

The Duncan Company's stock is currently selling for $15. People generally expect its price to rise to $18 by the end of next year. They also expect that it will pay a dividend of $.50 per share duri...

Q: Grand Banks Mining Inc. plans a project to strip mine a

Grand Banks Mining Inc. plans a project to strip mine a wilderness area. Setting up operations and initial digging will cost $5 million. The first year's operations are expected to be slow and net a...

Q: Calculate the present value of one dollar 30 years in the future

Calculate the present value of one dollar 30 years in the future at 10% interest. What does the result tell you about very long-term contracts?

Q: A four-stock portfolio is made up as follows

A four-stock portfolio is made up as follows Calculate the portfolio's beta.

Q: Pam Smith just inherited a $1,000 face value K

Pam Smith just inherited a $1,000 face value K-S Inc. bond from her grandmother. The bond clearly indicates a 12% coupon rate, but the maturity date has been smudged and can’t be read. Pam called a...

Q: What will a deposit of $4,500 left in the

What will a deposit of $4,500 left in the bank be worth under the following conditions? a. Left for nine years at 7% interest? b. Left for six years at 10% compounded semiannually? c. Left for five y...

Q: Blackstone Corporation's $7 preferred was issued five years ago. The

Blackstone Corporation's $7 preferred was issued five years ago. The risk-appropriate interest rate for the issue is currently 11%. What is this preferred stock selling for today?

Q: A project has the following cash flows /

A project has the following cash flows a. What is the project’s payback period? b. Calculate the projects NPV at 12%. c. Calculate the project’s PI at 12%.

Q: The Habender Company just issued a two-year bond at 12

The Habender Company just issued a two-year bond at 12%. Inflation is expected to be 4% next year and 6% the year after. Habender estimates its default risk premium at about 1.5% and its maturity ris...

Q: Fred Tibbits has made a detailed study of the denim clothing industry

Fred Tibbits has made a detailed study of the denim clothing industry. He's particularly interested in a company called Denhart Fashions that makes stylish denim apparel for children and teenagers. F...

Q: Conestoga Ltd. has the following estimated probability distribution of returns.

Conestoga Ltd. has the following estimated probability distribution of returns. Calculate Conestoga’s expected return, the variance and standard deviation of its expected return an...

Q: Calculate an IRR for the project in problem 2 using an iterative

Calculate an IRR for the project in problem 2 using an iterative technique. (Hint: Start by guessing 15%.)

Q: Calculate the IRR for the following projects. a. An

Calculate the IRR for the following projects. a. An initial outflow of $15,220 followed by inflows of $5,000, $6,000, and $6,500. b. An initial outflow of $47,104 followed by inflows of $16,000, $17,0...

Q: Why might the government be interested in influencing exchange rates from time

Why might the government be interested in influencing exchange rates from time to time? How would it go about moving the exchange rate?

Q: Write a brief, verbal description of the logic behind the development

Write a brief, verbal description of the logic behind the development of the time value formulas for annuities.

Q: Imagine making choices in the following situation to test your degree of

Imagine making choices in the following situation to test your degree of risk aversion. Someone offers you the choice between the following game and a sure thing. The Game: A coin is tossed. If it...

Q: Flextech Inc. is considering a project that will require new equipment

Flextech Inc. is considering a project that will require new equipment costing $150,000. It will replace old equipment with a book value of $35,000 that can be sold on the second-hand market for $75,...

Q: A four-year project has cash flows before taxes and depreciation

A four-year project has cash flows before taxes and depreciation of $12,000 per year. The project requires the purchase of a $50,000 asset that will be depreciated over five years, straight line. At...

Q: Voxland Industries purchased a computer for $10,000, which

Voxland Industries purchased a computer for $10,000, which it will depreciate straight line over five years to a $1,000 salvage value. The computer will then be sold at that price. The company’s mar...

Q: A project that is expected to last six years will generate a

A project that is expected to last six years will generate a profit and cash flow contribution before taxes and depreciation of $23,000 per year. It requires the initial purchase of equipment costing...

Q: Harry and Flo Simone are planning to start a restaurant. Stoves

Harry and Flo Simone are planning to start a restaurant. Stoves, refrigerators, other kitchen equipment, and furniture are expected to cost $50,000 all of which will be depreciated straight line over...

Q: Laurel Wilson has a portfolio of five stocks. The stocks’ actual

Laurel Wilson has a portfolio of five stocks. The stocks’ actual investment performance last year is given below along with an estimate of this year’s performance....

Q: Softek has two potentially big-selling products under development. Alpha

Softek has two potentially big-selling products under development. Alpha, the first new product, seems very likely to catch on and is expected to drive the firm's growth rate to 25% for the next two...

Q: How many years will it take for $850 per year to

How many years will it take for $850 per year to accumulate to $20,000 if the interest rate is 8%?

Q: Harrington Inc. is introducing a new product in its line of

Harrington Inc. is introducing a new product in its line of household appliances. Household products generally have ten-year life cycles and are viewed as capital budgeting projects over that period....

Q: Deferred payment terms are equivalent to a cash discount. Discuss and

Deferred payment terms are equivalent to a cash discount. Discuss and explain this idea.

Q: Meade Metals Inc plans to start doing its own deliveries instead of

Meade Metals Inc plans to start doing its own deliveries instead of using an outside service for which it has been paying $150,000 per year. To make the change Meade will purchase a $200,000 truck th...

Q: Olson-Jackson Corp. (OJC) is considering replacing a

Olson-Jackson Corp. (OJC) is considering replacing a machine that was purchased only two years ago because of dramatic improvements in new models. The old machine has been depreciated straight line a...

Q: Fox Woodworking Inc. issued preferred shares at a face value of

Fox Woodworking Inc. issued preferred shares at a face value of $50 to yield 9% 10 years ago. The shares are currently selling at $60. What return are they earning for investors who buy them today?...

Q: Blue & Noble is a small law firm that does all of

Blue & Noble is a small law firm that does all of its business through billings (no cash sales). Historically the firm has collected 40% of its revenue in the month of billing, 50% during the first mo...

Q: Auburn Concrete Inc. is considering the purchase of a new concrete

Auburn Concrete Inc. is considering the purchase of a new concrete mixer to replace an inefficient older model that is completely worn out. If purchased, the new machine will cost $90,000 and is expe...

Q: Calculate IRRs for the projects in the previous problem.

Calculate IRRs for the projects in the previous problem. Problem 19:

Q: The Paxton Homes Co. is a successful builder of moderate to

The Paxton Homes Co. is a successful builder of moderate to high-priced houses. The firm is currently considering an expansion into light commercial construction in which it would build shopping cent...

Q: Haley Motors is considering a maintenance contract for its heavy equipment.

Haley Motors is considering a maintenance contract for its heavy equipment. One firm has offered Haley a four-year contract for $100,000 to be paid in advance. Another firm has offered an eight-year...

Q: Keener Clothiers Inc. is considering investing $2 million in an

Keener Clothiers Inc. is considering investing $2 million in an automatic sewing machine to produce a newly designed line of dresses. The dresses will be priced at $200, and management expects to sell...

Q: Fuller, Inc. issued $100, 8% preferred stock

Fuller, Inc. issued $100, 8% preferred stock five years ago. The shares are currently selling for $84.50. Assuming Fuller has to pay floatation costs of 10%, what is Fuller’s cost of preferred stock...

Q: What's an opportunity cost interest rate?

What's an opportunity cost interest rate?

Q: The Pepperpot Company's stock is selling for $52. Its last

The Pepperpot Company's stock is selling for $52. Its last dividend was $4.50, and the firm is expected to grow at 7% indefinitely. Flotation costs associated with the sale of common stock are 10% o...

Q: Mitech Corp’s stock has been growing at approximately 8% for several

Mitech Corp’s stock has been growing at approximately 8% for several years and is now $30. Based on past growth rate performance, what would you expect the stock’s price to be in five years?

Q: Kleig Inc.'s bonds are selling to yield 9%. The

Kleig Inc.'s bonds are selling to yield 9%. The firm plans to sell new bonds to the general public and will therefore incur flotation costs of 6%. The company's marginal tax rate is 42%. a. What is...

Q: The Olson Company plans to replace an old machine with a new

The Olson Company plans to replace an old machine with a new one costing $85,000. The old machine originally cost $55,000, and has six years of its expected 11-year life remaining. It has been depre...

Q: Sanville Quarries is considering acquiring a new drilling machine which is expected

Sanville Quarries is considering acquiring a new drilling machine which is expected to be more efficient than their current machine. The project is to be evaluated over four years. The initial outlay...

Q: Blazingame Inc.'s capital components have the following market values:

Blazingame Inc.'s capital components have the following market values: Calculate the firm's capital structure and show the weights that would be used for a weighted average cost of capital (WACC) c...

Q: Asbury Corp. issued 30-year bonds 11 years ago with

Asbury Corp. issued 30-year bonds 11 years ago with a coupon rate of 9.5%. Those bonds are now selling to yield 7%. The firm also issued some 20-year bonds two years ago with an 8% coupon rate. The...

Q: The Dentite Corporation’s bonds are currently selling to yield new buyers a

The Dentite Corporation’s bonds are currently selling to yield new buyers a 12% return on their investment. Dentite’s marginal tax rate including both federal and state taxes is 38%. What is the fir...

Q: The Alligator Lock Company is planning a two-for-one

The Alligator Lock Company is planning a two-for-one stock split. You own 5,000 shares of Alligator's common stock that is currently selling for $120 a share. a. What is the value of your Alligator s...

Q: Calculate BWP’s DFL and DTL before and after the acquisition of the

Calculate BWP’s DFL and DTL before and after the acquisition of the new machine

Q: What is a sinking fund? How is it related to time

What is a sinking fund? How is it related to time value?

Q: The Aztec Corporation has the following capital components and costs. Calculate

The Aztec Corporation has the following capital components and costs. Calculate Aztec's WACC.

Q: What interest rate would you need to get to have an annuity

What interest rate would you need to get to have an annuity of $7,500 per year accumulate to $279,600 in 15 years?

Q: Watson Waterbed Works Inc. has an EBIT of $2.

Watson Waterbed Works Inc. has an EBIT of $2.75 million, can borrow at 15% interest, and pays combined state and federal income taxes of 40%. It currently has no debt and is capitalized by equity of $...

Q: The Manning Company's stock is currently selling for $23. It

The Manning Company's stock is currently selling for $23. It has the following prospects for next year: Calculate Manning's expected return for a one-year holding period.

Q: Southport Inc. has an inventory turnover of 10X, an ACP

Southport Inc. has an inventory turnover of 10X, an ACP of 45 days, and turns over its payables once a month. How long are Southport's operating and cash conversion cycles? (Use a 360-day year.)

Q: Willerton Industries Inc. has the following balances in its capital accounts

Willerton Industries Inc. has the following balances in its capital accounts as of 12/31/x3: Calculate Willerton’s capital structure based on book values.

Q: Scherbert Industries has the following balance sheet accounts as of 12/

Scherbert Industries has the following balance sheet accounts as of 12/31/x3 (not a complete balance sheet): Calculate gross and net working capital.

Q: What is the effective interest rate on a $750,000

What is the effective interest rate on a $750,000 loan at 8% for 120 days if a 20% minimum compensating balance is required?

Q: Moser Materials Inc. is considering acquiring Newkirk Products, which produces

Moser Materials Inc. is considering acquiring Newkirk Products, which produces a number of products that would enhance Moser’s product line. Last year Newkirk reported a $30 million loss. Moser has...

Q: Calculate the effective interest rate implied by the following terms of sale

Calculate the effective interest rate implied by the following terms of sale, using a 365-day year. 2/10, net 30 1/5, net 15 .5/10, net 30 2.5/10, net 25 1/5, net 20

Q: The amount formulas share a closer relationship than the annuity formulas.

The amount formulas share a closer relationship than the annuity formulas. Explain and interpret this statement.

Q: The Montauk Company has a dividend reinvestment plan in which shareholders owning

The Montauk Company has a dividend reinvestment plan in which shareholders owning 25% of its common stock participate. Last year the firm’s EPS was $4.20 and its payout ratio was 50%. There are 2 mi...

Q: Using the information from the previous problem, randomly select four NPV

Using the information from the previous problem, randomly select four NPV outcomes from the data. (Select one cash flow from each year and compute the project NPV and the probability of that NPV impli...

Q: The Grass Ridge Company has the following current asset accounts

The Grass Ridge Company has the following current asset accounts Its current ratio is 2.5:1. The bank is willing to lend the company enough to finance its working capital needs under a $10 million...

Q: Shelton Pharmaceuticals Inc. is planning to introduce a new drug for

Shelton Pharmaceuticals Inc. is planning to introduce a new drug for pain relief. Management expects to sell 3 million units in the first year at $8.50 each, and anticipates 10% growth in sales per y...

Q: The Cranston Company would like to acquire the Lamont Company, but

The Cranston Company would like to acquire the Lamont Company, but overtures made to management have been emphatically rebuffed. Five investors who were involved in the company's founding and continue...

Q: You're interested in investing in the Peters Company, which has shown

You're interested in investing in the Peters Company, which has shown a remarkable increase in EPS over the last three years. You investigate and find that the company's debt-to-equity ratio has incr...

Q: In the situation at Wachusett Window outlined in the last question,

In the situation at Wachusett Window outlined in the last question, do you think a higher prompt payment discount alongside the new sales program would have kept receivables down? Why?

Q: An American importer owes vendors the following sums a. 140

An American importer owes vendors the following sums a. 140,560 Canadian dollars b. 392,000 Australian dollars c. 1,362,000 Mexican pesos d. 680,540 British (U.K.) pounds e. 14,673 Euros State each de...

Q: Hampshire Motors Ltd., a British manufacturing company, wants to buy

Hampshire Motors Ltd., a British manufacturing company, wants to buy a production machine that isn’t available in England. Comparable products are made by an American company and a French firm. The Am...

Q: Calculate the effective interest rate on loans with the following minimum compensating

Calculate the effective interest rate on loans with the following minimum compensating balance requirements:

Q: What is valuation, and why are we interested in the results

What is valuation, and why are we interested in the results?

Q: Jenkins Appliances has cash flow problems and needs to borrow between $

Jenkins Appliances has cash flow problems and needs to borrow between $50,000 and $60,000 for approximately sixty (60) days. Because the business is small and relatively new, unsecured loans are very...

Q: Harris Inc.’s preferred stock was issued five years ago to

Harris Inc.’s preferred stock was issued five years ago to yield 9%. Investors buying those shares on the secondary market today are getting a 14% return. Harris generally pays flotation costs of 12...

Q: The York Company has an average receivables balance of $55,

The York Company has an average receivables balance of $55,000, which turns over once every 30 days. It offers all of its receivables to its bank as collateral for short-term borrowing (pledging). T...

Q: A few years ago Hendersen Corp issued preferred stock paying 8%

A few years ago Hendersen Corp issued preferred stock paying 8% of its par value of $50. The issue is currently selling for $38. Preferred stock flotation costs are 15% of the proceeds of the sale....

Q: Assume that Meade Metals Inc of the previous problem is replacing an

Assume that Meade Metals Inc of the previous problem is replacing an old truck with a new one instead of replacing an outside delivery service. The old truck was purchased 8 years ago for $120,000....

Q: Klints Inc. paid an annual dividend of $1.45

Klints Inc. paid an annual dividend of $1.45 last year. The firm’s stock sells for $29.50 per share, and the company is expected to grow at about 4% per year into the foreseeable future. Estimate Kl...

Q: Schoen Industries pays interest of $3 million each year on bonds

Schoen Industries pays interest of $3 million each year on bonds with an average coupon rate of 7.5%. The firm has 4.5 million shares of stock outstanding and pays out 100% of earnings in dividends....

Q: The Longlife Insurance Company has a beta of .8. The

The Longlife Insurance Company has a beta of .8. The average stock currently returns 15% and short-term treasury bills are offering 6%. Estimate Longlife's cost of retained earnings.

Q: Grandma's Cookies Inc. is considering acquiring Mother's Baked Goods Inc.

Grandma's Cookies Inc. is considering acquiring Mother's Baked Goods Inc. After consideration of all benefits, synergies and tax effects, Grandma (originally a finance major) has estimated that the i...

Q: The Longlife Insurance Company of the preceding problem has several bonds outstanding

The Longlife Insurance Company of the preceding problem has several bonds outstanding that are currently selling to yield 9%. What does this imply about the cost of the firm's equity?

Q: What is interest rate or price risk? Why is it sometimes

What is interest rate or price risk? Why is it sometimes called maturity risk? Explain fully.

Q: The Framingham Company expects to grow at 4% indefinitely. Economists

The Framingham Company expects to grow at 4% indefinitely. Economists are currently asserting that investment opportunities in short term government securities (treasury bills) are readily available...

Q: Suppose Hammell of the previous problem needs to issue new stock to

Suppose Hammell of the previous problem needs to issue new stock to raise additional equity capital. What is its cost of new equity if and flotation costs are 12%?

Q: Suppose the strategic options available to the Rollins Company in the last

Suppose the strategic options available to the Rollins Company in the last problem result in temporarily enhanced growth. Each option can be associated with a super normal growth rate that lasts for...

Q: The Longenes Company uses a target capital structure when calculating the cost

The Longenes Company uses a target capital structure when calculating the cost of capital. The target structure and current component costs based on market conditions follow. * The costs of debt an...

Q: How much will $650 per year be worth in eight years

How much will $650 per year be worth in eight years at interest rates of a. 12% b. 8% c. 6%

Q: Zuker Distributors handles the warehousing of perishable foods and is considering replacing

Zuker Distributors handles the warehousing of perishable foods and is considering replacing one of its primary cold storage units. One supplier has offered a unit for $250,000 with an expected life o...

Q: Emmons Motors is a distributor of electric motors. The firm projects

Emmons Motors is a distributor of electric motors. The firm projects product demand next year of 25,000 units. It costs $320 to place an order with suppliers. Management has determined that the EOQ...

Q: How many years will it take for $850 per year to

How many years will it take for $850 per year to amount to $20,000 if the interest rate is 8%?

Q: Livetree Ltd. is developing a detailed financial plan for next year

Livetree Ltd. is developing a detailed financial plan for next year, and expects to have the following fixed asset accounts by the end of this year ($000) The capital plan already completed calls fo...

Q: Go to a currency exchange site on the internet and look up

Go to a currency exchange site on the internet and look up today's exchange rates for the currencies in problem 1. Resolve the problems using today's rates. Analyze how the rates have changed since...

Q: What causes maturity risk? In other words, why do long

What causes maturity risk? In other words, why do long-term bonds respond differently to interest rate changes than short-term bonds? (Hint: Think about how the present value formulas work.)

Q: The Winthrop Company is constructing a five-year plan. The

The Winthrop Company is constructing a five-year plan. The firm's ACP is currently 90 days, while its inventory turnover ratio is 3 × based on COGS. The company has forecast aggressive re...

Q: What would you pay for an annuity of $2,000

What would you pay for an annuity of $2,000 paid every six months for 12 years if you could invest your money elsewhere at 10% compounded semiannually?

Q: Annuities are attractive investment vehicles for retirement savings as many people prefer

Annuities are attractive investment vehicles for retirement savings as many people prefer an income stream in retirement to a lump sum in the bank. It’s easy to trade one for the another by purchasin...

Q: You are a securities salesperson. Many of your clients are elderly

You are a securities salesperson. Many of your clients are elderly people who want very secure investments. They remember the days when interest rates were very stable (before the 1970s) and bond pr...

Q: Harry Clements would like to buy a new car. He can

Harry Clements would like to buy a new car. He can afford payments of $650 a month. The bank makes four-year car loans at 12% compounded monthly. How much can Harry borrow toward a new car?

Q: A $10,000 car loan has payments of $361

A $10,000 car loan has payments of $361.52 per month for three years. What is the interest rate? Assume monthly compounding and give the answer in terms of an annual rate.

Q: Construct an amortization schedule for a four-year, $10

Construct an amortization schedule for a four-year, $10,000 loan at 6% interest compounded annually.

Q: Partridge Inc. sells about $45 million a year on credit

Partridge Inc. sells about $45 million a year on credit. Good credit and collections performance in the industry results in a 35-day ACP. a. What is the maximum receivables balance Partridge can to...

Q: What are the monthly payments on the loan? Construct an amortization

What are the monthly payments on the loan? Construct an amortization table for the first six months of the loan.

Q: Construct an amortization schedule for the last six months of the loan

Construct an amortization schedule for the last six months of the loan. (Hint: What is the unpaid balance at the end of 29 ½ years?)

Q: Using words only, describe the process of finding a bond's yield

Using words only, describe the process of finding a bond's yield at a given selling price.

Q: The following direct quote exchange rates are found on the spot market

The following direct quote exchange rates are found on the spot market today. a. Euro: $.9347 b. Israeli shekel: $.2586 c. British (U.K.) pound: $1.6544 d. Japanese yen: $0.009423 Calculate the pri...

Q: Atkins Company has just issued a series of bonds with 5-

Atkins Company has just issued a series of bonds with 5- through 10-year maturities. The company’s default risk is 0.5% on 5-year bonds, and grows by 0.2% for each year that’s added to the bond’s ter...

Q: Bob and Chris received a grant through their University to travel to

Bob and Chris received a grant through their University to travel to Germany to do research. The grant awarded them $2,000 for room and board during their stay. It was paid to them in U.S. dollars o...

Q: Segwick Petroleum Ltd. has a dividend reinvestment plan in which new

Segwick Petroleum Ltd. has a dividend reinvestment plan in which new stock is issued to participating investors. Segwick's payout ratio is 40%, and 30% of stockholders participate in the plan. The f...

Q: The Cline family made a trip to Europe in 2015. They

The Cline family made a trip to Europe in 2015. They paid the following amounts in local currency for hotel, entertainment, and transportation. How much did the trip cost once they got to Europe?...

Q: Suppose a car manufactured in Japan in the mid-1980s,

Suppose a car manufactured in Japan in the mid-1980s, when there were 250 yen to the dollar, cost 2 million yen to produce, and was marked up 25% for sale in the United States. Assume the car's cos...

Q: The Greenbay Motor Company ordered six German built engines at, €

The Greenbay Motor Company ordered six German built engines at, €15,000 each when the direct exchange rate was $1.2500 per euro, and elected not to cover the obligation with a forward contract. When...

Q: Under what conditions is a bond almost certain to be called at

Under what conditions is a bond almost certain to be called at a particular date in the future? How does this condition affect its price?

Q: Describe the difference between a floating and a fixed exchange rate system

Describe the difference between a floating and a fixed exchange rate system.

Q: How and why do sinking funds enhance the safety of lenders?

How and why do sinking funds enhance the safety of lenders?

Q: Corporate executives sometimes abuse their positions by overpaying themselves at the expense

Corporate executives sometimes abuse their positions by overpaying themselves at the expense of stockholders. When that happens are the executives’ gains dollar for dollar losses to stockholders or c...

Q: Contrast real assets and financial (paper) assets. What is

Contrast real assets and financial (paper) assets. What is the basis for the value of each?

Q: How can two knowledgeable people come to different conclusions about the value

How can two knowledgeable people come to different conclusions about the value of the same security? Can this happen if they have access to the same information?

Q: Describe the nature of a bond. Include at least the following

Describe the nature of a bond. Include at least the following ideas. term/maturity face value debt vs. equity "buying" a bond non-amortized one borrower/many lenders risk conflict with stockhold...

Q: What is a call provision? Why do companies put them in

What is a call provision? Why do companies put them in bonds? Define: call-protected period and call premium/penalty

Q: Two interest rates are associated with pricing a bond. Name and

Two interest rates are associated with pricing a bond. Name and describe each. How are they used? Describe a third rate not used in pricing.

Q: If bonds pay fixed interest rates, how can they be sold

If bonds pay fixed interest rates, how can they be sold year after year on the secondary market? Include the idea of how yields adjust to changing market interest rates.

Q: Why do bonds have indentures?

Why do bonds have indentures?

Q: Describe bond pricing as two time-value-of-money

Describe bond pricing as two time-value-of-money problems.

Q: What is a trade deficit, and why does it hurt us

What is a trade deficit, and why does it hurt us to consistently run a deficit with another country?

Q: Discuss the nature of stock as an investment. Do most stockholders

Discuss the nature of stock as an investment. Do most stockholders play large roles in the management of the firms in which they invest? Why or why not?

Q: What is the relationship between bond prices and interest rates? Verbally

What is the relationship between bond prices and interest rates? Verbally describe how this relationship comes about. How can we use this relationship to estimate the value of a bond?

Q: Preferred stock is said to be a hybrid of common stock and

Preferred stock is said to be a hybrid of common stock and bonds. Explain fully. Describe the cash flows associated with preferred stock and their valuation.

Q: Discuss the relative riskiness of investment in bonds, common stock,

Discuss the relative riskiness of investment in bonds, common stock, and preferred stock.

Q: Compare fundamental analysis and technical analysis. Which makes more sense to

Compare fundamental analysis and technical analysis. Which makes more sense to you?

Q: What does the efficient market hypothesis say? What is its implication

What does the efficient market hypothesis say? What is its implication for stock analysis?

Q: Options are more exciting than investing in the underlying stocks because they

Options are more exciting than investing in the underlying stocks because they offer leverage. Explain this statement.

Q: Is investing in options really investing or is it more like gambling

Is investing in options really investing or is it more like gambling?

Q: Describe the feature of financial reporting that made leasing popular before FASB

Describe the feature of financial reporting that made leasing popular before FASB 13.

Q: Describe the primary conflict of interest that caused the public accounting industry

Describe the primary conflict of interest that caused the public accounting industry to fail in its duty to protect the investing public’s interests in the 1990s.

Q: How and why is the U.S. dollar unique among

How and why is the U.S. dollar unique among the world's currencies?

Q: Why did securities analysts issue biased reports in the 1990s? In

Why did securities analysts issue biased reports in the 1990s? In what direction were the reports biased?

Q: Verbally rationalize the validity of a stock valuation model that doesn't contain

Verbally rationalize the validity of a stock valuation model that doesn't contain a selling price as a source of cash flow to the investor. Give two independent arguments.

Q: Why are growth rate models practical and convenient ways to look at

Why are growth rate models practical and convenient ways to look at stock valuation?

Q: What is meant by normal growth? Contrast normal and super normal

What is meant by normal growth? Contrast normal and super normal growth. How long can each last? Why?

Q: Describe the approach to valuing a stock expected to grow at more

Describe the approach to valuing a stock expected to grow at more than one rate in the future. Can there be more than two rates? What two things have to be true of the last rate?

Q: Discuss the accuracy of stock valuation, and compare it with that

Discuss the accuracy of stock valuation, and compare it with that of bond valuation.

Q: Do stocks that don't pay dividends have value? Why?

Do stocks that don't pay dividends have value? Why?

Q: How is the IPO price of a stock determined? Is that

How is the IPO price of a stock determined? Is that price likely to be the stock’s intrinsic value.

Q: What is the fundamental motivation behind portfolio theory? That is,

What is the fundamental motivation behind portfolio theory? That is, what are people trying to achieve by investing in portfolios of stocks rather than in a few individual stocks or in debt? What ob...

Q: Describe risk in finance as up and down movement of return.

Describe risk in finance as up and down movement of return. Does this idea make sense in terms of the variance definition?

Q: Thermia Ltd is a family-owned business that produces packaged foods

Thermia Ltd is a family-owned business that produces packaged foods for supermarkets. The family has recently lost interest in the business and has indicated a willingness to sell.­The seni...

Q: Bradbury Ltd is a family-owned clothes manufacturer. For a

Bradbury Ltd is a family-owned clothes manufacturer. For a number of years, the chair and managing director was David Bradbury. During his period of office, sales revenue had grown steadily at a rate...

Q: Threads Limited manufactures nuts and bolts, which are sold to industrial

Threads Limited manufactures nuts and bolts, which are sold to industrial users. The abbreviated financial statements for 2018 and 2019 are as follows: Dividends were paid on ordinary shares of &Acir...

Q: Bernese plc develops and manufactures drills for businesses operating in the oil

Bernese plc develops and manufactures drills for businesses operating in the oil and gas industry. Although it is committed to maximising the wealth of its shareholders, the business has incurred heav...

Q: Bellona Ltd is a small business that produces a single product –

Bellona Ltd is a small business that produces a single product – a thermostat that is used in a range of kitchen appliances. Information relating to the thermostat is as follows: Al...

Q: Ndovu plc is considering investing in a new project and, in

Ndovu plc is considering investing in a new project and, in the past, it would have used a cost of capital of 10 per cent as the discount rate to assess new projects. This rate had been calculated by...

Q: Planters plc manufactures agricultural implements, components for which are acquired from

Planters plc manufactures agricultural implements, components for which are acquired from a number of sources, including some overseas ones. The implements are marketed in the UK and, increasingly, ov...

Q: A French business is due to pay $3 million in six

A French business is due to pay $3 million in six months’ time to a US supplier. In order to hedge against currency risk, the French business decides to sell euro futures immediately at €1 = $1.1306 a...

Q: Mithras plc is a UK business that is due to receive €

Mithras plc is a UK business that is due to receive €200,000 from a German customer in three months’ time. A money market hedge will be used to manage currency risk and the following borrowing rates a...

Q: Larunda plc operates a shipyard in the UK and has recently completed

Larunda plc operates a shipyard in the UK and has recently completed the building of a passenger ferry for a French business. The ferry has successfully completed its sea trials and final payment of €...

Q: Advocates of the shareholder value approach argue that, by delivering consistent

Advocates of the shareholder value approach argue that, by delivering consistent and sustainable improvements in shareholder value, a business will benefit several stakeholder groups. The performance...

Q: Accona plc operates a successful chain of furniture retail stores. For

Accona plc operates a successful chain of furniture retail stores. For the year that has just ended, the business reported after-tax profits of £250 million. It has 200 million £0.50 shares in issue a...

Q: The directors of Helena Beauty Products Ltd have been presented with the

The directors of Helena Beauty Products Ltd have been presented with the following abridged financial statements: Required: Using six ratios, comment on the profitability (three ratios) and efficienc...

Q: Was the depreciation of the Asian currencies during the Asian crisis due

Was the depreciation of the Asian currencies during the Asian crisis due to trade flows or capital flows? Why do you think the degree of movement over a short period may depend on whether the reason i...

Q: In most cases, a weak local currency is expected to stimulate

In most cases, a weak local currency is expected to stimulate the local economy. Yet, it appeared that the weak currencies of Asian countries adversely affected their economies. Why do you think the w...

Q: Assume that the level of capital flows between the United States and

Assume that the level of capital flows between the United States and the country of Krendo is negligible (close to zero) and will continue to be negligible. In contrast, a substantial amount of trade...

Q: You reside in the United States and are planning to make a

You reside in the United States and are planning to make a one-year investment in Germany during the next year. Because the investment is denominated in euros, you want to forecast how the euro’s valu...

Q: Assume that the level of capital flows between the United States and

Assume that the level of capital flows between the United States and the country of Zeus is negligible (close to zero) and will continue to be negligible. A substantial amount of trade takes place bet...

Q: The country of Luta has large capital flows with the United States

The country of Luta has large capital flows with the United States. It has no trade with the United States and will not have trade with the United States in the future. Its interest rate is 6 percent,...

Q: Kurnick Co. expects that the pound will depreciate from $1

Kurnick Co. expects that the pound will depreciate from $1.70 to $1.68 in one year. It has no money to invest, but it could borrow money to invest. A bank allows the company to borrow either $1 millio...

Q: Assume you want to determine whether the monthly movements in the Polish

Assume you want to determine whether the monthly movements in the Polish zloty against the dollar are more volatile than the monthly movements in some other currencies against the dollar. The zloty wa...

Q: Assume that inflation is zero in the United States and in Europe

Assume that inflation is zero in the United States and in Europe and will remain at zero. U.S. interest rates are presently the same as in Europe. Assume that economic growth in the United States is p...

Q: Last year a dollar was equal to 7 Swedish kronor, and

Last year a dollar was equal to 7 Swedish kronor, and a Polish zloty was equal to $0.40. Today, the dollar is equal to 8 Swedish kronor, and a Polish zloty is equal to $0.44. By what percentage did th...

Q: Assume U.S. interest rates fall relative to British interest

Assume U.S. interest rates fall relative to British interest rates. Other things being equal, how should this affect (a) the U.S. demand for British pounds, (b) the supply of pounds for sale, and (...

Q: Here are exchange rates for the Japanese yen and British pound at

Here are exchange rates for the Japanese yen and British pound at the beginning of each of the last five years. Your firm wants to determine which currency is more volatile as it assesses its exposure...

Q: During the Asian crisis, Hong Kong and China successfully intervened (

During the Asian crisis, Hong Kong and China successfully intervened (by raising their interest rates) to protect their local currencies from depreciating. Nevertheless, these countries were also adve...

Q: The country of Quinland has large capital flows with the United States

The country of Quinland has large capital flows with the United States. It has no trade with the United States and will not have trade with the United States in the future. Its interest rate is 6 perc...

Q: The country of Zars has large capital flows with the United States

The country of Zars has large capital flows with the United States. It has no trade with the United States and will not have trade with the United States in the future. Its interest rate is 6 percent,...

Q: The country of Vezot has massive capital flows with the United States

The country of Vezot has massive capital flows with the United States because it has no restrictions on the movement of investment funds into or out of the country. Its inflation rate just increased s...

Q: The country of Neeland has stable and predictable international trade flows with

The country of Neeland has stable and predictable international trade flows with the United States. Neeland periodically makes the news because its government might have problems repaying its debt owe...

Q: The New Zealand dollar’s spot rate was equal to $0.

The New Zealand dollar’s spot rate was equal to $0.60 last month. New Zealand conducts much international trade with the United States, but the financial (investment) transactions between the two coun...

Q: Assume that the U.S. income level rises at a

Assume that the U.S. income level rises at a much higher rate than does the Canadian income level. Other things being equal, how should this affect (a) the U.S. demand for Canadian dollars, (b) the...

Q: Assume that the Japanese government relaxes its controls on imports by Japanese

Assume that the Japanese government relaxes its controls on imports by Japanese companies. Other things being equal, how should this affect (a) the U.S. demand for Japanese yen, (b) the supply of ye...

Q: What is the expected relationship between the relative real interest rates of

What is the expected relationship between the relative real interest rates of two countries and the exchange rate of their currencies?

Q: Explain why a public forecast by a respected economist about future interest

Explain why a public forecast by a respected economist about future interest rates could affect the value of the dollar today. Why do some forecasts by well-respected economists have no impact on toda...

Q: What factors affect the future movements in the value of the euro

What factors affect the future movements in the value of the euro against the dollar?

Q: Why do you think the values of bonds issued by Asian governments

Why do you think the values of bonds issued by Asian governments declined during the Asian crisis? Why do you think the values of Latin American bonds declined in response to the Asian crisis?

Q: Assume that substantial capital flows occur among Canada, the United States

Assume that substantial capital flows occur among Canada, the United States, and Japan. If the interest rate in Canada declines to a level below the U.S. interest rate, and inflationary expectations r...

Q: Compare and contrast forward and futures contracts

Compare and contrast forward and futures contracts

Q: Randy Rudecki purchased a call option on British pounds for $0

Randy Rudecki purchased a call option on British pounds for $0.02 per unit. The strike price was $1.45, and the spot rate at the time the option was exercised was $1.46. Assume there are 31,250 units...

Q: Alice Duever purchased a put option on British pounds for $0

Alice Duever purchased a put option on British pounds for $0.04 per unit. The strike price was $1.80,and the spot rate at the time the pound option was exercised was $1.59. Assume there are 31,250 uni...

Q: Mike Suerth sold a call option on Canadian dollars for $0

Mike Suerth sold a call option on Canadian dollars for $0.01 per unit. The strike price was $0.76, and the spot rate at the time the option was exercised was $0.82. Assume Mike did not obtain Canadian...

Q: Brian Tull sold a put option on Canadian dollars for $0

Brian Tull sold a put option on Canadian dollars for $0.03 per unit. The strike price was $0.75, and the spot rate at the time the option was exercised was $0.72. Assume Brian immediately sold the Can...

Q: What are the advantages and disadvantages to a U.S.

What are the advantages and disadvantages to a U.S. corporation that uses currency options on euros rather than a forward contract on euros to hedge its exposure in euros? Explain why an MNC might use...

Q: Assume that the euro’s spot rate has moved in cycles over time

Assume that the euro’s spot rate has moved in cycles over time. How might you try to use futures contracts on euros to capitalize on this tendency? How could you determine whether such a strategy woul...

Q: Assume that the transactions listed in the first column of the following

Assume that the transactions listed in the first column of the following table are anticipated by U.S. firms that have no other foreign transactions. Place an “X” i...

Q: Assume that on November 1, the spot rate of the British

Assume that on November 1, the spot rate of the British pound was $1.58 and the price on a December futures contract was $1.59. Assume that the pound depreciated during November so that by November 30...

Q: Why do you think the depreciation of the Asian currencies adversely affected

Why do you think the depreciation of the Asian currencies adversely affected U.S. firms? (There are at least three reasons, each related to a different type of exposure of some U.S. firms to exchange...

Q: Assume that a March futures contract on Mexican pesos was available in

Assume that a March futures contract on Mexican pesos was available in January for $0.09 per unit. Also assume that forward contracts were available for the same settlement date at a price of $0.092 p...

Q: LSU Corp. purchased Canadian dollar call options for speculative purposes.

LSU Corp. purchased Canadian dollar call options for speculative purposes. If these options are exercised, LSU will immediately sell the Canadian dollars in the spot market. Each option was purchased...

Q: How can corporations use currency futures? b. How can speculators

How can corporations use currency futures? b. How can speculators use currency futures?

Q: Auburn Co. has purchased Canadian dollar put options for speculative purposes

Auburn Co. has purchased Canadian dollar put options for speculative purposes. Each option was purchased for a premium of $0.02 per unit, with an exercise price of $0.86 per unit. Auburn Co. will purc...

Q: Bama Corp. has sold British pound call options for speculative purposes

Bama Corp. has sold British pound call options for speculative purposes. The option premium was $0.06 per unit, and the exercise price was $1.58. Bama will purchase the pounds on the day the options a...

Q: Bulldog, Inc., has sold Australian dollar put options at a

Bulldog, Inc., has sold Australian dollar put options at a premium of $0.01 per unit, and an exercise price of $0.76 per unit. It has forecasted the Australian dollar’s lowest level...

Q: A U.S. professional football team plans to play an

A U.S. professional football team plans to play an exhibition game in the United Kingdom next year. Assume that all expenses will be paid by the British government, and that the team will receive a ch...

Q: Currency futures markets are commonly used as a means of capitalizing on

Currency futures markets are commonly used as a means of capitalizing on shifts in currency values, because the value of a futures contract tends to move in line with the change in the corresponding c...

Q: One year ago, you sold a put option on 100,

One year ago, you sold a put option on 100,000 euros with an expiration date of one year. You received a premium on the put option of $0.04 per unit; the exercise price was $1.22. Assume that one year...

Q: Myrtle Beach Co. purchases imports that have a price of 400

Myrtle Beach Co. purchases imports that have a price of 400,000 Singapore dollars, and it has to pay for the imports in 90 days. It can purchase a 90-day forward contract on Singapore dollars at $0.50...

Q: During the Asian crisis, the currencies of many Asian countries declined

During the Asian crisis, the currencies of many Asian countries declined even though their governments attempted to intervene with direct intervention or by raising interest rates. Given that the abru...

Q: Reska, Inc., has constructed a long euro straddle. A

Reska, Inc., has constructed a long euro straddle. A call option on euros with an exercise price of $1.10 has a premium of $0.025 per unit. A euro put option has a premium of $0.017 per un...

Q: Refer to the previous question, but assume that the call and

Refer to the previous question, but assume that the call and put option premiums are $0.02 per unit and $0.015 per unit, respectively. (See Appendix B in this chapter.) a. Construct a contingency grap...

Q: The current spot rate of the Singapore dollar (S$) is

The current spot rate of the Singapore dollar (S$) is $0.50. The following option information is available: Call option premium on Singapore dollar (S$) $ 5 0.015. Put option premium on Singapore dol...

Q: Differentiate between a currency call option and a currency put option.

Differentiate between a currency call option and a currency put option.

Q: Maggie Hawthorne is a currency speculator. She has noticed that recently

Maggie Hawthorne is a currency speculator. She has noticed that recently the euro has appreciated substantially against the U.S. dollar. The current exchange rate of the euro is $1.15. After reading a...

Q: Assume the following options are currently available for British pounds (£):

Assume the following options are currently available for British pounds (£): Call option premium on Britishpounds 5$0.04 perunit. Put option premium on British pounds5$0.03 perunit. Call option stri...

Q: Refer to the previous question, but assume that the call and

Refer to the previous question, but assume that the call and put option premiums are $0.035 per unit and $0.025 per unit, respectively. (See Appendix B in this chapter.) a. Construct a contingency gra...

Q: The following information is currently available for Canadian dollar (C$)

The following information is currently available for Canadian dollar (C$) options (see Appendix B in this chapter): Put option exercise price 5 $0.75. Put option premium 5 $0.014 per unit. Call opt...

Q: For the following options available on Australian dollars (A$), construct

For the following options available on Australian dollars (A$), construct a worksheet and contingency graph for a long strangle. Locate the break-even points for this strangle. (See Appendix B in this...

Q: Barry Egan is a currency speculator. Barry believes that the Japanese

Barry Egan is a currency speculator. Barry believes that the Japanese yen will fluctuate widely against the U.S. dollar in the coming month. Currently, one-month call options on Japanese yen (¥) are a...

Q: Blades, the U.S.-based roller blades manufacturer,

Blades, the U.S.-based roller blades manufacturer, is currently both exporting to and importing from Thailand. The company has chosen Thailand as an export target for its primary product, Speedos, bec...

Q: A call option on British pounds (£) exists with a strike price

A call option on British pounds (£) exists with a strike price of $1.56 and a premium of $0.08 per unit. Another call option on British pounds has a strike price of $1.59 and a premium of...

Q: Two British pound (£) put options are available with exercise prices of

Two British pound (£) put options are available with exercise prices of $1.60 and $1.62. The premiums associated with these options are $0.03 and $0.04 per unit, respectively. (See Append...

Q: On July 2, the two-month futures rate of the

On July 2, the two-month futures rate of the Mexican peso contained a 2 percent discount (unannualized). A call option on pesos was available with an exercise price that was equal to the spot rate. In...

Q: This morning, a Canadian dollar call option contract has a $

This morning, a Canadian dollar call option contract has a $0.71 strike price, a premium of $0.02, and an expiration date of one month from now. This afternoon, news about international economic condi...

Q: Compute the forward discount or premium for the Mexican peso whose 90

Compute the forward discount or premium for the Mexican peso whose 90-day forward rate is $0.102 and spot rate is $0.10. State whether your answer is a discount or premium.

Q: At 10:30 a.m., the media reported news

At 10:30 a.m., the media reported news that the Mexican government’s political problems had decreased, which reduced the expected volatility of the Mexican peso against the dollar over the next month....

Q: Assume that one year ago, the spot rate of the British

Assume that one year ago, the spot rate of the British pound was $1.70, and the one-year futures contract of the British pound exhibited a discount of 6 percent. At that time, you sold futures contrac...

Q: The spot rate of the New Zealand dollar is $0.

The spot rate of the New Zealand dollar is $0.77. A call option on New Zealand dollars with a one-year expiration date has an exercise price of $0.78 and a premium of $0.04. A put option on New Zealan...

Q: Assume that Australia’s central bank announced plans to stabilize the Australian dollar

Assume that Australia’s central bank announced plans to stabilize the Australian dollar (A$) in the foreign exchange markets. In response to this announcement, the expected volatility of the A$ declin...

Q: How can a forward contract backfire?

How can a forward contract backfire?

Q: The “Market” section of the Bloomberg website (www .

The “Market” section of the Bloomberg website (www .bloomberg.com) provides interest rate quotations for numerous currencies. 1. Review the section of the website that provides interest rates for var...

Q: When would a U.S. firm consider purchasing a call

When would a U.S. firm consider purchasing a call option on euros for hedging? When would a U.S. firm consider purchasing a put option on euros for hedging

Q: When should a speculator purchase a call option on Australian dollars?

When should a speculator purchase a call option on Australian dollars? When should a speculator purchase a put option on Australian dollars?

Q: List the factors that affect currency call option premiums, and briefly

List the factors that affect currency call option premiums, and briefly explain the relationship that exists for each. Do you think an at-the-money call option in euros has a higher or lower premium t...

Q: List the factors that affect currency put option premiums, and briefly

List the factors that affect currency put option premiums, and briefly explain the relationship that exists for each

Q: Compare and contrast the fixed, freely floating, and managed float

Compare and contrast the fixed, freely floating, and managed float exchange rate systems. What are some advantages and disadvantages of a freely floating exchange rate system versus a fixed exchange r...

Q: U.S. bond prices are usually inversely related to U

U.S. bond prices are usually inversely related to U.S. inflation. If the Fed planned to use intervention to weaken the dollar, how might bond prices be affected?

Q: If most countries in Europe experience a recession, how might the

If most countries in Europe experience a recession, how might the European Central Bank use direct intervention to stimulate economic growth?

Q: Explain the difference between sterilized and nonsterilized interventions.

Explain the difference between sterilized and nonsterilized interventions.

Q: Suppose that the government of Chile reduces one of its key interest

Suppose that the government of Chile reduces one of its key interest rates. The values of several other Latin American currencies are expected to change substantially against the Chilean peso in respo...

Q: Should the governments of Asian countries allow their currencies to float freely

Should the governments of Asian countries allow their currencies to float freely? What would be the advantages of letting their currencies float freely? What would be the disadvantages?

Q: Recall that Blades, Inc., the U.S.-based

Recall that Blades, Inc., the U.S.-based manufacturer of roller blades, is currently both exporting to and importing from Thailand. Ben Holt, Blades’ chief financial officer (CFO), and you, a financia...

Q: During the Asian crisis (see Appendix 6 at the end of

During the Asian crisis (see Appendix 6 at the end of this chapter), some Asian central banks raised their interest rates to prevent their currencies from weakening. Yet the currencies weakened anyway...

Q: During the Asian crisis (see Appendix 6 at the end of

During the Asian crisis (see Appendix 6 at the end of this chapter), some Asian central banks raised their interest rates to prevent their currencies from weakening. Yet the currencies weakened anyway...

Q: Within a few days after the September 11, 2001, terrorist

Within a few days after the September 11, 2001, terrorist attack on the United States, the Federal Reserve reduced short-term interest rates to stimulate the U.S. economy. How might this action have a...

Q: Assume you have a subsidiary in Australia. The subsidiary sells mobile

Assume you have a subsidiary in Australia. The subsidiary sells mobile homes to local consumers in Australia, who buy the homes using mostly borrowed funds from local banks. Your subsidiary purchases...

Q: Why might a country suddenly decide to peg its currency to the

Why might a country suddenly decide to peg its currency to the dollar or some other currency? When a currency is unable to maintain the peg, which forces usually act to break the peg?

Q: Assume that Belgium, one of the European countries that uses the

Assume that Belgium, one of the European countries that uses the euro as its currency, would prefer that its currency depreciate against the U.S. dollar. Can it apply central bank intervention to achi...

Q: Assume that the central bank of the country Zakow periodically intervenes in

Assume that the central bank of the country Zakow periodically intervenes in the foreign exchange market to prevent large upward or downward fluctuations in its currency (the zak) against the U.S. dol...

Q: As of 10:00 a.m., the premium on

As of 10:00 a.m., the premium on a specific one-year call option on British pounds is $0.04. Assume that the Bank of England had not been intervening in the foreign exchange markets in the last severa...

Q: Assume that you expect the European Central Bank to engage in central

Assume that you expect the European Central Bank to engage in central bank intervention by using euros to purchase a substantial amount of U.S. dollars in the foreign exchange market over the next mon...

Q: Assume the Hong Kong dollar (HK$) value is tied to

Assume the Hong Kong dollar (HK$) value is tied to the U.S. dollar and will remain tied to the U.S. dollar. Last month, one HK$ 5 0.25 Singapore dollar. Today, one HK$ 5 0.30 Singapore dollar. Assume...

Q: The Sports Exports Company converts British pounds into dollars every month.

The Sports Exports Company converts British pounds into dollars every month. The prevailing spot rate is about $1.65, but there is much uncertainty about the future value of the pound. Jim Logan, owne...

Q: The country of Zapakar has much international trade with the United States

The country of Zapakar has much international trade with the United States and other countries, as it has no significant barriers on trade or capital flows. Many firms in Zapakar export common product...

Q: Assume that Canada decides to peg its currency (the Canadian dollar

Assume that Canada decides to peg its currency (the Canadian dollar) to the U.S. dollar and that the exchange rate will remain fixed. Assume that Canada commonly obtains its imports from the United St...

Q: The inflation rate in Yinland was 14 percent last year. The

The inflation rate in Yinland was 14 percent last year. The government of Yinland just devalued its currency (the yin) by 40 percent against the dollar. Even though it produces products similar to tho...

Q: Interest rate parity exists and will continue to exist. The one

Interest rate parity exists and will continue to exist. The one-year interest rate in the United States and in the eurozone is 6 percent and will continue to be 6 percent. Assume that Denmark’s curren...

Q: The United States, Argentina, and Canada commonly engage in international

The United States, Argentina, and Canada commonly engage in international trade with each other. All the products traded can easily be produced in all three countries. The traded products are always i...

Q: Assume that France wants to change the prevailing spot rate of its

Assume that France wants to change the prevailing spot rate of its currency (euro) so as to improve its economy; likewise, Switzerland wants to change the prevailing value of its currency (Swiss franc...

Q: How can a central bank use direct intervention to change the value

How can a central bank use direct intervention to change the value of a currency? Explain why a central bank may desire to smooth the exchange rate movements of its currency.

Q: Assume that the United States has a weak economy and that the

Assume that the United States has a weak economy and that the Fed wants to correct this problem by adjusting the value of the dollar. The Fed is not worried about inflation. Assume that the eurozone h...

Q: a. Assume that the Federal Reserve engages in intervention by exchanging

a. Assume that the Federal Reserve engages in intervention by exchanging a very large amount of Canadian dollars for U.S. dollars in the foreign exchange market. Will this action increase, reduce, or...

Q: a. Explain the dilemma that the ECB faces as it attempts

a. Explain the dilemma that the ECB faces as it attempts to help countries with large budget deficits. b. Describe the types of conditions that the ECB requires when providing credit to countries tha...

Q: Blades, Inc., is currently exporting roller blades to Thailand and

Blades, Inc., is currently exporting roller blades to Thailand and importing certain components needed to manufacture roller blades from that country. Under a fixed contractual agreement, Bladesâ...

Q: a. Explain why one country abandoning the euro could reduce the

a. Explain why one country abandoning the euro could reduce the value of the euro, even if that country accounts for a very small proportion of the total production among all eurozone participants. b...

Q: How can a central bank use indirect intervention to change the value

How can a central bank use indirect intervention to change the value of its home currency?

Q: Assume there is concern that the United States may experience a recession

Assume there is concern that the United States may experience a recession. How should the Federal Reserve influence the dollar to prevent a recession? How might U.S. exporters react to this policy (fa...

Q: What is the impact of a weak home currency on the home

What is the impact of a weak home currency on the home economy, other things being equal? What is the impact of a strong home currency on the home economy, other things being equal?

Q: Explain the potential feedback effects of a currency’s changing value on inflation

Explain the potential feedback effects of a currency’s changing value on inflation.

Q: Why would the Fed’s indirect intervention have a stronger impact on some

Why would the Fed’s indirect intervention have a stronger impact on some currencies than on others? Why would a central bank’s indirect intervention have a stronger impact than its direct intervention...

Q: The Hong Kong dollar’s value is tied to the U.S

The Hong Kong dollar’s value is tied to the U.S. dollar. Explain how the following trade patterns would be affected by the appreciation of the Japanese yen against the dollar: (a) Hong Kong exports t...

Q: Explain the concept of locational arbitrage and the scenario necessary for it

Explain the concept of locational arbitrage and the scenario necessary for it to be plausible.

Q: Why do you think currencies of countries with high inflation rates tend

Why do you think currencies of countries with high inflation rates tend to have forward discounts?

Q: Assume that the existing U.S. one-year interest

Assume that the existing U.S. one-year interest rate is 10 percent and the Canadian one-year interest rate is 11 percent. Also assume that interest rate parity exists. Should the forward rate of the C...

Q: Why do you think the Indonesia rupiah was more exposed to an

Why do you think the Indonesia rupiah was more exposed to an abrupt decline in value than the Japanese yen during the Asian crisis (even if the home countries’ economies experienced the same degree of...

Q: At the current time, the Sports Exports Company is willing to

At the current time, the Sports Exports Company is willing to receive payments in British pounds for the monthly exports it sends to the United Kingdom. Although all of its receivables are denominated...

Q: Why would U.S. investors consider covered interest arbitrage in

Why would U.S. investors consider covered interest arbitrage in France when the interest rate on euros in France is lower than the U.S. interest rate?

Q: Consider investors who invest in either U.S. or British

Consider investors who invest in either U.S. or British one-year Treasury bills. Assume zero transaction costs and no taxes. a. If interest rate parity exists, then the return for U.S. investors who...

Q: Assume that the Japanese yen’s forward rate currently exhibits a premium of

Assume that the Japanese yen’s forward rate currently exhibits a premium of 6 percent and that interest rate parity exists. If U.S. interest rates decrease, how must this premium change to maintain in...

Q: Assume that the forward rate premium of the euro was higher last

Assume that the forward rate premium of the euro was higher last month than it is today. What does this imply about interest rate differentials between the United States and Europe today compared to t...

Q: If the relationship that is specified by interest rate parity does not

If the relationship that is specified by interest rate parity does not exist at any period but does exist on average, then covered interest arbitrage should not be considered by U.S. firms. Do you agr...

Q: The one-year interest rate in New Zealand is 6 percent

The one-year interest rate in New Zealand is 6 percent. The one-year U.S. interest rate is 10 percent. The spot rate of the New Zealand dollar (NZ$) is $0.50. The forward rate of the New Zealand dolla...

Q: Assume that the one-year U.S. interest rate

Assume that the one-year U.S. interest rate is 11 percent, whereas the one-year interest rate in Malaysia is 40 percent. Assume that a U.S. bank is willing to purchase the currency of that country fro...

Q: Assume that the annual U.S. interest rate is currently

Assume that the annual U.S. interest rate is currently 8 percent and Germany’s annual interest rate is currently 9 percent. The euro’s one-year forward rate currently exhibits a discount of 2 percent....

Q: Assume the following information: / Given this information

Assume the following information: Given this information, is locational arbitrage possible? If so, explain the steps involved in locational arbitrage, and compute the profit from this arbitrage if yo...

Q: The South African rand has a one-year forward premium of

The South African rand has a one-year forward premium of 2 percent. One-year interest rates in the United States are 3 percentage points higher than in South Africa. Based on this information, is cove...

Q: Blades, Inc., has recently decided to expand its international trade

Blades, Inc., has recently decided to expand its international trade relationship by exporting its roller blades to the United Kingdom. Jogs, Ltd., a British retailer, has committed itself to the annu...

Q: Assume that annual interest rates in the United States are 4 percent

Assume that annual interest rates in the United States are 4 percent, whereas interest rates in France are 6 percent. a. According to IRP, what should the forward rate premium or discount of the euro...

Q: The following information is available: You have $500,

The following information is available: You have $500,000 to invest. The current spot rate of the Moroccan dirham is $0.110. The 60-day forward rate of the Moroccan dirham is $0.108 The 60-day intere...

Q: Assume that Mexico’s economy has expanded significantly, creating a high demand

Assume that Mexico’s economy has expanded significantly, creating a high demand for loanable funds there by local firms. How might these conditions affect the forward discount of the Mexican peso?

Q: Assume that the 30-day forward premium of the euro is

Assume that the 30-day forward premium of the euro is 1 percent, while the 90-day forward premium of the euro is 2 percent. Explain the likely interest rate conditions that would cause these premiums....

Q: Describe a method for testing whether interest rate parity exists. Why

Describe a method for testing whether interest rate parity exists. Why are transaction costs, currency restrictions, and differential tax laws important when evaluating whether covered interest arbitr...

Q: If the U.S. interest rate is close to zero

If the U.S. interest rate is close to zero, while the interest rate of Russia is very high, what would interest rate parity suggest about the forward rate of the Russian ruble? Explain.

Q: Assume that interest rate parity holds. At the beginning of the

Assume that interest rate parity holds. At the beginning of the month, the spot rate of the Canadian dollar is $0.70, whereas the one-year forward rate is $0.68. Assume that U.S. interest rates increa...

Q: The interest rate in Indonesia is commonly higher than the interest rate

The interest rate in Indonesia is commonly higher than the interest rate in the United States, which reflects a high expected rate of inflation there. Why should Nike’s Indonesia-based division consid...

Q: At the end of this month, you (the owner of

At the end of this month, you (the owner of a U.S. firm) are meeting with a Japanese firm to which you will try to sell supplies. If you receive an order from that firm, you will obtain a forward cont...

Q: Explain the concept of triangular arbitrage and the scenario necessary for it

Explain the concept of triangular arbitrage and the scenario necessary for it to be plausible.

Q: Jim Logan, owner of the Sports Exports Company, will be

Jim Logan, owner of the Sports Exports Company, will be receiving about 10,000 British pounds about one month from now as payment for exports produced and sent by his firm. Logan is concerned about hi...

Q: The one-year interest rate in Singapore is 11 percent.

The one-year interest rate in Singapore is 11 percent. The one-year interest rate in the United States is 6 percent. The spot rate of the Singapore dollar (S$) is $0.50 and the forward rate of the S$...

Q: Assume that interest rate parity exists. The one-year nominal

Assume that interest rate parity exists. The one-year nominal interest rate in the United States is 7 percent, while the one-year nominal interest rate in Australia is 11 percent. The spot rate of the...

Q: You go to a bank and are given these quotes: You

You go to a bank and are given these quotes: You can buy a euro for 14 pesos. The bank will pay you 13 pesos for a euro. You can buy a U.S. dollar for 0.9 euro The bank will pay you 0.8 euro for a U.S...

Q: You are given these quotes by the bank: You can sell

You are given these quotes by the bank: You can sell Canadian dollars (C$) to the bank for $0.70. You can buy Canadian dollars from the bank for $0.73. The bank is willing to buy dollars for 0.9 euro...

Q: Assume that cross exchange rates are always properly aligned, such that

Assume that cross exchange rates are always properly aligned, such that triangular arbitrage is not feasible. While at the Miami airport today, you notice that a U.S. dollar can be exchanged for 125 J...

Q: Assume that the annual U.S. interest rate is currently

Assume that the annual U.S. interest rate is currently 6 percent, whereas Germany’s annual interest rate is currently 8 percent. The spot rate of the euro is $1.10 and the one-year forward rate of the...

Q: Assume that interest rate parity exists. As of this morning,

Assume that interest rate parity exists. As of this morning, the one-month interest rate in Canada was lower than the one-month interest rate in the United States. Assume that as a result of the Fed’s...

Q: Assume that the spot rate of the Brazilian real is $0

Assume that the spot rate of the Brazilian real is $0.30 today. Also assume that interest rate parity exists. Obtain the interest rate data you need from Bloomberg.com to derive the one-year forward r...

Q: Assume that interest rate parity exists and will continue to exist.

Assume that interest rate parity exists and will continue to exist. As of today, the one-year interest rate in Singapore is 4 percent; the corresponding rate is 7 percent in the United States. The Sin...

Q: Assume that interest rate parity exists, along with the following information

Assume that interest rate parity exists, along with the following information: Spot rate of British pound 5 $1.80 6-month forward rate of pound 5 $1.82 12-month forward rate of pound 5 $1.78 a. Is th...

Q: Blades, Inc., has been exporting to Thailand since it made

Blades, Inc., has been exporting to Thailand since it made the decision to supplement its declining U.S. sales by exporting its roller blades to that country. Furthermore, Blades has recently begun ex...

Q: Assume the following information: / Given this information

Assume the following information: Given this information, is triangular arbitrage possible? If so, explain the steps that would reflect triangular arbitrage, and compute the profit from this strategy...

Q: Assume that interest rate parity exists. The 6-month forward

Assume that interest rate parity exists. The 6-month forward rate of the Swiss franc has a premium, whereas the 12-month forward rate of the Swiss franc has a discount. What does this tell you about t...

Q: Assume that interest rate parity exists. The spot rate of the

Assume that interest rate parity exists. The spot rate of the Argentine peso is $0.40. The one-year interest rate in the United States is 7 percent; the comparable rate is 12 percent in Argentina. Ass...

Q: Today, the one-year U.S. interest rate

Today, the one-year U.S. interest rate is 4 percent, while the corresponding rate in Argentina is 17 percent. The spot rate of the Argentine peso (AP) is $0.44. The one-year forward rate of the AP exh...

Q: Assume zero transaction costs. As of now, the Japanese oneyear

Assume zero transaction costs. As of now, the Japanese oneyear interest rate is 3 percent, and the U.S. one-year interest rate is 9 percent. The spot rate of the Japanese yen is $0.0090 and the one-ye...

Q: Earlier this morning, the annual U.S. interest rate

Earlier this morning, the annual U.S. interest rate was 6 percent, whereas Mexico’s annual interest rate was 8 percent. The spot rate of the Mexican peso was $0.16. The one-year forward rate of the pe...

Q: Assume that interest rate parity exists, along with the following information

Assume that interest rate parity exists, along with the following information: Spot rate of Swiss franc 5 $0.80 6-month forward rate of Swiss franc $ 5 0.78 12-month forward rate of Swiss franc $ 5 0....

Q: Assume that the annual U.S. interest rate is currently

Assume that the annual U.S. interest rate is currently 8 percent, whereas Japan’s annual interest rate is currently 7 percent. The spot rate of the Japanese yen is $0.01. The one-year forward rate of...

Q: A bank is willing to buy dollars for 0.9 euro

A bank is willing to buy dollars for 0.9 euro per dollar. It is willing to sell dollars for 0.91 euro per dollar. Also consider the following information: You can sell Australian dollars (A$) to the b...

Q: Alabama Bank is willing to buy or sell British pounds for $

Alabama Bank is willing to buy or sell British pounds for $1.98. The bank is willing to buy or sell Mexican pesos at an exchange rate of 10 pesos per dollar. It is willing to purchase British pounds a...

Q: Jim Logan, owner of the Sports Exports Company, remains concerned

Jim Logan, owner of the Sports Exports Company, remains concerned about his exposure to exchange rate risk. Even if he hedges his transactions from one month to another, he recognizes that a long-term...

Q: Biscayne Co. will be receiving Mexican pesos today and will need

Biscayne Co. will be receiving Mexican pesos today and will need to convert them into Australian dollars. Today, a U.S. dollar can be exchanged for 10 Mexican pesos. An Australian dollar is worth one-...

Q: Explain the concept of covered interest arbitrage and the scenario necessary for

Explain the concept of covered interest arbitrage and the scenario necessary for it to be plausible.

Q: Assume that interest rate parity exists and will continue to exist.

Assume that interest rate parity exists and will continue to exist. As of this morning, the one-month interest rate in the United States was higher than the one-month interest rate in the eurozone. As...

Q: You obtain the following quotes from different banks. One bank is

You obtain the following quotes from different banks. One bank is willing to buy or sell Japanese yen at an exchange rate of 110 yen per dollar. A second bank is willing to buy or sell the Argentine p...

Q: Interest rate parity exists between the United States and Poland (its

Interest rate parity exists between the United States and Poland (its currency is the zloty). The one-year risk-free CD (deposit) rate in the United States is 7 percent. The one-year risk-free CD rate...

Q: As of now, the nominal interest rate is 6 percent in

As of now, the nominal interest rate is 6 percent in the United States and 6 percent in Australia. The spot rate of the Australian dollar is $0.58, whereas the oneyear forward rate of the Australian d...

Q: Assume that the one-year interest rate in the United Kingdom

Assume that the one-year interest rate in the United Kingdom is 9 percent, whereas the one-year interest in the United States is 4 percent. The spot rate of the pound is $1.50. Assume that interest ra...

Q: Today, the annualized interest rate in the United States is 4

Today, the annualized interest rate in the United States is 4 percent for any debt maturity. The annualized interest rate in Australia is 4 percent for debt maturities of three months or less, 5 perce...

Q: Assume that interest rate parity holds and will continue to hold in

Assume that interest rate parity holds and will continue to hold in the future. At the beginning of the month, the spot rate of the British pound is $1.60, while the one-year forward rate is $1.50. As...

Q: Assume that the one-year interest rate in Canada is 4 

Assume that the one-year interest rate in Canada is 4 percent. The one-year U.S. interest rate is 8 percent. The spot rate of the Canadian dollar (C$) is $0.94. The forward rate of the Canadian dollar...

Q: For the last year, Blades, Inc., has been exporting

For the last year, Blades, Inc., has been exporting its products to Thailand to supplement its declining U.S. sales. Under the existing arrangement, Blades sells 180,000 pairs of roller blades annuall...

Q: Assume the following information: / Given this information

Assume the following information: Given this information, what would be the yield (percentage return) to a U.S. investor who used covered interest arbitrage? (Assume the investor invests $1 million.)...

Q: Assume the following information / Given this information,

Assume the following information Given this information, is covered interest arbitrage worthwhile for Mexican investors who have pesos to invest? Explain your answer.

Q: The terrorist attacks on the United States on September 11, 2001

The terrorist attacks on the United States on September 11, 2001, led to expectations of a weaker U.S. economy. Explain how such expectations could have affected U.S. interest rates and, therefore, th...

Q: Explain the concept of interest rate parity. Provide the rationale for

Explain the concept of interest rate parity. Provide the rationale for its possible existence

Q: Explain the theory of purchasing power parity (PPP). Based on

Explain the theory of purchasing power parity (PPP). Based on this theory, what is a general forecast of the values of currencies in countries with high inflation?

Q: investors in the United States and Canada require the same real interest

investors in the United States and Canada require the same real interest rate, and the nominal rate of interest is 2 percent higher in Canada, what does this imply about expectations of U.S. inflation...

Q: Assume that several European countries that use the euro as their currency

Assume that several European countries that use the euro as their currency experience higher inflation than the United States does, while two other European countries that use the euro as their curren...

Q: The currencies of some Latin American countries, such as Brazil and

The currencies of some Latin American countries, such as Brazil and Venezuela, frequently weaken against most other currencies. What concept in this chapter explains this occurrence? Why don’t all U.S...

Q: Japan has typically had lower inflation than the United States has.

Japan has typically had lower inflation than the United States has. How would one expect this to affect the Japanese yen’s value? Why does this expected relationship not always occur?

Q: Assume that the nominal interest rate in Mexico is 48 percent and

Assume that the nominal interest rate in Mexico is 48 percent and the interest rate in the United States is 8 percent for one-year securities that are free from default risk. What does the IFE suggest...

Q: Jim Logan’s business, the Sports Exports Company, continues to grow

Jim Logan’s business, the Sports Exports Company, continues to grow. His primary product is the footballs he produces and exports to a distributor in the United Kingdom. However, his recent joint vent...

Q: IFE Shouldn’t the IFE discourage investors from attempting to capitalize on higher

IFE Shouldn’t the IFE discourage investors from attempting to capitalize on higher foreign interest rates? Why do some investors continue to invest overseas, even when they have no other transactions...

Q: Assume that the inflation rate in Brazil is expected to increase substantially

Assume that the inflation rate in Brazil is expected to increase substantially. How will this affect Brazil’s nominal interest rates and the value of its currency (the real)? If the IFE holds, how wil...

Q: How is it possible for PPP to hold if the IFE does

How is it possible for PPP to hold if the IFE does not?

Q: Assume that the spot exchange rate of the British pound is $

Assume that the spot exchange rate of the British pound is $1.73. How will this spot rate adjust according to PPP if the United Kingdom experiences an inflation rate of 7 percent while the United Stat...

Q: Assume that the spot exchange rate of the Singapore dollar is $

Assume that the spot exchange rate of the Singapore dollar is $0.70. The one-year interest rate is 11 percent in the United States and 7 percent in Singapore. What will the spot rate be in one year ac...

Q: Explain the rationale underlying PPP theory.

Explain the rationale underlying PPP theory.

Q: As of today, assume the following information is available:

As of today, assume the following information is available: a. Use the forward rate to forecast the percentage change in the Mexican peso over the next year. b. Use the differential in expected infla...

Q: Russia commonly experiences a high rate of inflation. a.

Russia commonly experiences a high rate of inflation. a. Explain why the high Russian inflation typically places severe downward pressure on the value of the Russian ruble. b. In some periods, the R...

Q: Brazil commonly has a much higher nominal interest rate than the United

Brazil commonly has a much higher nominal interest rate than the United States. Yet, some large institutional investors do not invest in Brazilian money market securities, even when they believe the s...

Q: Given the conversion of several European currencies to the euro, explain

Given the conversion of several European currencies to the euro, explain what would cause the euro’s value to change against the dollar according to the IFE.

Q: Because Ben Holt, Blades’ chief financial officer, believes the growth

Because Ben Holt, Blades’ chief financial officer, believes the growth potential for the roller blades market in Thailand is very high, he has decided to invest in Thailand. This investment would invo...

Q: Beth Miller does not believe that the IFE holds. Current one

Beth Miller does not believe that the IFE holds. Current one-year interest rates in Europe are 5 percent, whereas one-year interest rates in the United States are 3 percent. Beth converts $100,000 to...

Q: Assume the following information is available for the United States and the

Assume the following information is available for the United States and the eurozone: a. Does IRP hold? b. According to PPP, what is the expected spot rate of the euro in one year? c. According to t...

Q: The one-year risk-free interest rate in Mexico is

The one-year risk-free interest rate in Mexico is 10 percent. The one-year risk-free rate in the United States is 2 percent. Assume that interest rate parity exists. The spot rate of the Mexican peso...

Q: How could you use regression analysis to determine whether the relationship specified

How could you use regression analysis to determine whether the relationship specified by PPP exists, on average? Specify the model, and describe how you would assess the regression results to determin...

Q: Describe a statistical test for the IFE.

Describe a statistical test for the IFE.

Q: Would PPP be more likely to hold between the United States and

Would PPP be more likely to hold between the United States and Hungary if trade barriers were completely removed and if Hungary’s currency were allowed to float without any government intervention? Wo...

Q: Explain how you could determine whether PPP exists. Describe a limitation

Explain how you could determine whether PPP exists. Describe a limitation in testing whether PPP holds.

Q: Assume that the inflation rates of the countries that use the euro

Assume that the inflation rates of the countries that use the euro are very low, whereas other European countries that have their own currencies experience high inflation. Explain how and why the euro...

Q: Assume that Mexico has a one-year interest rate that is

Assume that Mexico has a one-year interest rate that is higher than the U.S. one-year interest rate. Assume that you believe in the international Fisher effect and interest rate parity. Assume zero tr...

Q: Assume that locational arbitrage ensures that spot exchange rates are properly aligned

Assume that locational arbitrage ensures that spot exchange rates are properly aligned. Also assume that you believe in purchasing power parity. The spot rate of the British pound is $1.80. The spot r...

Q: Jim Logan, owner of the Sports Exports Company, has been

Jim Logan, owner of the Sports Exports Company, has been pleased with his success in the United Kingdom. He began his business by producing footballs and exporting them to the United Kingdom. Although...

Q: You believe that interest rate parity and the international Fisher effect hold

You believe that interest rate parity and the international Fisher effect hold. Assume that the U.S. interest rate is presently much higher than the New Zealand interest rate. You have receivables of...

Q: The U.S. three month interest rate (unannualized)

The U.S. three month interest rate (unannualized) is 1 percent. The Canadian three-month interest rate (unannualized) is 4 percent. Interest rate parity exists. The expected inflation over this period...

Q: Today’s spot rate of the Mexican peso is $0.10

Today’s spot rate of the Mexican peso is $0.10. Assume that purchasing power parity holds. The U.S. inflation rate over this year is expected to be 7 percent, whereas Mexican inflation over this year...

Q: The Argentine one-year CD (deposit) rate is 13

The Argentine one-year CD (deposit) rate is 13 percent, while the Mexican one-year CD rate is 11 percent and the U.S. one-year CD rate is 6 percent. All CDs have zero default risk. Interest rate parit...

Q: Today, a U.S. dollar can be exchanged for

Today, a U.S. dollar can be exchanged for three New Zealand dollars. The one-year CD (deposit) rate in New Zealand is 7 percent, and the one-year CD rate in the United States is 6 percent. Interest ra...

Q: The United States and the country of Rueland have the same real

The United States and the country of Rueland have the same real interest rate of 3 percent. The expected inflation over the next year is 6 percent in the United States versus 21 percent in Rueland. In...

Q: The nominal (quoted) U.S. one-year

The nominal (quoted) U.S. one-year interest rate is 6 percent, whereas the nominal one-year interest rate in Canada is 5 percent. Assume you believe in purchasing power parity. You believe that the re...

Q: Inflation differentials between the United States and other industrialized countries have typically

Inflation differentials between the United States and other industrialized countries have typically been a few percentage points in any given year. Yet, in many years annual exchange rates between the...

Q: Assume the value of the Hong Kong dollar (HK$) is

Assume the value of the Hong Kong dollar (HK$) is tied to the U.S. dollar and will remain tied to the U.S. dollar. Assume that interest rate parity exists. Today, an Australian dollar (A$) is worth $0...

Q: 1 million euros in one year from selling exports. It did

1 million euros in one year from selling exports. It did not hedge this future transaction. Boston believes that the future value of the euro will be determined by purchasing power parity (PPP). It ex...

Q: Recall that Ben Holt, Blades’ chief financial officer (CFO),

Recall that Ben Holt, Blades’ chief financial officer (CFO), has suggested to the board of directors that Blades proceed with the establishment of a subsidiary in Thailand. Due to the high growth pote...

Q: Assume that you believe purchasing power parity exists. You expect that

Assume that you believe purchasing power parity exists. You expect that inflation in Canada during the next year will be 3 percent and inflation in the United States will be 8 percent. Today the spot...

Q: Assume that you believe exchange rate movements are mostly driven by purchasing

Assume that you believe exchange rate movements are mostly driven by purchasing power parity. The United States and Canada presently have the same nominal (quoted) interest rate. The central bank of C...

Q: The one-year Treasury (risk-free) interest rate

The one-year Treasury (risk-free) interest rate in the United States is presently 6 percent, whereas the one-year Treasury interest rate in Switzerland is 13 percent. The spot rate of the Swiss franc...

Q: You believe that the future value of the Australian dollar will be

You believe that the future value of the Australian dollar will be determined by purchasing power parity. You expect that inflation in Australia will be 6 percent next year, whereas inflation in the U...

Q: Investors based in the United States can earn 11 percent interest on

Investors based in the United States can earn 11 percent interest on a oneyear bank deposit in Argentina (with no default risk) or 2 percent on a one-year bank deposit in the United States (with no de...

Q: The United States has expected inflation of 2 percent, whereas Country

The United States has expected inflation of 2 percent, whereas Country A, Country B, and Country C have expected inflation of 7 percent. Country A engages in much international trade with the United S...

Q: Explain why PPP does not hold.

Explain why PPP does not hold.

Q: Explain the international Fisher effect (IFE). What is the rationale

Explain the international Fisher effect (IFE). What is the rationale for the existence of the IFE? What are the implications of the IFE for firms with excess cash that consistently invest in foreign T...

Q: Assume U.S. interest rates are generally higher than foreign

Assume U.S. interest rates are generally higher than foreign interest rates. What does this suggest about the future strength or weakness of the dollar based on the IFE? Should U.S. investors invest i...

Q: Compare and contrast interest rate parity (discussed in Chapter 7),

Compare and contrast interest rate parity (discussed in Chapter 7), PPP, and the IFE.

Q: During the Asian crisis, direct intervention did not prevent depreciation of

During the Asian crisis, direct intervention did not prevent depreciation of currencies. Offer your explanation for why the interventions did not work.

Q: The Sports Exports Company has been successful in producing footballs in the

The Sports Exports Company has been successful in producing footballs in the United States and exporting them to the United Kingdom. Recently, Jim Logan, the owner of the Sports Exports Company, has c...

Q: One assumption made in developing the IFE is that all investors in

One assumption made in developing the IFE is that all investors in all countries have the same real interest rate. What does this mean?

Q: Explain corporate motives for forecasting exchange rates.

Explain corporate motives for forecasting exchange rates.

Q: Assume that the four-year annualized interest rate in the United

Assume that the four-year annualized interest rate in the United States is 9 percent and the four-year annualized interest rate in Singapore is 6 percent. Assume interest rate parity holds for a four-...

Q: Assume that foreign exchange markets were found to be weak-form

Assume that foreign exchange markets were found to be weak-form efficient. What does this suggest about utilizing technical analysis to speculate in euros? If MNCs believe that foreign exchange market...

Q: The director of currency forecasting at Champaign-Urbana Corp. says

The director of currency forecasting at Champaign-Urbana Corp. says, “The most critical task of forecasting exchange rates is not to derive a point estimate of a future exchange rate, but rather to as...

Q: When some countries in Eastern Europe initially allowed their currencies to fluctuate

When some countries in Eastern Europe initially allowed their currencies to fluctuate against the dollar, would the fundamental technique based on historical relationships have been useful for forecas...

Q: Royce Co. is a U.S. firm with future

Royce Co. is a U.S. firm with future receivables one year from now denominated in Canadian dollars and British pounds. Its pound receivables are known with certainty, but its estimated Canadian dollar...

Q: Cooper, Inc., a U.S.- based MNC,

Cooper, Inc., a U.S.- based MNC, periodically obtains euros to purchase German products. It assesses U.S. and German trade patterns and inflation rates to develop a fundamental forecast for the euro....

Q: Assume that you obtain a quote for a one-year forward

Assume that you obtain a quote for a one-year forward rate on the Mexican peso. Assume that Mexico’s one-year interest rate is 40 percent, whereas the U.S. one-year interest rate is 7 percent. Over th...

Q: You believe that the Singapore dollar’s exchange rate movements are mostly attributable

You believe that the Singapore dollar’s exchange rate movements are mostly attributable to purchasing power parity. Today the nominal annual interest rate in Singapore is 18 percent, compared to 3 per...

Q: Recently, Ben Holt, Blades’ chief financial officer, has assessed

Recently, Ben Holt, Blades’ chief financial officer, has assessed whether it would be more beneficial for Blades to establish a subsidiary in Thailand to manufacture roller blades or to acquire an exi...

Q: Assume that the forward rate is an unbiased but not necessarily accurate

Assume that the forward rate is an unbiased but not necessarily accurate forecast of the future exchange rate of the yen over the next several years. Based on this information, do you think Raven Co....

Q: Assume that the following regression model was applied to historical quarterly data

Assume that the following regression model was applied to historical quarterly data: Assume that the regression coefficients were estimated as follows: Also assume that the inflation differential in...

Q: Explain the technical approach to forecasting exchange rates. What are some

Explain the technical approach to forecasting exchange rates. What are some limitations of using technical forecasting to predict these rates?

Q: You must determine whether there is a forecast bias in the forward

You must determine whether there is a forecast bias in the forward rate. You apply regression analysis to test the relationship between the actual spot rate and the forward rate forecast (F ): The reg...

Q: The September 11, 2001, terrorist attacks on the United States

The September 11, 2001, terrorist attacks on the United States were quickly followed by lower interest rates in the United States. How would this affect a fundamental forecast of foreign currencies? H...

Q: The treasurer of Glencoe, Inc., detected a forecast bias when

The treasurer of Glencoe, Inc., detected a forecast bias when using the 30-day forward rate of the euro to forecast future spot rates of the euro over various periods. He believes he can use this info...

Q: The value of each Latin American currency relative to the dollar is

The value of each Latin American currency relative to the dollar is dictated by supply and demand conditions between that currency and the dollar. The values of Latin American currencies have generall...

Q: Bolivia currently has a nominal one-year risk-free interest

Bolivia currently has a nominal one-year risk-free interest rate of 40 percent, which is primarily due to the high level of expected inflation. The U.S. nominal one-year risk-free interest rate is 8 p...

Q: For all parts of this question, assume that interest rate parity

For all parts of this question, assume that interest rate parity exists, that the prevailing one-year U.S. nominal interest rate is low, and that you expect U.S. inflation to be low this year. a. Ass...

Q: New York Co. has agreed to pay 10 million Australian dollars

New York Co. has agreed to pay 10 million Australian dollars (A$) in two years for equipment that it is importing from Australia. The spot rate of the Australian dollar is $0.60. The annualized U.S. i...

Q: The Sports Exports Company produces footballs in the United States and exports

The Sports Exports Company produces footballs in the United States and exports them to the United Kingdom. It also has an ongoing joint venture with a British firm that produces some sporting goods fo...

Q: Purdue Co. (based in the United States) exports cable

Purdue Co. (based in the United States) exports cable wire to Australian manufacturers. It invoices its product in U.S. dollars and will not change its price over the next year. There is intense compe...

Q: Assume that interest rate parity exists, and that it will continue

Assume that interest rate parity exists, and that it will continue to exist in the future. Assume that interest rates of the United States and the United Kingdom vary substantially in many periods. Yo...

Q: Assume that interest rate parity exists. Today the one-year

Assume that interest rate parity exists. Today the one-year U.S. interest rate is equal to 8 percent, whereas Mexico’s one-year interest rate is equal to 10 percent. Today the two-year annualized U.S....

Q: Explain the fundamental approach to forecasting exchange rates. What are some

Explain the fundamental approach to forecasting exchange rates. What are some limitations of using a fundamental technique to forecast these rates?

Q: Assume that interest rate parity exists. One year ago, the

Assume that interest rate parity exists. One year ago, the spot rate of the euro was $1.40, whereas the spot rate of the Japanese yen was $0.01. At that time, the one-year interest rate of the euro an...

Q: Assume that interest rate parity exists and it will continue to exist

Assume that interest rate parity exists and it will continue to exist in the future. Kentucky Co. wants to forecast the value of the Japanese yen in one month. The Japanese interest rate is lower than...

Q: Assume that interest rate parity exists. The one-year risk

Assume that interest rate parity exists. The one-year risk-free interest rate in the United States is 3 percent versus 16 percent in Singapore. You believe in purchasing power parity, and you also bel...

Q: The prevailing one-year risk-free interest rate in Argentina

The prevailing one-year risk-free interest rate in Argentina is higher than the interest rate in the United States and will continue to be higher over time. Sycamore Co. believes the international Fis...

Q: Explain the market-based approach to forecasting exchange rates. What

Explain the market-based approach to forecasting exchange rates. What is the rationale for using market-based forecasts? If the euro appreciates substantially against the dollar during a specific peri...

Q: Explain the mixed technique for forecasting exchange rates.

Explain the mixed technique for forecasting exchange rates.

Q: Recall that Blades has tentatively decided to establish a subsidiary in Thailand

Recall that Blades has tentatively decided to establish a subsidiary in Thailand to manufacture roller blades. The new plant will be utilized to produce Speedos, Blades’ primary product. Once the subs...

Q: Explain how to assess performance in forecasting exchange rates. Explain how

Explain how to assess performance in forecasting exchange rates. Explain how to detect a bias in forecasting exchange rates.

Q: You are hired as a consultant to assess a firm’s ability to

You are hired as a consultant to assess a firm’s ability to forecast. The firm has developed a point forecast for two different currencies presented in the following table. The firm...

Q: Syracuse Corp. believes that future real interest rate movements will affect

Syracuse Corp. believes that future real interest rate movements will affect exchange rates, and it has applied regression analysis to historical data to assess this relationship. It will use regressi...

Q: Lexington Co. is a U.S.- based MNC with

Lexington Co. is a U.S.- based MNC with subsidiaries in most major countries. Each subsidiary is responsible for forecasting the future exchange rate of its local currency relative to the U.S. dollar....

Q: Compare and contrast transaction exposure and economic exposure. Why would an

Compare and contrast transaction exposure and economic exposure. Why would an MNC consider examining only its “net” cash flows in each currency when assessing its transaction exposure?

Q: Consider a period in which the U.S. dollar weakens

Consider a period in which the U.S. dollar weakens against the euro. How will this affect the reported earnings of a U.S.-based MNC with European subsidiaries? Consider a period in which the U.S. doll...

Q: Aggie Co. produces chemicals. It is a major exporter to

Aggie Co. produces chemicals. It is a major exporter to Europe, where its main competition is from other U.S. exporters. All of these companies invoice their products in U.S. dollars. Is Aggie’s trans...

Q: Longhorn Co. produces hospital equipment. Most of its revenues are

Longhorn Co. produces hospital equipment. Most of its revenues are in the United States. About half of its expenses require outflows in Philippine pesos (to pay for materials obtained in the Philippin...

Q: Lubbock, Inc., produces furniture and has no international business.

Lubbock, Inc., produces furniture and has no international business. Its major competitors import most of their furniture from Brazil and then sell it out of retail stores in the United States. How wi...

Q: Sooner Co. is a U.S. wholesale company that

Sooner Co. is a U.S. wholesale company that imports expensive, highquality luggage and sells it to retail stores around the United States. Its main competitors also import high-quality luggage and sel...

Q: The Sports Exports Company has considered a variety of projects, but

The Sports Exports Company has considered a variety of projects, but all of its business is still in the United Kingdom. Because most of its business comes from exporting footballs (with revenues bein...

Q: Boulder, Inc., exports chairs to Europe (invoiced in U

Boulder, Inc., exports chairs to Europe (invoiced in U.S. dollars) and competes against local European companies. If purchasing power parity exists, why would Boulder not benefit from a stronger euro?...

Q: Toyota Motor Corp. measures the sensitivity of its exports to the

Toyota Motor Corp. measures the sensitivity of its exports to the yen exchange rate (relative to the U.S. dollar). Explain how regression analysis could be used for such a task. Identify the expected...

Q: Cieplak, Inc., is a U.S.-based MNC

Cieplak, Inc., is a U.S.-based MNC that has expanded into Asia. Its U.S. parent exports goods to some Asian countries, with its exports denominated in the Asian currencies. It also has a large subsidi...

Q: Periodically, rumors swirl that China will weaken its currency (the

Periodically, rumors swirl that China will weaken its currency (the yuan) against the U.S. dollar and many European currencies. This causes investors to sell stocks in Asian countries such as Japan, T...

Q: Erie Co. has most of its business in the United States

Erie Co. has most of its business in the United States, but exports some products to Belgium. Its exports were invoiced in euros (Belgium’s currency) last year. The firm has no other economic exposure...

Q: Your employer, a large MNC, has asked you to assess

Your employer, a large MNC, has asked you to assess its transaction exposure. Its projected cash flows are as follows for the next year: Danish krone inflows equal DK50,000,000, while outflows equal D...

Q: a. How can a U.S. company use regression

a. How can a U.S. company use regression analysis to assess its economic exposure to fluctuations in the British pound? b. In using regression analysis to assess the sensitivity of cash flows to ex...

Q: Vegas Corp. is a U.S. firm that exports

Vegas Corp. is a U.S. firm that exports most of its products to Canada. Historically, the firm invoiced its products in Canadian dollars to accommodate the importers. However, it was adversely affecte...

Q: Using the cost and revenue information shown for DeKalb, Inc.,

Using the cost and revenue information shown for DeKalb, Inc., determine how the costs, revenue, and cash flow items would be affected by three possible exchange rate scenarios for the New Zealand dol...

Q: The Walt Disney Company built an amusement park in France that opened

The Walt Disney Company built an amusement park in France that opened in 1992. How do you think this project has affected Disney’s economic exposure to exchange rate movements? Think carefully before...

Q: Recall that Blades, Inc., is considering the establishment of a

Recall that Blades, Inc., is considering the establishment of a subsidiary in Thailand to manufacture Speedos, Blades’ primary roller blades product. Alternatively, Blades could acqu...

Q: Cornhusker Co. is an exporter of products to Singapore. It

Cornhusker Co. is an exporter of products to Singapore. It wants to know how its stock price is affected by changes in the Singapore dollar’s exchange rate. The firm believes that the impact may occur...

Q: In 2016, the United Kingdom decided to leave the European Union

In 2016, the United Kingdom decided to leave the European Union (a decision referred to as Brexit). Many analysts have made arguments about how this event will affect firms in the United Kingdom. Assu...

Q: Celtic Co. is a U.S. firm that exports

Celtic Co. is a U.S. firm that exports its products to England. It faces competition from many firms in England. Its prices to customers in England have generally been lower than those of the U.K. com...

Q: Raton Co. is a U.S. company that has

Raton Co. is a U.S. company that has net inflows of 100 million Swiss francs and net outflows of 100 million British pounds. The present exchange rate of the Swiss franc is approximately $0.70 and the...

Q: Washington Co. and Vermont Co. have no domestic business.

Washington Co. and Vermont Co. have no domestic business. Both have a similar dollar equivalent amount of international exporting business. Washington Co. exports all of its products to Canada, wherea...

Q: Assume that the Mexican peso and the Brazilian currency (the real

Assume that the Mexican peso and the Brazilian currency (the real) have depreciated against the U.S. dollar recently due to the high inflation rates in those countries. Assume that inflation in these...

Q: What factors affect a firm’s degree of transaction exposure in a particular

What factors affect a firm’s degree of transaction exposure in a particular currency? For each factor, explain the desirable characteristics that would reduce transaction exposure.

Q: Zemart is a U.S. firm that plans to establish

Zemart is a U.S. firm that plans to establish an international business in which it will export goods to Mexico (these exports will be denominated in pesos) and to Canada (these exports will be denomi...

Q: Each of the following U.S. firms is expected to

Each of the following U.S. firms is expected to generate $40 million in net cash flows (after including the estimated cash flows from international sales, if there are any) over the next year. Ignore...

Q: The Central Bank of Poland is about to engage in indirect intervention

The Central Bank of Poland is about to engage in indirect intervention later today, by which it will lower Poland’s interest rates substantially. This will have an impact on the value of the Polish cu...

Q: Long-Term Financing Decision by the Sports Exports CompanyThe Sports Exports

Long-Term Financing Decision by the Sports Exports CompanyThe Sports Exports Company continues to focus on producing footballs in the United States and exporting them to the United Kingdom. Its export...

Q: You use today’s spot rate of the Brazilian real to forecast the

You use today’s spot rate of the Brazilian real to forecast the spot rate of the real for one month ahead. Today’s spot rate is $0.4558. Use the VaR method to determine the maximum percentage loss of...

Q: Kanab Co. and Zion Co. are U.S.

Kanab Co. and Zion Co. are U.S. companies of approximately the same size that engage in much business within the United States. Both conduct some international business as well. Kanab Co. has a subsid...

Q: The Hong Kong dollar (HK$) is presently pegged to the

The Hong Kong dollar (HK$) is presently pegged to the U.S. dollar and is expected to remain pegged. Some Hong Kong firms export products to Australia that are denominated in Australian dollars and hav...

Q: Spratt Co. (a U.S. firm) attempts

Spratt Co. (a U.S. firm) attempts to determine its economic exposure to movements in the British pound by applying regression analysis to data over the last 36 quarters: SP b b e 5 10 1 1 m where SP r...

Q: Assume the euro’s spot rate is presently equal to $1.

Assume the euro’s spot rate is presently equal to $1.00. All of the following firms are based in New York and are the same size. Although these firms concentrate on business in the United States, thei...

Q: Minnesota Co. is a U.S. firm that exports

Minnesota Co. is a U.S. firm that exports computer parts to Japan. Its main competition is from firms that are based in Japan, which invoice their products in yen. In contrast, Minnesota’s exports are...

Q: Harz Co., a U.S. firm, has an

Harz Co., a U.S. firm, has an arrangement with a Chinese company in which it purchases products from this supplier every week at the prevailing spot rate, and then sells the products in the United Sta...

Q: Kopetsky Co. has net receivables in several currencies that are highly

Kopetsky Co. has net receivables in several currencies that are highly correlated with each other. What does this imply about the firm’s overall degree of transaction exposure? Are currency correlatio...

Q: Maine Co., a U.S. firm, measures its

Maine Co., a U.S. firm, measures its economic exposure to movements in the British pound by applying regression analysis to data over the last 36 quarters: where SP represents the percentage change in...

Q: Layton Co., a U.S. firm, attempts to

Layton Co., a U.S. firm, attempts to determine its economic exposure to movements in the Japanese yen by applying regression analysis to data over the last 36 quarters: where SP represents the percent...

Q: Blades, Inc., has recently decided to establish a subsidiary in

Blades, Inc., has recently decided to establish a subsidiary in Thailand to produce Speedos, its primary roller blades product. In establishing the subsidiary in Blades, Inc. Case Assessment of Intern...

Q: Lance Co. is a U.S. company that has

Lance Co. is a U.S. company that has exposure to the Swiss franc (SF) and the Danish krone (DK). It has net inflows of SF100 million and net outflows of DK500 million. The present exchange rate of the...

Q: Layton Co., a U.S. firm, attempts to

Layton Co., a U.S. firm, attempts to determine its economic exposure to movements in the Japanese yen by applying regression analysis to data over the last 36 quarters: where SP represents the percen...

Q: Quartz Co. has its entire operations in Miami, Florida,

Quartz Co. has its entire operations in Miami, Florida, and is an exporter of products to eurozone countries. All of its earnings are derived from its exports. The exports are denominated in euros. Re...

Q: Yazoo, Inc., is a U.S. firm that

Yazoo, Inc., is a U.S. firm that has substantial international business in Japan and has cash inflows in Japanese yen. The spot rate of the yen today is $0.01. The yen exchange rate was $0.008 three m...

Q: Reese Co. will pay 1 million British pounds for materials imported

Reese Co. will pay 1 million British pounds for materials imported from the United Kingdom in one month. This firm also sells some goods to Poland and will receive 3 million zloty (the Polish currency...

Q: Spencer Co., a U.S. firm, has a

Spencer Co., a U.S. firm, has a large subsidiary in Singapore that generates a large amount of the parent’s earnings. Spencer’s stock is usually valued at approximately 16 times its reported earnings...

Q: Milwaukee Co. has an Australian subsidiary that earned 40 million Australian

Milwaukee Co. has an Australian subsidiary that earned 40 million Australian dollars (A$) this year. Little Rock Co. has an Australian subsidiary that earned A$30 million this year. Milwaukee’s subsid...

Q: Bag Company, a U.S. firm, has a

Bag Company, a U.S. firm, has a business of offering cruises along the coast of Argentina that are solely geared toward American tourists. The company charges American tourists in U.S. dollars, but al...

Q: How should appreciation of a firm’s home country currency generally affect its

How should appreciation of a firm’s home country currency generally affect its cash inflows? How should depreciation of a firm’s home country currency generally affect its cash outflows?

Q: Fischer, Inc., a U.S.- based MNC,

Fischer, Inc., a U.S.- based MNC, exports products from Florida to Europe. It obtains supplies and borrows funds locally. How would appreciation of the euro likely affect its net cash flows? Why?

Q: The Sports Exports Company produces footballs and exports them to a distributor

The Sports Exports Company produces footballs and exports them to a distributor in the United Kingdom. It typically sends footballs in bulk and then receives payment after the distributor receives the...

Q: Why are the cash flows of a purely domestic firm exposed to

Why are the cash flows of a purely domestic firm exposed to exchange rate fluctuations?

Q: Memphis Co. hires you as a consultant to assess its degree

Memphis Co. hires you as a consultant to assess its degree of economic exposure to exchange rate fluctuations. How would you handle this task? Be specific.

Q: What factors affect a firm’s degree of translation exposure? Explain how

What factors affect a firm’s degree of translation exposure? Explain how each factor influences translation exposure

Q: Explain the relationship between hedging (discussed in this chapter) and

Explain the relationship between hedging (discussed in this chapter) and measuring exposure (discussed in Chapter 10)

Q: Kayla Co. imports products from Mexico, and it will make

Kayla Co. imports products from Mexico, and it will make payment in pesos in 90 days. Interest rate parity holds. The prevailing interest rate in Mexico is very high, which reflects the high expected...

Q: Assume the following information: / Assume that the

Assume the following information: Assume that the Santa Barbara Co. in the United States will need 300,000 ringgit in 90 days. It wishes to hedge this payables position. Would it be better off using...

Q: Assume the following information: / Assume that Riverside

Assume the following information: Assume that Riverside Corp. from the United States will receive 400,000 pounds in 180 days. Would it bebetter off using a forward hedge or a money market hedge? Subs...

Q: Relate the use of currency options to hedging net payables and receivables

Relate the use of currency options to hedging net payables and receivables. That is, when should a firm purchase currency puts, and when should it purchase currency calls? Why would Cleveland, Inc., c...

Q: Can Brooklyn Co. determine whether currency options will be more or

Can Brooklyn Co. determine whether currency options will be more or less expensive than a forward hedge when considering both hedging techniques to cover net payables in euros? Why or why not?

Q: How can a firm hedge its long-term currency positions?

How can a firm hedge its long-term currency positions? Elaborate on each method.

Q: Blades, Inc., just received a special order for 120,

Blades, Inc., just received a special order for 120,000 pairs of Speedos, its primary roller blades product. Ben Holt, Blades’ chief financial officer (CFO), needs shortterm financing to finance this...

Q: Under what conditions would Zona Co.’s subsidiary consider using a

Under what conditions would Zona Co.’s subsidiary consider using a leading strategy to reduce transaction exposure? Under what conditions would Zona Co.’s subsidiary consider using a lagging strategy...

Q: Explain how a firm can use cross-hedging to reduce its

Explain how a firm can use cross-hedging to reduce its transaction exposure.

Q: Explain how a firm can use currency diversification to reduce its transaction

Explain how a firm can use currency diversification to reduce its transaction exposure.

Q: As treasurer of Tucson Corp. (a U.S.

As treasurer of Tucson Corp. (a U.S. exporter to New Zealand), you must decide how to hedge (if at all) future receivables of 250,000 New Zealand dollars 90 days from now. Put options are available fo...

Q: Assume that Stevens Point Co. has net receivables of 100,

Assume that Stevens Point Co. has net receivables of 100,000 Singapore dollars in 90 days. The spot rate of the Singapore dollar is $0.50, and the Singapore interest rate is 2 percent over 90 days. Su...

Q: Would Oregon Co.’s real cost of hedging Australian dollar payables

Would Oregon Co.’s real cost of hedging Australian dollar payables every 90 days have been positive, negative, or about zero onaverage over a period in which the Australian dollar strengthened consist...

Q: If interest rate parity exists, would a forward hedge be more

If interest rate parity exists, would a forward hedge be more favorable than, the same as, or less favorable than a money market hedge on euro payables? Explain

Q: Would Montana Co.’s real cost of hedging Japanese yen payables

Would Montana Co.’s real cost of hedging Japanese yen payables have been positive, negative, or about zero, on average, over a period in which the yen weakened consistently? Explain.

Q: Suppose your firm is a U.S. importer of Mexican

Suppose your firm is a U.S. importer of Mexican goods, and you believe that today’s forward rate of the peso is a very accurate estimate of the future spot rate. Do you think Mexican peso call options...

Q: Your firm exports goods to the United Kingdom, and you believe

Your firm exports goods to the United Kingdom, and you believe that today’s forward rate of the British pound substantially underestimates the future spot rate. Company policy requires you to hedge yo...

Q: During the Asian crisis, some local firms in Asia borrowed U

During the Asian crisis, some local firms in Asia borrowed U.S. dollars rather than local currency to support their local operations. Why would they borrow dollars when they really needed their local...

Q: At the current time, the Sports Exports Company focuses on producing

At the current time, the Sports Exports Company focuses on producing footballs and exporting them to a distributor in the United Kingdom. The exports are denominated in British pounds. Jim Logan, the...

Q: Explain how a Malaysian firm can use the forward market to hedge

Explain how a Malaysian firm can use the forward market to hedge periodic purchases of U.S. goods denominated in U.S. dollars. Explain how a French firm can use forward contracts to hedge periodic sal...

Q: Cornell Co. purchases computer chips denominated in euros on a monthly

Cornell Co. purchases computer chips denominated in euros on a monthly basis from a Dutch supplier. To hedge its exchange rate risk, this U.S. firm negotiates a three-month forward contract three mont...

Q: Malibu, Inc., is a U.S. company that

Malibu, Inc., is a U.S. company that imports British goods. It plans to use call options to hedge payables of 100,000 pounds in 90 days. Three call options are available that have an expiration date 9...

Q: Wedco Technology of New Jersey exports plastics products to Europe. Wedco

Wedco Technology of New Jersey exports plastics products to Europe. Wedco decided to price its exports in dollars. Telematics International, Inc. (of Florida), exports computer network systems to the...

Q: St. Louis, Inc., which relies on exporting, denominates

St. Louis, Inc., which relies on exporting, denominates its exports in pesos and receives pesos every month. It expects the peso to weaken over time. St. Louis recognizes the limitations of monthly he...

Q: Assume that Hampshire Co. has net payables of 200,000

Assume that Hampshire Co. has net payables of 200,000 Mexican pesos in 180 days. The Mexican interest rate is 7 percent over 180 days, and the spot rate of the Mexican peso is $0.10. Suggest how the U...

Q: Because Obisbo, Inc., conducts much business in Japan, it

Because Obisbo, Inc., conducts much business in Japan, it is likely to have cash flows in yen that will periodically be remitted by its Japanese subsidiary to the U.S. parent. What are the limitations...

Q: Describe how a crisis in Asia could reduce the cash flows of

Describe how a crisis in Asia could reduce the cash flows of a U.S. firm that exports products (denominated in U.S. dollars) to Asian countries. How could a U.S. firm that exports products (denominate...

Q: Assume that Carbondale Co. expects to receive S$500,

Assume that Carbondale Co. expects to receive S$500,000 in one year. The existing spot rate of the Singapore dollar is $0.60. The one-year forward rate of the Singapore dollar is $0.62. Carbondale cre...

Q: SMU Corp. has future receivables of 4 million New Zealand dollars

SMU Corp. has future receivables of 4 million New Zealand dollars (NZ$) in one year. It must decide whether to use options or a money market hedge to hedge this position. Use any of the following info...

Q: Recall from Chapter 20 that the new Thailand subsidiary of Blades,

Recall from Chapter 20 that the new Thailand subsidiary of Blades, Inc., received a one-time order from a customer for 120,000 pairs of Speedos, Blades’ primary product. There is a six-month lag betwe...

Q: If you were a U.S. importer of products from

If you were a U.S. importer of products from Europe, explain whether a weak U.S. economy would cause you to hedge your payables (denominated in euros) due a few months later if you expected that the w...

Q: As treasurer of Tempe Corp., you are confronted with the following

As treasurer of Tempe Corp., you are confronted with the following problem. Assume the one-year forward rate of the British pound is $1.59. You plan to receive 1 million pounds in one year. A one-year...

Q: You believe that IRP presently exists. The nominal annual interest rate

You believe that IRP presently exists. The nominal annual interest rate in Mexico is 14 percent, whereas the nominal annualinterest rate in the United States is 3 percent. You expect that annual infla...

Q: Assume that Calumet Co. will receive 10 million pesos in 15 

Assume that Calumet Co. will receive 10 million pesos in 15 months. It does not have a relationship with a bank at this time and, therefore, cannot obtain a forward contract to hedge its receivables a...

Q: You apply a regression model to annual data in which the annual

You apply a regression model to annual data in which the annual percentage change in the British pound is the dependent variable, and INF (defined as annual U.S. inflation minus U.K. inflation) is the...

Q: Virginia Co. has subsidiaries in both Hong Kong and Thailand.

Virginia Co. has subsidiaries in both Hong Kong and Thailand. Assume that the Hong Kong dollar (HK$) is pegged at $0.13 per Hong Kong dollar and will remain pegged. The Thai baht fluctuates against th...

Q: Why should an MNC identify net exposure before hedging?

Why should an MNC identify net exposure before hedging?

Q: Indiana Co. expects to receive 5 million euros in one year

Indiana Co. expects to receive 5 million euros in one year from exports, and it wants to consider hedging its exchange rate risk. The spot rate of the euro as of today is $1.10. Interest rate parity e...

Q: Denver Co. is about to order supplies from Canada that are

Denver Co. is about to order supplies from Canada that are denominated in Canadian dollars (C$). It has no other transactions in Canada and will not have any other transactions in the future. The supp...

Q: Tampa Co. will build airplanes and export them to Mexico for

Tampa Co. will build airplanes and export them to Mexico for delivery in three years. The total payment to be received in three years for these exports is 900 million pesos. Today the peso’s spot rate...

Q: Ever since Jim Logan began his Sports Exports Company, he has

Ever since Jim Logan began his Sports Exports Company, he has been concerned about his exposure to exchange rate risk. The firm produces footballs and exports them to a distributor in the United Kingd...

Q: Red River Co. (a U.S. firm)

Red River Co. (a U.S. firm) purchases imports that have a price of 400,000 Singapore dollars; it has to pay for the imports in 90 days. The firm will use a 90-day forward contract to cover its payable...

Q: Assume interest rate parity exists. Today the one-year interest

Assume interest rate parity exists. Today the one-year interest rate in Canada is the same as the one-year interest rate in the United States. Utah Co. uses the forward rate to forecast the future spo...

Q: Evar Imports, Inc., buys chocolate from Switzerland and resells it

Evar Imports, Inc., buys chocolate from Switzerland and resells it in the United States. It just purchased chocolate invoiced at SF62,500; payment for the invoice is due in 30 days. Assume that the cu...

Q: Marson, Inc., has some customers in Canada and frequently receives

Marson, Inc., has some customers in Canada and frequently receives payments denominated in Canadian dollars (C$). The current spot rate for the Canadian dollar is $0.75. Two call options on Canadian d...

Q: Brooks, Inc., imports wood from Morocco. The Moroccan exporter

Brooks, Inc., imports wood from Morocco. The Moroccan exporter invoices these products in Moroccan dirham. The current exchange rate of the dirham is $0.10. Brooks just purchased wood for 2 million di...

Q: Refer to the previous problem. Assume that Brooks believes the cost

Refer to the previous problem. Assume that Brooks believes the cost of a long straddle is too high. However, call options with an exercise price of $0.105 and a premium of $0.002 and put options with...

Q: You own a U.S. exporting firm that will receive

You own a U.S. exporting firm that will receive 10 million Swiss francs in one year. Assume that interest parity exists. Assume zero transaction costs. Today the oneyear interest rate in the United St...

Q: Explain how a U.S. corporation could hedge net receivables

Explain how a U.S. corporation could hedge net receivables in euros with futures contracts. Explain how a U.S. corporation could hedge net payables in Japanese yen with futures contracts

Q: Visor, Inc. (a U.S. firm),

Visor, Inc. (a U.S. firm), has agreed to purchase supplies from Argentina and will need 1 million Argentine pesos in one year. Interest rate parity presently exists. The annual interest rate in Argent...

Q: Assume that interest rate parity exists. The annualized interest rate is

Assume that interest rate parity exists. The annualized interest rate is presently 5 percent in the United States for any term to maturity and is 13 percent in Mexico for any term to maturity. Dokar C...

Q: Each month, the Sports Exports Company (a U.S

Each month, the Sports Exports Company (a U.S. firm) receives an order for footballs from a British sporting goods distributor. The monthly payment for the footballs is denominated in British pounds,...

Q: Narto Co. (a U.S. firm) exports

Narto Co. (a U.S. firm) exports to Switzerland and expects to receive 500,000 Swiss francs in one year. The one-year U.S. interest rate is 5 percent when investing funds and 7 percent when borrowing f...

Q: Assume that interest rate parity exists. Today the one-year

Assume that interest rate parity exists. Today the one-year interest rate in Japan is the same as the one-yearinterest rate in the United States. You use the international Fisher effect when forecasti...

Q: Rebel Co. (a U.S. firm) has

Rebel Co. (a U.S. firm) has a contract with the government of Spain and will receive payments of 10,000 euros in exchange for consulting services at the end of each of the next 10 years. The annualize...

Q: San Fran Co. imports products. It will pay 5 million

San Fran Co. imports products. It will pay 5 million Swiss francs for imports in one year. Mateo Co. will also pay 5 million Swiss francs for imports in one year. San Fran Co. and Mateo Co. will also...

Q: Today the spot rate of the euro is $1.20

Today the spot rate of the euro is $1.20 and the oneyear forward rate is $1.16. A one-year call option on euros exists with a premium of $0.04 per unit and an exercise price of $1.17. You think the sp...

Q: The one-year U.S. interest rate is presently

The one-year U.S. interest rate is presently higher than the Japanese interest rate. Assume a real rate of interest of 0 percent in each country. Assume that interest rate parity exists. You believe i...

Q: Assume that the country of Dreeland has a currency (called the

Assume that the country of Dreeland has a currency (called the dree) that tends to move in tandem with the Chilean peso and is expected to continue to move in tandem with the Chilean peso in the futur...

Q: Grady Co. is a manufacturer of hockey equipment in Chicago,

Grady Co. is a manufacturer of hockey equipment in Chicago, and it will need 3 million Swiss francs in one year to pay for imported supplies. The U.S. oneyear interest rate is 2 percent, versus 7 perc...

Q: Explain how a U.S. corporation could hedge net receivables

Explain how a U.S. corporation could hedge net receivables in Malaysian ringgit with a forward contract. Explain how a U.S. corporation could hedge payables in Canadian dollars with a forward contract...

Q: Assume that Loras Corp. imported goods from New Zealand and needs

Assume that Loras Corp. imported goods from New Zealand and needs 100,000 New Zealand dollars 180 days from now. It is trying to determine whether to hedge this position. Loras has developed the follo...

Q: As the chief financial officer of Blades, Inc., Ben Holt

As the chief financial officer of Blades, Inc., Ben Holt is pleased that his current system of exporting “Speedos” to Thailand seems to be working well. Blades&acir...

Q: If hedging is expected to be more costly than not hedging,

If hedging is expected to be more costly than not hedging, why would a firm even consider hedging?

Q: Assume that Suffolk Co. negotiated a forward contract to purchase 200

Assume that Suffolk Co. negotiated a forward contract to purchase 200,000 British pounds in 90 days. The 90-day forward rate was $1.40 per British pound. The pounds to be purchased were to be used to...

Q: Colorado, Inc., is a U.S.-based MNC

Colorado, Inc., is a U.S.-based MNC that obtains 10 percent of its supplies from European manufacturers. Sixty percent of its revenues are due to exports to Europe, where its products are invoiced in...

Q: Nelson Co. is a U.S. firm with annual

Nelson Co. is a U.S. firm with annual export sales to Singapore of about S$800 million. Its main competitor is Mez Co., also based in the United States, with a subsidiary in Singapore that generates a...

Q: St. Paul Co. does business in the United States and

St. Paul Co. does business in the United States and New Zealand. In attempting to assess its economic exposure, it compiled the following information. St. Paul’s U.S. sales are some...

Q: Alaska, Inc., plans to create and finance a subsidiary in

Alaska, Inc., plans to create and finance a subsidiary in Mexico that produces computer components at a low cost and exports them to other countries. It has no other international business. The subsid...

Q: Clearlake, Inc., produces its products in its factory in Texas

Clearlake, Inc., produces its products in its factory in Texas and exports most of the products to Mexico each month. The exports are denominated in pesos. Clearlake recognizes that hedging on a month...

Q: Laguna Co. (a U.S. firm) will

Laguna Co. (a U.S. firm) will be receiving 4 million British pounds in one year. It will need to make a payment of 3 million Polish zloty in one year. It has no other exchange rate risk at this time....

Q: Lola Co. (a U.S. firm) expects

Lola Co. (a U.S. firm) expects to receive 10 million euros in one year. It does not plan to hedge this transaction with a forward contract or other hedging techniques. This transaction is its only int...

Q: Nashville Co. presently incurs costs of approximately 12 million Australian dollars

Nashville Co. presently incurs costs of approximately 12 million Australian dollars (A$) per year for research and development expenses in Australia. It sells the products that are designed each year,...

Q: Because the Sports Exports Company (a U.S. firm

Because the Sports Exports Company (a U.S. firm) receives payments in British pounds every month and converts those pounds into dollars, it needs to closely monitor the value of the British pound in t...

Q: UVA Co. is a U.S.-based MNC that

UVA Co. is a U.S.-based MNC that obtains 40 percent of its foreign supplies from Thailand. It also borrows Thailand’s currency (the baht) from Thai banks and converts the baht to dollars to support it...

Q: Albany Corp. is a U.S.-based MNC that

Albany Corp. is a U.S.-based MNC that has a large government contract with Australia. The contract will continue for several years and generate more than half of Albany’s total sales volume. The Austr...

Q: When an MNC restructures its operations to reduce its economic exposure,

When an MNC restructures its operations to reduce its economic exposure, it may sometimes forgo economies of scale. Explain

Q: Explain how a U.S.-based MNC’s consolidated earnings are

Explain how a U.S.-based MNC’s consolidated earnings are affected by depreciation of foreign currencies.

Q: Explain how a firm can hedge its translation exposure.

Explain how a firm can hedge its translation exposure.

Q: Bartunek Co. is a U.S.-based MNC that

Bartunek Co. is a U.S.-based MNC that has European subsidiaries and wants to hedge its translation exposure to fluctuations in the euro’s value. Explain some limitations when this MNC hedges translati...

Q: Would a more established MNC or a less established MNC be better

Would a more established MNC or a less established MNC be better able to effectively hedge its given level of translation exposure? Why?

Q: Carlton Co. and Palmer, Inc., are U.S

Carlton Co. and Palmer, Inc., are U.S.- based MNCs with subsidiaries in Mexico that distribute medical supplies (produced in the United States) to customers throughout Latin America. Both subsidiaries...

Q: Describe some potential benefits to an MNC as a result of direct

Describe some potential benefits to an MNC as a result of direct foreign investment (DFI). Elaborate on each type of benefit. Which motives for DFI do you think encouraged Nike to expand its footwear...

Q: This chapter concentrates on possible benefits to a firm that increases its

This chapter concentrates on possible benefits to a firm that increases its international business. a. What are some risks of international business that may not exist for local business? b. What does...

Q: Blades, Inc. needs to order supplies two months ahead of

Blades, Inc. needs to order supplies two months ahead of the delivery date. It is considering an order from a Japanese supplier that requires a payment of 12.5 million yen payable as of the delivery d...

Q: Starter Corp. of New Haven, Connecticut, produces sportswear that

Starter Corp. of New Haven, Connecticut, produces sportswear that is licensed by professional sports teams. It recently decided to expand in Europe. What are the potential benefits for this firm from...

Q: What potential benefits do you think were most important in the decision

What potential benefits do you think were most important in the decision of the Walt Disney Co. to build a theme park in France?

Q: Once an MNC establishes a subsidiary, DFI remains an ongoing decision

Once an MNC establishes a subsidiary, DFI remains an ongoing decision. What does this statement mean?

Q: Why would foreign governments provide MNCs with incentives to undertake DFI there

Why would foreign governments provide MNCs with incentives to undertake DFI there?

Q: Friendly Stores, a U.S. retailer, has recognized

Friendly Stores, a U.S. retailer, has recognized numerous opportunities to expand in foreign countries and has assessed many foreign markets, including Brazil, Greece, Mexico, Portugal, Singapore, and...

Q: Decko Co. is a U.S. firm with a

Decko Co. is a U.S. firm with a Chinese subsidiary that produces smartphones in China and sells them in Japan. This subsidiary pays its wages and its rent in Chinese yuan, which is stable relative to...

Q: Trak Co. (of the United States) presently serves as

Trak Co. (of the United States) presently serves as a distributor of products by purchasing them from other U.S. firms and selling them in Japan. It wants to purchase a manufacturer in India that coul...

Q: Myzo Co. (based in the United States) sells basic

Myzo Co. (based in the United States) sells basic household products that many other U.S. firms produce at the same quality level; these other U.S. firms have approximately the same production costs a...

Q: Packer, Inc., a U.S. producer of tablet

Packer, Inc., a U.S. producer of tablet computers, plans to establish a subsidiary in Mexico in an effort to penetrate the Mexican market. Packer’s executives believe that the Mexican peso’s value is...

Q: Bear Co. and Viking, Inc., are automobile manufacturers that

Bear Co. and Viking, Inc., are automobile manufacturers that desire to benefit from economies of scale. Bear has decided to establish distributorship subsidiaries in various countries, whereas Viking...

Q: The Sports Exports Company receives British pounds each month as payment for

The Sports Exports Company receives British pounds each month as payment for the footballs that it exports. It anticipates that the pound will depreciate over time against the U.S. dollar. 1. How can...

Q: Raider Chemical Co. and Ram, Inc., had similar intentions

Raider Chemical Co. and Ram, Inc., had similar intentions to reduce the volatility of their cash flows. Raider implemented a long-range plan to establish 40 percent of its business in Canada. Ram impl...

Q: If the United States imposed long-term restrictions on imports,

If the United States imposed long-term restrictions on imports, would the amount of DFI by non-U.S. MNCs in the United States increase, decrease, or be unchanged? Explain.

Q: Some MNCs establish a manufacturing facility where there is a relatively low

Some MNCs establish a manufacturing facility where there is a relatively low cost of labor, but they sometimes close the facility later when the cost advantage dissipates. Why do you think the relativ...

Q: Offer your opinion on why the economies of some less developed countries

Offer your opinion on why the economies of some less developed countries with strict restrictions on international trade and DFI are somewhat independent from the economies of other countries. Why wou...

Q: Ohio, Inc., considers establishing a manufacturing plant in central Asia

Ohio, Inc., considers establishing a manufacturing plant in central Asia, which would be used to cover its exports to Japan and Hong Kong. If Ohio is concerned about possible terrorism, how might this...

Q: Bronco Corp. has decided to establish a subsidiary in Taiwan that

Bronco Corp. has decided to establish a subsidiary in Taiwan that will produce MP3 players and sell them there. It expects that its cost of producing these MP3 players will be onethird the cost of pro...

Q: Why should capital budgeting for subsidiary projects be assessed from the parent’s

Why should capital budgeting for subsidiary projects be assessed from the parent’s perspective? Which additional factors that normally are not relevant for a purely domestic project deserve considerat...

Q: Athens, Inc., established a subsidiary in the United Kingdom that

Athens, Inc., established a subsidiary in the United Kingdom that was independent of its operations in the United States. The subsidiary’s performance significantly exceeded expectations. Consequently...

Q: Lehigh Co. established a subsidiary in Switzerland that was performing below

Lehigh Co. established a subsidiary in Switzerland that was performing below the cash flow projections developed before the subsidiary was established. Lehigh anticipated that future cash flows would...

Q: Flagstaff Corp. is a U.S.-based firm with

Flagstaff Corp. is a U.S.-based firm with a subsidiary in Mexico. It plans to reinvest its earnings in Mexican government securities for the next 10 years because the interest rate earned on these sec...

Q: Recall that Blades, Inc., the U.S. manufacturer

Recall that Blades, Inc., the U.S. manufacturer of roller blades, generates most of its revenue and incurs most of its expenses in the United States. However, the company has recently begun exporting...

Q: Brower, Inc., just constructed a manufacturing plant in Ghana.

Brower, Inc., just constructed a manufacturing plant in Ghana. The construction cost 9 billion Ghanaian cedi. Brower intends to keep the plant open for three years. During the three years of operation...

Q: Ventura Corp., a U.S.-based MNC, plans

Ventura Corp., a U.S.-based MNC, plans to establish a subsidiary in Japan. It is confident that the Japanese yen will appreciate against the dollar over time. The subsidiary will retain only enough re...

Q: Santa Monica Co., a U.S.-based MNC,

Santa Monica Co., a U.S.-based MNC, was considering establishing a consumer products division in Germany, which would be financed by German banks. Santa Monica completed its capital budgeting analysis...

Q: Assume that a less developed country called LDC encourages direct foreign investment

Assume that a less developed country called LDC encourages direct foreign investment (DFI) in an effort to reduce its unemployment rate, currently at 15 percent. Also assume that several MNCs are like...

Q: PepsiCo recently decided to invest more than $300 million for expansion

PepsiCo recently decided to invest more than $300 million for expansion in Brazil. Brazil offers considerable potential because it has 150 million people and their demand for soft drinks is increasing...

Q: Assume that Fordham Co. was evaluating a project in Thailand (

Assume that Fordham Co. was evaluating a project in Thailand (to be financed with U.S. dollars). All cash flows generated from the project were to be reinvested in Thailand for several years. Explain...

Q: When considering the implementation of a project in one of various possible

When considering the implementation of a project in one of various possible countries, what types of tax characteristics should be assessed among the countries? (See the chapter appendix.

Q: What is the major limitation of using point estimates of exchange rates

What is the major limitation of using point estimates of exchange rates in the capital budgeting analysis? List the various techniques for adjusting risk in multinational capital budgeting. Describe a...

Q: A project in South Korea requires an initial investment of 2 billion

A project in South Korea requires an initial investment of 2 billion South Korean won. The project is expected to generate net cash flows to the subsidiary of 3 billion won and 4 billion won in the tw...

Q: Carson Co. is considering a 10-year project in Hong

Carson Co. is considering a 10-year project in Hong Kong, where the Hong Kong dollar is tied to the U.S. dollar. Carson Co. uses sensitivity analysis that allows for alternative exchange rate scenario...

Q: Jim Logan, owner of the Sports Exports Company, is concerned

Jim Logan, owner of the Sports Exports Company, is concerned about the value of the British pound over time because his firm receives pounds as payment for footballs exported to the United Kingdom. He...

Q: Marathon, Inc., considers a one-year project with the

Marathon, Inc., considers a one-year project with the Belgian government. Its euro revenues would be guaranteed. Its consultant states that the percentage change in the euro is represented by a normal...

Q: Assume that Nike decides to build a shoe factory in Brazil;

Assume that Nike decides to build a shoe factory in Brazil; half the initial outlay will be funded by the parent’s equity and half by borrowing funds in Brazil. Assume that Nike wants to assess the pr...

Q: A project in Malaysia costs $4 million. Over the next

A project in Malaysia costs $4 million. Over the next three years, the project will generate total operating cash flows of $3.5 million, measured in today’s dollars using a required rate of return of...

Q: Zistine Co. considers a one-year project in New Zealand

Zistine Co. considers a one-year project in New Zealand so that it can capitalize on its technology. Although the company is generally risk averse, it is attracted to the project because of a governme...

Q: Blustream, Inc., considers a project in which it will sell

Blustream, Inc., considers a project in which it will sell the use of its technology to firms in Mexico. It already has received orders from Mexican firms that will generate 3 million Mexican pesos (M...

Q: Wolverine Corp. currently has no existing business in New Zealand but

Wolverine Corp. currently has no existing business in New Zealand but is considering establishing a subsidiary there. The following information has been gathered to assess this project: The initial i...

Q: Baxter Co. is considering a project with Thailand’s government. If

Baxter Co. is considering a project with Thailand’s government. If it accepts the project, it will definitely receive one lump-sum cash flow of 10 million Thai baht in five years. The spot rate of the...

Q: Cantoon Co. is considering the acquisition of a unit from the 

Cantoon Co. is considering the acquisition of a unit from the French government. Its initial outlay would be $4 million. Cantoon will reinvest all the earnings in the unit. It expects that at the end...

Q: Using the capital budgeting framework discussed in this chapter, explain the

Using the capital budgeting framework discussed in this chapter, explain the sources of uncertainty surrounding a proposed project in Hungary being considered by a U.S. firm. In what ways is the estim...

Q: Burton Co., based in the United States, considers a project

Burton Co., based in the United States, considers a project in which it has an initial outlay of $3 million and expects to receive 10 million Swiss francs in one year. The spot rate of the Swiss franc...

Q: The Asian crisis showed that a currency crisis could affect interest rates

The Asian crisis showed that a currency crisis could affect interest rates. Why did the crisis put upward pressure on interest rates in Asian countries? Why did it put downward pressure on U.S. intere...

Q: Recall that Blades, a U.S. manufacturer of roller

Recall that Blades, a U.S. manufacturer of roller blades, has chosen Thailand as its primary export target for Speedos, Blades’ primary product. Moreover, Blades’ p...

Q: Carlotto Co. (a U.S. firm) will

Carlotto Co. (a U.S. firm) will definitely receive 1 million British pounds in one year based on a business contract it has with the British government. Like most firms, Carlotto Co. is risk averse an...

Q: Sazer Co. (a U.S. firm) is

Sazer Co. (a U.S. firm) is considering a project in which it produces special safety equipment. It will incur an initial outlay of $1 million for the research and development of this equipment. It exp...

Q: Konk Co., a U.S. firm, considers a

Konk Co., a U.S. firm, considers a project in which it would build a subsidiary in Belgium that would generate net cash flows of approximately 10 million euros per year for five years and would remit...

Q: Louisville Co. is a U.S. firm considering a

Louisville Co. is a U.S. firm considering a project in Austria that will require an initial cash outlay of $7 million. Louisville will accept the project only if it can satisfy its required rate of re...

Q: The appendix to this chapter explains how tax laws can affect how

The appendix to this chapter explains how tax laws can affect how much earnings subsidiaries remit to their parents. Explain why the U.S. tax rules prior to 2017 encouraged foreign subsidiaries of U.S...

Q: Explain why a territorial tax law could encourage U.S.-

Explain why a territorial tax law could encourage U.S.-based MNCs to consider moving their headquarters to another country.

Q: Your employees have estimated the net present value of Project X to

Your employees have estimated the net present value of Project X to be $1.2 million. Their report says that they have not accounted for risk but that, with such a large NPV, the project should be acce...

Q: a. Describe in general terms how future appreciation of the euro

a. Describe in general terms how future appreciation of the euro will likely affect the value (from the parent’s perspective) of a project established in Germany today by a U.S.-based MNC. Will the se...

Q: Explain how the financing decision can influence the sensitivity of the net

Explain how the financing decision can influence the sensitivity of the net present value to exchange rate forecasts.

Q: Woodsen, Inc., of Pittsburgh, Pennsylvania, considered the development

Woodsen, Inc., of Pittsburgh, Pennsylvania, considered the development of a large subsidiary in Greece. In the face of Greece’s government-debt crisis, its expected cash flows and earnings from this a...

Q: As the Sports Exports Company exports footballs to the United Kingdom,

As the Sports Exports Company exports footballs to the United Kingdom, it receives British pounds. The check (denominated in pounds) for last month’s exports just arrived. Jim Logan, the owner of the...

Q: Huskie Industries, a U.S.-based MNC, considers

Huskie Industries, a U.S.-based MNC, considers purchasing a small manufacturing company in France that sells products only within France. Huskie has no other existing business in France and no cash fl...

Q: When Walt Disney World considered establishing a theme park in France,

When Walt Disney World considered establishing a theme park in France, were the forecasted revenues and costs associated with the French park sufficient to assess the feasibility of this project? Were...

Q: Why do you think MNCs continuously assess possible forms of multinational restructuring

Why do you think MNCs continuously assess possible forms of multinational restructuring, such as foreign acquisitions or downsizing of a foreign subsidiary?

Q: Provide two reasons why an MNC’s strategy of acquiring a foreign target

Provide two reasons why an MNC’s strategy of acquiring a foreign target could backfire. That is, explain why the acquisition might result in a negative NPV.

Q: Alaska, Inc., would like to acquire Estoya Corp., which

Alaska, Inc., would like to acquire Estoya Corp., which is located in Peru. In initial negotiations, Estoya has asked for a purchase price of 1 billion Peruvian new sol. If Alaska completes the purcha...

Q: Senser Co. established a subsidiary in Russia two years ago.

Senser Co. established a subsidiary in Russia two years ago. Under its original plans, Senser intended to operate the subsidiary for a total of four years. However, it would like to reassess the situa...

Q: Colorado Springs Co. plans to divest either its Singapore subsidiary or

Colorado Springs Co. plans to divest either its Singapore subsidiary or its Canadian subsidiary. Assume that if exchange rates remain constant, the dollar cash flows that each of these subsidiaries wo...

Q: San Gabriel Corp. recently considered divesting its Italian subsidiary, but

San Gabriel Corp. recently considered divesting its Italian subsidiary, but determined that the divestiture was not feasible. Therequired rate of return on this subsidiary was 17 percent. In the last...

Q: Ethridge Co. of Atlanta, Georgia, has a subsidiary in

Ethridge Co. of Atlanta, Georgia, has a subsidiary in India that produces products and sells them throughout Asia. In response to the September 11, 2001, terrorist attacks on the United States, Ethrid...

Q: Merton, Inc., has a subsidiary in Bulgaria that it fully

Merton, Inc., has a subsidiary in Bulgaria that it fully finances with its own equity. Last week, a firm offered to buy the subsidiary from Merton for $60 million in cash, and the offer is still avail...

Q: Blades, Inc., is a U.S.-based company

Blades, Inc., is a U.S.-based company that has been incorporated in the United States for 3 years. Blades is a relatively small company, with total assets of only $200 million. The company produces a...

Q: Sunbelt, Inc., plans to purchase a firm in Indonesia.

Sunbelt, Inc., plans to purchase a firm in Indonesia. It believes that it can install its operating procedure in this firm, which would significantly reduce the firm’s operating expenses. However, the...

Q: Florida Co. produces software. Its primary business in Boca Ratonis

Florida Co. produces software. Its primary business in Boca Ratonis expected to generate cash flows of $4 million at the end of each of the next three years, and Florida expects that it could sell thi...

Q: Co. consists of two businesses. Its local business is expected

Co. consists of two businesses. Its local business is expected to generate cash flows of $1 million at the end of each of the next three years. It also owns a foreign subsidiary based in Mexico, whose...

Q: Maude, Inc., a U.S.-based MNC,

Maude, Inc., a U.S.-based MNC, has recently acquired a firm in Singapore. To eliminate inefficiencies, Maudedownsized the target substantially, eliminating two-thirds of the workforce. Why might this...

Q: Kentucky Co. has an existing business in Italy that it is

Kentucky Co. has an existing business in Italy that it is trying to sell. It receives one offer today from Rome Co. for $20 million (after capital gains taxes are paid). Another Italian company, Venic...

Q: Baltimore Co. considers divesting its six foreign projects as of today

Baltimore Co. considers divesting its six foreign projects as of today. Each project will last one year. The company’s required rate of return on each project is the same. The cost o...

Q: Clemson Co. (a U.S. firm) has

Clemson Co. (a U.S. firm) has a subsidiary in Germany that generates substantial earnings in euros each year. One week ago, Clemson received an offer from a company to purchase the German subsidiary,...

Q: Targ Co. of the United States has been targeted by three

Targ Co. of the United States has been targeted by three firms that consider acquiring it: Americo (from the United States), Japino (of Japan), and Canzo (of Canada). These three firms do not haveany...

Q: Gaston Co. (a U.S. firm) is

Gaston Co. (a U.S. firm) is considering the purchase of a target company based in Mexico. The net cash flows to be generated by this target firm are expected to be 300 million pesos at the end of one...

Q: Rudecki Co. (a U.S. firm) has

Rudecki Co. (a U.S. firm) has a Polish subsidiary that it is considering divesting. The subsidiary is completely focused on research and development for Rudecki’s other business. Rudecki has cash outf...

Q: In every chapter of this text, some of the key concepts

In every chapter of this text, some of the key concepts are illustrated with an application to a small sporting goods firm that conducts international business. These “Small Business Dilemma” features...

Q: Explain how a foreign target could use poison pills to prevent a

Explain how a foreign target could use poison pills to prevent a takeover or change the terms of a takeover

Q: Explain the various ways in which large shareholders can attempt to govern

Explain the various ways in which large shareholders can attempt to govern an MNC and improve its management.

Q: Ved Co. (a U.S. firm) has

Ved Co. (a U.S. firm) has a subsidiary in Germany that generates substantial earnings in euros each year. It will soon decide whether to divest the subsidiary. One week ago, a company offered to purch...

Q: Dallen Co. has a subsidiary in Mexico that does research and

Dallen Co. has a subsidiary in Mexico that does research and development and produces prescription pills that are transported to and sold in the United States. The parent used its own funds to build t...

Q: Poki, Inc., a U.S.-based MNC,

Poki, Inc., a U.S.-based MNC, is considering expanding into Thailand because of decreasing profit margins in the United States. The demand for Poki’s product in Thailand is very strong. However, forec...

Q: Kylee Co. (a U.S. firm) has

Kylee Co. (a U.S. firm) has a British subsidiary that will generate cash flows of 3 million pounds at the end of each of the next two years. It uses the prevailing spot rate of the British pound of $1...

Q: Rastell, Inc., a U.S.-based MNC,

Rastell, Inc., a U.S.-based MNC, is considering the acquisition of a Russian target to produce tablet computers and market them throughout Russia, where demand for tablets has increased substantially...

Q: Savannah, Inc., a manufacturer of clothing, wants to increase

Savannah, Inc., a manufacturer of clothing, wants to increase its market share by acquiring a target producing a popular clothing line in Europe. This clothing line is well established. Forecasts indi...

Q: Why are valuations of privatized businesses previously owned by the governments of

Why are valuations of privatized businesses previously owned by the governments of developing countries more difficult than valuations of existing firms in developed countries?

Q: Blore, Inc., a U.S.- based MNC,

Blore, Inc., a U.S.- based MNC, has screened several targets. Based on economic and political considerations, only one eligible target remains in Malaysia. Blore would like you to value this target an...

Q: Ben Holt, chief financial officer (CFO) of Blades,

Ben Holt, chief financial officer (CFO) of Blades, Inc., has decided to counteract the decreasing demand for Speedos roller blades by exporting this product to Thailand. Furthermore, due to the low co...

Q: Refer to question 7. What are some of the key sources

Refer to question 7. What are some of the key sources of uncertainty in Blore’s valuation of the target? Identify two reasons why the expected cash flows from an Asian subsidiary of a U.S.-based MNC w...

Q: A crisis in a foreign country commonly causes a substantial reduction in

A crisis in a foreign country commonly causes a substantial reduction in cash flows (and valuations) of an MNC’s subsidiaries based in that country. Explain why the MNC will not necessarily sell its s...

Q: List some forms of political risk other than a takeover of a

List some forms of political risk other than a takeover of a subsidiary by the host government, and briefly elaborate on how each factor can affect the risk to the MNC. Identify common financial facto...

Q: Explain some methods of reducing exposure to existing country risk while maintaining

Explain some methods of reducing exposure to existing country risk while maintaining the same amount of business within a particular country.

Q: Why do some subsidiaries maintain a low profile as to where their

Why do some subsidiaries maintain a low profile as to where their parents are located?

Q: When NYU Corp. considered establishing a subsidiary in Zenland, it

When NYU Corp. considered establishing a subsidiary in Zenland, it performed a country risk analysis to help make the decision. It first retrieved a country risk analysis performed about one year earl...

Q: MNCs such as Alcoa, DowDuPont, Kraft Heinz, and IBM

MNCs such as Alcoa, DowDuPont, Kraft Heinz, and IBM have donated products and technology to foreign countries where they had subsidiaries. How could these actions have reduced some forms of country ri...

Q: Assauer, Inc., would like to assess the country risk of

Assauer, Inc., would like to assess the country risk of Glovanskia. Assauer has identified various political and financial risk factors, as shown in the table. Assauer has assigned overall ratings of...

Q: Arkansas, Inc., exports to various less developed countries, and

Arkansas, Inc., exports to various less developed countries, and its receivables are denominated in the foreign currencies of the importers. It considers reducing its exchange rate risk by establishin...

Q: Hoosier, Inc., is planning a project in the United Kingdom

Hoosier, Inc., is planning a project in the United Kingdom. It would lease space for one year in a shopping mall to sell expensive clothes manufactured in the United States. The project would end in o...

Q: Recall from Chapter 1 that Jim Logan planned to pursue his dream

Recall from Chapter 1 that Jim Logan planned to pursue his dream of establishing his own business, the Sports Exports Company, for exporting footballs to one or more foreign markets. He has decided to...

Q: Explain how the capital budgeting analysis in question 16 would need to

Explain how the capital budgeting analysis in question 16 would need to be adjusted if there were three possible outcomes for the British pound along with the possible outcomes for the British economy...

Q: Recently, Best Bargain Co., a U.S.-based

Recently, Best Bargain Co., a U.S.-based retailer, decided to consider expanding into various foreign countries; it applied a comprehensive country risk analysis before making its expansion decisions....

Q: Monk, Inc., is considering a capital budgeting project in Tunisia

Monk, Inc., is considering a capital budgeting project in Tunisia. The project requires an initial outlay of 1 million Tunisian dinars; the dinar is currently valued at $0.70. In the first and second...

Q: Describe the steps involved in assessing country risk once all relevant information

Describe the steps involved in assessing country risk once all relevant information has been gathered.

Q: In the previous question, assume that instead of adjusting the estimated

In the previous question, assume that instead of adjusting the estimated cash flows of the project, Monk had decided to adjust the discount rate from 12 to 17 percent. Reevaluate the NPV of the projec...

Q: During a conflict in the Middle East, some MNCs capitalized on

During a conflict in the Middle East, some MNCs capitalized on opportunities to rebuild the damaged areas. However, some of their employees were kidnapped by local militant groups. How should an MNC a...

Q: Tovar Co. is a U.S. firm that has

Tovar Co. is a U.S. firm that has been asked to provide consulting services to help Grecia Co. (in Greece) improve its performance. Tovar would need to spend $300,000 today on expenses related to this...

Q: Wyoming Co. is a nonprofit educational institution that wants to import

Wyoming Co. is a nonprofit educational institution that wants to import educational software products from Hong Kong and sell them in the United States. It wants to assess the net present value of thi...

Q: Kansas Co. wants to invest in a project in China.

Kansas Co. wants to invest in a project in China. The proposed project would require an initial investment of 5 million yuan, but is expected to generate cash flows of 7 million yuan at the end of one...

Q: Slidell Co. (a U.S. firm) considers

Slidell Co. (a U.S. firm) considers a foreign project in which it expects to receive 10 million euros at the endof this year. It plans to hedge receivables of 10 million euros with a forward contract....

Q: As a financial analyst for Blades, Inc., you are reasonably

As a financial analyst for Blades, Inc., you are reasonably satisfied with the firm’s current setup of exporting “Speedos” (roller blades) to Thailand. Due to the unique arrangement with Blades’ prima...

Q: Assume that interest rate parity exists. At 10:30 a

Assume that interest rate parity exists. At 10:30 a.m., the media reported that the Mexican government’s political problems had been solved, which reduced the expected volatility of the Mexican peso a...

Q: Drysdale Co. (a U.S. firm) is

Drysdale Co. (a U.S. firm) is considering a new project that would result in cash flows of 5 million Argentine pesos in one year under the most likely economic and political conditions. The spot rate...

Q: Slidell Co. (a U.S. firm) considers

Slidell Co. (a U.S. firm) considers a foreign project in which it expects to receive 10 million euros at the end of one year. Although it realizes that its receivables are uncertain, it decides to hed...

Q: Duv Co. (a U.S. firm) is

Duv Co. (a U.S. firm) is planning to invest $2.5 million in a project in Portugal that will exist for one year. Its required rate of return on this project is 18 percent. It expects to receive cash fl...

Q: Describe the possible errors involved in assessing country risk. In other

Describe the possible errors involved in assessing country risk. In other words, explain why country risk analysis is not always accurate.

Q: Why do you think that an MNC’s strategy of diversifying projects internationally

Why do you think that an MNC’s strategy of diversifying projects internationally could achieve low exposure to country risk?

Q: Once a project is accepted, country risk analysis for the foreign

Once a project is accepted, country risk analysis for the foreign country involved is no longer necessary, assuming that the MNC is not evaluating any other proposed projects for that country. Do you...

Q: If the potential return is high enough, any degree of country

If the potential return is high enough, any degree of country risk can be tolerated. Do you agree with this statement? Why or why not? Do you think that a proper country risk analysis can replace a ca...

Q: Niagara, Inc., has decided to call a well-known

Niagara, Inc., has decided to call a well-known country risk consultant to conduct a country risk analysis in a small country where it plans to develop a large subsidiary. Niagara prefers to hire the...

Q: Explain the micro-assessment of country risk

Explain the micro-assessment of country risk

Q: Gandor Co. is a U.S. firm that is

Gandor Co. is a U.S. firm that is considering a joint venture with a Chinese firm to produce and sell DVDs. Gandor will invest $12 million in this project, which will help finance the Chinese firm&aci...

Q: How could a country risk assessment be used to adjust a project’s

How could a country risk assessment be used to adjust a project’s required rate of return? How could such an assessment be used instead to adjust a project’s estimated cash flows?

Q: Present an argument in support of an MNC favoring a debt-

Present an argument in support of an MNC favoring a debt-intensive capital structure. Present an argument in support of an MNC favoring an equity-intensive capital structure.

Q: Pullman, Inc., a U.S. firm, has

Pullman, Inc., a U.S. firm, has been highly profitable but prefers not to pay out higher dividends because its shareholders want the funds to be reinvested. It plans for aggressive growth in several l...

Q: Explain why the cost of capital for a U.S.-

Explain why the cost of capital for a U.S.-based MNC with a large subsidiary in Brazil is higher than for a U.S.-based MNC in the same industry with a largesubsidiary in Japan. Assume that the subsidi...

Q: An MNC has total assets of $100 million and debt of

An MNC has total assets of $100 million and debt of $20 million. The firm’s before-tax cost of debt is 12 percent, and its cost of financing with equity is 15 percent. The MNC has a corporate tax rate...

Q: Wiley, Inc., an MNC, has a beta of 1

Wiley, Inc., an MNC, has a beta of 1.3. The U.S. stock market is expected to generate an annual return of 11 percent. Currently, Treasury bonds yield 2 percent. Based on this information, what is Wile...

Q: Blues, Inc., is an MNC located in the United States

Blues, Inc., is an MNC located in the United States. The firm would like to estimate its weighted average cost of capital (WACC). On average, bonds issued by Blues yield 9 percent. Currently, Treasury...

Q: Rose, Inc., of Dallas, Texas, needed to infuse

Rose, Inc., of Dallas, Texas, needed to infuse capital into its foreign subsidiaries to support their expansion. As of August 2001, it planned to issue stock in the United States. However, after the S...

Q: If Nike decides to expand further in South America, why might

If Nike decides to expand further in South America, why might its capital structure be affected? Why will its overall cost of capital be affected?

Q: Charleston Corp. is considering establishing a subsidiary in either Germany or

Charleston Corp. is considering establishing a subsidiary in either Germany or the United Kingdom. The subsidiary will be mostly financed with loans from the local banks in the host country chosen. Ch...

Q: Kent Co. is a large U.S. firm with

Kent Co. is a large U.S. firm with no international business. It has two branches in the United States, an eastern branch and a western branch. Each branch currently makes investing or financing decis...

Q: In recent years, several U.S. firms have entered

In recent years, several U.S. firms have entered the market in Mexico. One of the biggest challenges is the cost of capital to finance businesses in Mexico. Mexican interest rates tend to be much high...

Q: The subsidiaries of Forest Co. produce goods in the United States

The subsidiaries of Forest Co. produce goods in the United States, Germany, and Australia and sell those goods in the areas where they are produced. Foreign earnings are periodically remitted to the U...

Q: Wizard, Inc., has a subsidiary in a country where the

Wizard, Inc., has a subsidiary in a country where the government allows only a small amount of earnings to be remitted to the United States each year. Should Wizard finance the subsidiary with debt fi...

Q: Fairfield Corp., a U.S. firm, recently established

Fairfield Corp., a U.S. firm, recently established a subsidiary in a less developed country that consistently experiences an annual inflation rate of 80 percent or more. The country does nothave an es...

Q: Carazona, Inc., is a U.S. firm that

Carazona, Inc., is a U.S. firm that has a large subsidiary in Indonesia. It wants to finance the subsidiary’s operations in Indonesia, but the cost of debt is currently about 30 percent there for firm...

Q: Zylon Co. is a U.S. firm that provides

Zylon Co. is a U.S. firm that provides technology software for the government of Singapore. It will be paid S$7 million at the end of each of the next five years. The entire amount of the payment repr...

Q: The U.S. firm Orlando Co. is funded in

The U.S. firm Orlando Co. is funded in dollars, with a capital structure of 60 percent debt and 40 percent equity. Its Thailand business is funded in Thai baht, with a capital structure of 50 percent...

Q: Nebraska Co. plans to pursue a project in Argentina that will

Nebraska Co. plans to pursue a project in Argentina that will generate revenue of 10 million Argentinean pesos (AP) at the end of each of the next four years. It will have to pay operating expenses of...

Q: Texas Co. produces pharmaceutical drugs and plans to acquire a subsidiary

Texas Co. produces pharmaceutical drugs and plans to acquire a subsidiary in Poland. This subsidiary, a laboratory, would perform biotechnology research. Texas Co. is attracted to the lab because of t...

Q: Nevada Co. is a U.S. firm that conducts

Nevada Co. is a U.S. firm that conducts major importing and exporting business in Japan, with all of these transactions invoiced in dollars. It obtained debt in the United States at an interest rate o...

Q: Vogl Co. is a U.S. firm creating a

Vogl Co. is a U.S. firm creating a financial plan for the next year. It has no foreign subsidiaries, but more than half of its sales come from exports. Its foreign cash inflows to be received from e...

Q: Messan Co., a U.S. firm, borrows U

Messan Co., a U.S. firm, borrows U.S. funds at an interest rate of 10 percent per year. Its beta is 1.0. The longterm annualized risk-free rate in the United States is 6 percent. The stock market retu...

Q: Newark Co. is based in the United States. Approximately 30

Newark Co. is based in the United States. Approximately 30 percent of its sales are from exports to Portugal, and the company has no other international business. It finances its operations with 40 pe...

Q: Slater Co. is a U.S.-based MNC that

Slater Co. is a U.S.-based MNC that finances all of its operations with debt and equity. It borrows U.S. funds at an interest rate of 11 percent per year. The long-termrisk-free rate in the United Sta...

Q: Describe general differences between the capital structures of firms based in the

Describe general differences between the capital structures of firms based in the United States and those of firms based in Japan. Offer an explanation for these differences.

Q: Assume that Naperville Co. will use equity to finance a project

Assume that Naperville Co. will use equity to finance a project in Switzerland, that Lombard Co. will rely on a dollardenominated loan to finance a project in Switzerland, and that Addison Co. will re...

Q: Illinois Co. is a U.S. firm that plans

Illinois Co. is a U.S. firm that plans to expand its business overseas. It plans to use all the equity to be obtained in the United States to finance a new project. The project’s cash flows are not af...

Q: Marks Co. (a U.S. firm) considers

Marks Co. (a U.S. firm) considers a project in which it will establish a subsidiary in Zinlandto weaken by 20 percent per year against the dollar over time. Marks Co. will borrow some funds to finance...

Q: Why might a firm use a “local” capital structure at

Why might a firm use a “local” capital structure at a particular subsidiary that differs substantially from its “global” capital structure?

Q: Explain how characteristics of MNCs can affect the cost of capital

Explain how characteristics of MNCs can affect the cost of capital

Q: Explain why managers of a wholly owned subsidiary may be more likely

Explain why managers of a wholly owned subsidiary may be more likely to satisfy the shareholders of the MNC

Q: It is commonly argued that high interest rates reflect the expectation of

It is commonly argued that high interest rates reflect the expectation of high inflation. Based on this theory, how would expectations of Asian exchange rates change after interest rates in Asia incre...

Q: Explain why the Greece credit crisis could cause contagion effects throughout Europe

Explain why the Greece credit crisis could cause contagion effects throughout Europe.

Q: LaSalle Corp. is a U.S.-based MNC with

LaSalle Corp. is a U.S.-based MNC with subsidiaries in various less developed countries where stock markets are not well established. How can LaSalle still achieve its “global” target capital structur...

Q: Drexel Co. is a U.S.-based company that

Drexel Co. is a U.S.-based company that is establishing a project in a politically unstable country. It is considering two possible sources of financing: Either the parent could provide most of the fi...

Q: Veer Co. is a U.S.-based MNC that

Veer Co. is a U.S.-based MNC that has most of its operations in Japan. Because the Japanese companies with which it competes use more financial leverage, it has decided to adjust its own financial lev...

Q: a. What factors should be considered by a U.S

a. What factors should be considered by a U.S. firm that plans to issue a floating-rate bond denominated in a foreign currency? b. Is the risk of issuing a floating-rate bond higher or lower than the...

Q: Hawaii Co. just agreed to a long-term deal in

Hawaii Co. just agreed to a long-term deal in which it will export products to Japan. It needs funds to finance the production of the products that it will export. The products will be denominated in...

Q: Assume that Seminole, Inc., considers issuing a Singapore dollar–

Assume that Seminole, Inc., considers issuing a Singapore dollar– denominated bond at its present coupon rate of 7 percent, even though it has no incoming cash flows to cover the bon...

Q: Assume that Hurricane, Inc., is a U.S.

Assume that Hurricane, Inc., is a U.S. company that exports products to the United Kingdom, invoiced in dollars. It also exports products to Denmark, invoiced in dollars. The company currently has no...

Q: Grant, Inc., is a wellknown U.S. firm

Grant, Inc., is a wellknown U.S. firm that needs to borrow 10 million British pounds to support a new business in theUnited Kingdom. However, it cannot obtain financing from British banks because it i...

Q: Janutis Co. has just issued fixed-rate debt at 10

Janutis Co. has just issued fixed-rate debt at 10 percent, but it wants to convert its financing to incur a floating rate on its debt. It engages in an interest rate swap in which it swaps variable ra...

Q: Cedar Falls Co. has a subsidiary in Brazil, where local

Cedar Falls Co. has a subsidiary in Brazil, where local interest rates are high. It considers borrowing dollars and hedging the exchange rate risk by selling the Brazilian real forward in exchange for...

Q: a. With regard to Euro credit loans, who are the

a. With regard to Euro credit loans, who are the borrowers? b. Why would a bank desire to participate in syndicated Euro credit loans? c. What is LIBOR, and how is it used in the Euro credit market?...

Q: The parent of Nester Co. (a U.S.

The parent of Nester Co. (a U.S. firm) has no international business but plans to invest $20 million in a business in Switzerland. Because the operating costs of this business are very low, Nester Co....

Q: Vix Co. (a U.S firm) presently serves

Vix Co. (a U.S firm) presently serves as a distributor of products: It purchases these products from other U.S. firms and sells them in Europe. Vix Co. wants to acquire a manufacturer in Thailand that...

Q: Compton Co. has a subsidiary in Thailand that produces computer components

Compton Co. has a subsidiary in Thailand that produces computer components. The subsidiary sells the components to manufacturers in the United States. The components are invoiced in U.S. dollars. Comp...

Q: Omaha Co. has a subsidiary in Chile that wants to borrow

Omaha Co. has a subsidiary in Chile that wants to borrow from a local bank at a fixed rate over the next 10 years. a. Explain why Chile’s term structure of interest rates (as reflected in its yield c...

Q: What is the advantage of using simulation to assess the bond financing

What is the advantage of using simulation to assess the bond financing position?

Q: Dryden Co. is a U.S. firm that plans

Dryden Co. is a U.S. firm that plans a foreign project in which it needs $8 million as an initial investment. The project is expected to generate cash flows of 10 million euros in one year after the c...

Q: a. Explain the difference in the cost of financing with foreign

a. Explain the difference in the cost of financing with foreign currencies during a strong-dollar period versus a weak-dollar period for a U.S. firm. b. Explain how a U.S.-based MNC issuing bonds den...

Q: Columbia Corp. is a U.S. company with no

Columbia Corp. is a U.S. company with no foreign currency cash flows. It plans to issue either a bond denominated in euros with a fixed interest rate or a bond denominated in U.S. dollars with a float...

Q: Cedar Falls Co. has a subsidiary in Brazil, where local

Cedar Falls Co. has a subsidiary in Brazil, where local interest rates are high. It considers borrowing dollars and hedging the exchange rate risk by selling the Brazilian real forward in exchange for...

Q: Kerr, Inc., a major U.S. exporter of

Kerr, Inc., a major U.S. exporter of products to Japan, denominates its exports in dollars and has no other international business. It can borrow dollars at 9 percent to finance its operations or borr...

Q: You just came back from Canada, where the Canadian dollar was

You just came back from Canada, where the Canadian dollar was worth $0.70. You still have C$200 from your trip and could exchange them for dollars at the airport, but the airport foreign exchange desk...

Q: Katina, Inc., is a U.S. firm that

Katina, Inc., is a U.S. firm that plans to finance with bonds denominated in euros to obtain a lower interest rate than is available on dollar-denominated bonds. What is the most critical point in tim...

Q: Cuanto Corp. is a U.S. drug company that

Cuanto Corp. is a U.S. drug company that has attempted to capitalize on opportunities to expand in Eastern Europe. The production costs in most Eastern European countries are very low, often less than...

Q: Sambuka, Inc., can issue bonds either in U.S

Sambuka, Inc., can issue bonds either in U.S. dollars or in Swiss francs. Dollar-denominated bonds would have a coupon rate of 15 percent; Swiss franc-denominated bonds would have a coupon rate of 12...

Q: a. Describe how foreign trade would be affected if banks did

a. Describe how foreign trade would be affected if banks did not provide trade-related services. b. How can a banker’s acceptance be beneficial to an exporter, an importer, and a bank?

Q: Every quarter, Bronx Co. ships computer chips to a firm

Every quarter, Bronx Co. ships computer chips to a firm in central Asia. It has not used any trade financing because the importing firm always pays its bill in a timely manner upon receipt of the comp...

Q: Briefly describe the Working Capital Loan Guarantee Program administered by the Export

Briefly describe the Working Capital Loan Guarantee Program administered by the Export Import Bank.

Q: Describe the Small Business Policy of the Export-Import Bank.

Describe the Small Business Policy of the Export-Import Bank.

Q: Describe the role of the Overseas Private Investment Corporation (OPIC).

Describe the role of the Overseas Private Investment Corporation (OPIC).

Q: Ocean Traders of North America is a firm based in Mobile,

Ocean Traders of North America is a firm based in Mobile, Alabama, that specializes in seafood exports and commonly uses letters of credit (L/Cs) to ensure payment. It recently experienced a problem,...

Q: a. Why would an exporter provide financing for an importer?

a. Why would an exporter provide financing for an importer? b. Is there much risk in this activity? Explain.

Q: Explain why firms may issue stock in foreign markets. Why might

Explain why firms may issue stock in foreign markets. Why might U.S. firms have issued more stock in Europe after the inception of the euro?

Q: What is the role of a factor in international trade transactions?

What is the role of a factor in international trade transactions?

Q: a. What is the role today of the Export-Import

a. What is the role today of the Export-Import Bank of the United States? b. Describe the Direct Loan Program administered by the Ex-Im Bank.

Q: What are bills of lading, and how do they facilitate international

What are bills of lading, and how do they facilitate international trade transactions?

Q: What is forfaiting? Specify the type of traded products for which

What is forfaiting? Specify the type of traded products for which forfaiting is applied.

Q: Briefly describe the role of the Private Export Funding Corporation (PEFCO

Briefly describe the role of the Private Export Funding Corporation (PEFCO).

Q: This chapter described many forms of government insurance and guarantee programs.

This chapter described many forms of government insurance and guarantee programs. What motivates a government to establish such programs?

Q: What is countertrade?

What is countertrade?

Q: Explain why an MNC parent would consider financing from its subsidiaries.

Explain why an MNC parent would consider financing from its subsidiaries.

Q: Greensboro, Inc., needs $4 million for one year.

Greensboro, Inc., needs $4 million for one year. It currently has no business in Japan but plans to borrow Japanese yen from a Japanese bank because the Japanese interest rate is 3 percentage points l...

Q: Assume that the U.S. interest rate is 7 percent

Assume that the U.S. interest rate is 7 percent and the euro’s interest rate is 4 percent. Assume that the euro’s forward rate has a premium of 4 percent. Determine whether the following statement is...

Q: Explain why some financial institutions prefer to provide credit in financial markets

Explain why some financial institutions prefer to provide credit in financial markets outside their own country.

Q: Mizner, Inc., is a U.S.-based MNC

Mizner, Inc., is a U.S.-based MNC with a subsidiary in Mexico. Its Mexican subsidiary needs a one-year loan of 10 million pesos to cover its operating expenses. The subsidiary can borrow pesos at 11 p...

Q: Bradenton, Inc., has a foreign subsidiary in Asia that commonly

Bradenton, Inc., has a foreign subsidiary in Asia that commonly obtains short-term financing from local banks. If Asiasuddenly experiences an economic crisis, explain why Bradenton may not be able to...

Q: Homewood Co. commonly finances some of its U.S.

Homewood Co. commonly finances some of its U.S. expansion by repeatedly borrowing on a short-term basis. Explain how a global credit crisis might limit the firm’s ability to repeatedly borrow short-te...

Q: Missoula, Inc., decides to borrow Japanese yen for one year

Missoula, Inc., decides to borrow Japanese yen for one year. The interest rate on the borrowed yen is 8 percent. Missoula has developed the following probability distribution for the yenâ€&...

Q: Jacksonville Corp. is a U.S.-based firm that

Jacksonville Corp. is a U.S.-based firm that needs $600,000. It has no business in Japan but is considering one-year financing with Japanese yen because the annual interest rate would be 5 percent ver...

Q: Pepperdine, Inc., considers obtaining 40 percent of its one-

Pepperdine, Inc., considers obtaining 40 percent of its one-year financing in Canadian dollars and 60 percent in Japanese yen. The forecasts of appreciation in the Canadian dollar and Japanese yen for...

Q: a. Does borrowing a portfolio of currencies offer any possible advantages

a. Does borrowing a portfolio of currencies offer any possible advantages over borrowing a single foreign currency? b. If a firm borrows a portfolio of currencies, what characteristics of the currenc...

Q: Raleigh Corp. needs to borrow funds for one year to support

Raleigh Corp. needs to borrow funds for one year to support its operations in the United States. The following interest rates are available: The percentage changes in the spot rates of the Canadian d...

Q: a. Explain how a firm’s degree of risk aversion enters into

a. Explain how a firm’s degree of risk aversion enters into its decision of whether to finance in a foreign currency or a local currency. b. Assume that interest rate parity exists. If the forward ra...

Q: a. Discuss the development of a probability distribution of effective financing

a. Discuss the development of a probability distribution of effective financing rates when financing in a foreign currency. How is this distribution developed? b. Once the probability distribution of...

Q: Chapman Co. is a privately owned MNC in the United States

Chapman Co. is a privately owned MNC in the United States that plans to engage in an initial public offering (IPO) of stock so that it can finance its international expansion. Currently, world stock m...

Q: How can a U.S. firm finance in euros and

How can a U.S. firm finance in euros and not necessarily be exposed to exchange rate risk?

Q: Assume that Davenport, Inc., needs $3 million for a

Assume that Davenport, Inc., needs $3 million for a one-year period. Within one year, it will generate enough U.S. dollars to pay off the loan. It is considering three options: (1) borrowing U.S. dol...

Q: How is it possible for a firm to incur a negative effective

How is it possible for a firm to incur a negative effective financing rate?

Q: Connecticut Co. plans to finance its U.S. operations

Connecticut Co. plans to finance its U.S. operations. It can borrow euros on a short-term basis at a lower interest rate than if it borrowed dollars. a. If interest rate parity does not hold, what st...

Q: Seabreeze Co. needs to finance some dollar-denominated expenses for

Seabreeze Co. needs to finance some dollar-denominated expenses for oneyear. It can borrow euros at a lower cost than it can borrow dollars. Interest rate parity exists. The oneyear forward rate of th...

Q: Assume that interest rate parity exists. If a firm believes that

Assume that interest rate parity exists. If a firm believes that the forward rate is an unbiased predictor of the future spot rate, will it expect to achieve lower financing costs by consistently borr...

Q: Discuss the general functions involved in international cash management. Explain how

Discuss the general functions involved in international cash management. Explain how an MNC can optimize cash flows.

Q: Repeat question 9, but this time assume that Rollins, Inc

Repeat question 9, but this time assume that Rollins, Inc., expects the 1-year forward rate of the pound to substantially overestimate the spot rate to be realized in 1 year

Q: Repeat question 9, but this time assume that Rollins, Inc

Repeat question 9, but this time assume that Rollins, Inc., expects the 1-year forward rate of the pound to substantially underestimate the spot rate to be realized in 1 year.

Q: Assume that the one-year U.S. interest rate

Assume that the one-year U.S. interest rate is 2 percent and the one-year Canadian interest rate is 5 percent. If a U.S. firm invests its funds in Canada, by what percentage will the Canadian dollar h...

Q: Why do you think the terrorist attacks on the United States on

Why do you think the terrorist attacks on the United States on September 11, 2001, were expected to cause a decline in U.S. interest rates? Given the expectations for a decline in U.S. interest rates...

Q: Why would a firm consider investing in a portfolio of foreign currencies

Why would a firm consider investing in a portfolio of foreign currencies instead of just a single foreign currency?

Q: Dallas Co. has determined that the interest rate on euros is

Dallas Co. has determined that the interest rate on euros is 6 percent and the U.S. interest rate for one-year Treasury bills is 3 percent. The one-year forward rate of the euro has a discount of 5 pe...

Q: Hofstra, Inc., has no European business and has cash invested

Hofstra, Inc., has no European business and has cash invested in six European countries, each of which uses the euro as its local currency. Are Hofstra’s short-term investments well diversified and su...

Q: Should McNeese Co. consider investing funds in Latin American countries where

Should McNeese Co. consider investing funds in Latin American countries where it may expand facilities? The interest rates are high in this region, and the proceeds from the investments could be used...

Q: Palos Co. commonly invests some of its excess dollars in foreign

Palos Co. commonly invests some of its excess dollars in foreign governments’ short-term securities in an effort to earn a higher short-term interest rate on its cash. Describe how the potential retur...

Q: Pittsburgh Co. plans to invest its excess cash in Mexican pesos

Pittsburgh Co. plans to invest its excess cash in Mexican pesos for one year. The one-year Mexican interest rate is 19 percent. The probability of the peso’s percentage change in val...

Q: Ithaca Co. considers placing 30 percent of its excess funds in

Ithaca Co. considers placing 30 percent of its excess funds in a one-year Singapore dollar deposit and the remaining 70 percent of its funds in a one-year Canadian dollar depos...

Q: Explain the benefits of netting. How can a centralized cash management

Explain the benefits of netting. How can a centralized cash management system be beneficial to the MNC?

Q: How can an MNC implement leading and lagging techniques to help subsidiaries

How can an MNC implement leading and lagging techniques to help subsidiaries in need of funds?

Q: If a U.S. firm believes that the international Fisher

If a U.S. firm believes that the international Fisher effect holds, what are the implications regarding a strategy of continually attempting to generate high returns from investing in currencies with...

Q: Walmart has established two retail outlets in the city of Shanzen,

Walmart has established two retail outlets in the city of Shanzen, China, which has a population of 3.7 million. These massive outlets sell imported goods in addition to products produced locally. As...

Q: Tallahassee Co. has $2 million in excess cash that it

Tallahassee Co. has $2 million in excess cash that it has invested in Mexico at an annual interest rate of 60 percent. The U.S. interest rate is 9 percent. By how much would the Mexican peso have to d...

Q: Why would a U.S. firm consider investing its short

Why would a U.S. firm consider investing its short-term funds in euros even when it does not have any future cash outflows in euros?

Q: Evansville, Inc., has $2 million in cash available for

Evansville, Inc., has $2 million in cash available for 90 days. It is considering the use of covered interest arbitrage because the euro’s 90-day interest rate is higher than the U.S. interest rate. W...

Q: Fort Collins, Inc., has $1 million in cash available

Fort Collins, Inc., has $1 million in cash available for 30 days. It can earn 1 percent on a 30-day investment in the United States. Alternatively, if it converts the dollars to Mexican pesos, it can...

Q: Rollins, Inc., has $3 million in cash available for

Rollins, Inc., has $3 million in cash available for 1 year. It can earn 3 percent on aU.S. Treasury bill or 5 percent on a British Treasury security. The British investment requires conversion of the...

Q: Plak Co. of Chicago has several European subsidiaries that remit earnings

Plak Co. of Chicago has several European subsidiaries that remit earnings to it each year. Explain how appreciation of the euro (the currency used in many European countries) would affect Plak’s valua...

Q: As an overall review of this chapter, identify possible reasons for

As an overall review of this chapter, identify possible reasons for growth in international business. Then list the various disadvantages that may discourage international business

Q: Hudson Co., a U.S. firm, has a

Hudson Co., a U.S. firm, has a subsidiary in Mexico, where political risk has recently increased. Hudson’s best guess of its future peso cash flows to be received has not changed. However, its valuati...

Q: Would the agency problem be more pronounced for Berkeley Corp., whose

Would the agency problem be more pronounced for Berkeley Corp., whose parent company makes most major decisions for its foreign subsidiaries, or Oakland Corp., which uses a decentralized approach?

Q: Explain why morestandardized product specifications across countries can increase global competition

Explain why morestandardized product specifications across countries can increase global competition

Q: Why do interest rates vary among countries? Why are interest rates

Why do interest rates vary among countries? Why are interest rates usually similar for those European countries that use the euro as their currency? Offer a reason why the government interest rate of...

Q: McCanna Corp., a U.S. firm, has a

McCanna Corp., a U.S. firm, has a French subsidiary that produces and exports wine. All of the European countries where it sells its wine use the euro as their currency, which is the same currency use...

Q: Review this book’s table of contents and indicate whether each of the

Review this book’s table of contents and indicate whether each of the chapters from Chapter 2 through Chapter 21 has a macro or micro perspective.

Q: Duve, Inc., desires to penetrate a foreign market either by

Duve, Inc., desires to penetrate a foreign market either by creating a licensing agreement with a foreign firm or by acquiring a foreign firm. Explain the differences in potential risk and return betw...

Q: Snyder Golf Co., a U.S. firm that sells

Snyder Golf Co., a U.S. firm that sells high-quality golf clubs in the United States, wants to expand internationally by selling the same golf clubs in Brazil. a. Describe the trade-offs that are inv...

Q: Explain why political risk may discourage international business.

Explain why political risk may discourage international business.

Q: Following the terrorist attacks on the United States on September 11,

Following the terrorist attacks on the United States on September 11, 2001, the valuations of many MNCs declined by more than 10 percent. Explain why the expected cash flows of MNCs were reduced, even...

Q: Anheuser-Busch (which is now part of AB InBev due

Anheuser-Busch (which is now part of AB InBev due to a merger), the producer of Budweiser and other beers, has engaged in a joint venture with Kirin Brewery, the largest brewery in Japan. The joint ve...

Q: The managers of Loyola Corp. recently had a meeting to discuss

The managers of Loyola Corp. recently had a meeting to discuss new opportunities in Europe as a result of recent integration among Eastern European countries. They decided not to penetrate new markets...

Q: Birm Co., based in Alabama, is considering several international opportunities

Birm Co., based in Alabama, is considering several international opportunities in Europe that could affect the firm’s value. Its valuation depends on four factors: (1) expected cash flows in dollars,...

Q: Fort Worth, Inc., specializes in manufacturing some basic parts for

Fort Worth, Inc., specializes in manufacturing some basic parts for sports utility vehicles (SUVs) that are produced and sold in the United States. Its main advantage in the United States is that its...

Q: Today you notice the following exchange rate quotations: (a)

Today you notice the following exchange rate quotations: (a) $1 5 3.00 Argentine pesos and (b) 1 Argentine peso 5 0.50 Canadian dollar. You need to purchase 100,000 Canadian dollars with U.S. dollars....

Q: In addition to its stores in the United States, Walmart Stores

In addition to its stores in the United States, Walmart Stores, Inc., has numerous retail units in Argentina, Brazil, Canada, China, Mexico, and the United Kingdom. Consider that the value of Walmart...

Q: Nantucket Travel Agency specializes in tours for American tourists. Until recently

Nantucket Travel Agency specializes in tours for American tourists. Until recently, all of its business was in the United States It just established a subsidiary in Athens, Greece, which provides tour...

Q: Rose Co., a U.S. firm, has expanded

Rose Co., a U.S. firm, has expanded its business by establishing networking portals in numerous countries, including Argentina, Australia, China, Germany, Ireland, Japan, and the United Kingdom. It ha...

Q: Carlisle Co. is a U.S. firm that is

Carlisle Co. is a U.S. firm that is about to purchase a large company in Switzerland at a purchase price of $20 million. This company, which produces furniture and sells it locally (in Switzerland), i...

Q: Olmsted Co. has small computer chips assembled in Poland and transports

Olmsted Co. has small computer chips assembled in Poland and transports the final assembled products to the parent company; the parent then sells these products in the United States. The assembled pro...

Q: Minneapolis Co. is a major exporter of products to Canada.

Minneapolis Co. is a major exporter of products to Canada. Today, an event occurred that has increased the uncertainty surrounding the Canadian dollar’s future value over the long term. Explain how th...

Q: Arlington Co. expects to receive 10 million euros in each of

Arlington Co. expects to receive 10 million euros in each of the next 10 years. It will need to obtain 2 million Mexican pesos in each of the next 10 years. The euro exchange rate is presently valued...

Q: If a U.S. recession occurred without any change in

If a U.S. recession occurred without any change in interest rates, identify the part of the MNC valuation equation that would most likely be affected.

Q: Because of the low labor costs in Thailand, Melnick Co.

Because of the low labor costs in Thailand, Melnick Co. (based in the United States) recently established a major research and development subsidiary there that it owns. The subsidiary was created to...

Q: MNCs tend to expand more when they can more easily access funds

MNCs tend to expand more when they can more easily access funds by issuing stock. In some countries, shareholder rights are very limited, and the MNCs have limited ability to raise funds by issuing st...

Q: During the Asian crisis, why did the discount of the forward

During the Asian crisis, why did the discount of the forward rate of Asian currencies change? Do you think it increased or decreased? Why?

Q: Today, the stock price of Genevo Co. (based in

Today, the stock price of Genevo Co. (based in Switzerland) is priced at SF80 per share. The spot rate of the Swiss franc (SF) is $0.70. During the next year, you expect that the stock price of Genevo...

Q: Tuscaloosa Co. is a U.S. firm that assembles

Tuscaloosa Co. is a U.S. firm that assembles phones in Argentina and transports the final assembled products to the parent, which then sells the products in the United States. The assembled products a...

Q: Asheville Co. has a subsidiary in Mexico that develops software for

Asheville Co. has a subsidiary in Mexico that develops software for its parent. It rents a large facility in Mexico and hires many people in Mexico to work in this facility. Asheville Co. has no other...

Q: Co. is a U.S. firm that has a

Co. is a U.S. firm that has a subsidiary in China. The subsidiary reinvests half of its net cash flows into operations and remits half to the parent. Biloxi Co. has expected cash flows from its domest...

Q: a. Assume that Bangor Co., a U.S.

a. Assume that Bangor Co., a U.S. firm, knows that it will have cash inflows of $900,000 from domestic operations, cash inflows of 200,000 Swiss francs due to exports to Swiss operations, and cash out...

Q: Odessa Co., Midland Co., and Roswell Co. are U

Odessa Co., Midland Co., and Roswell Co. are U.S. firms in the same industry and have the same valuation as of yesterday, based on the present value of the future cash flows of each company. Odessa Co...

Q: Assume that Alpine Co. is a U.S. firm

Assume that Alpine Co. is a U.S. firm that has direct foreign investment in Brazil as a result of establishing a subsidiary there. Political conditions have changed in Brazil, but investors’ best gues...

Q: a. Rochester Co. is a U.S. firm

a. Rochester Co. is a U.S. firm that operates a language institute in France. This institute attracts Americans who want to learn the French language. Rochester Co. charges tuition to the American stu...

Q: a. What are the main components of the current account?

a. What are the main components of the current account? b. What are the main components of the capital account?

Q: Assume a simple world in which the United States exports soft drinks

Assume a simple world in which the United States exports soft drinks and beer to France and imports wine from France. If the United States imposes large tariffs on the French wine, explain the likely...

Q: There has been considerable momentum to reduce or remove trade barriers in

There has been considerable momentum to reduce or remove trade barriers in an effort to achieve “free trade.” Yet one disgruntled executive of an exporting firm stated, “Free trade is not conceivable;...

Q: Go to the currency converter at finance. yahoo.com/

Go to the currency converter at finance. yahoo.com/currency-converter and determine the bid/ask spread for the euro. Then determine the bid/ask spread for a currency in a less developed country. What...

Q: MNCs commonly invest in foreign securities. a. Assume that the

MNCs commonly invest in foreign securities. a. Assume that the dollar is presently weak and is expected to strengthen over time. How will these expectations affect the tendency of U.S. investors to in...

Q: a. Explain why a stronger dollar could enlarge the U.

a. Explain why a stronger dollar could enlarge the U.S. balance-of-trade deficit. Explain why a weaker dollar could affect the U.S. balance-of-trade deficit. b. It is sometimes suggested that a float...

Q: The governments of many countries enact policies that can have a major

The governments of many countries enact policies that can have a major impact on international trade flows. a. Explain how governments might give their local firms a competitive advantage in the inter...

Q: There is an ongoing debate between the United States and China regarding

There is an ongoing debate between the United States and China regarding whether the Chinese yuan’s value should be revalued upward. The cost of labor in China is substantially lower than that in the...

Q: a. How would a relatively high domestic inflation rate affect the

a. How would a relatively high domestic inflation rate affect the home country’s current account, other things being equal? b. Is a negative current account harmful to a country? Discuss.

Q: How can government restrictions affect international payments among countries?

How can government restrictions affect international payments among countries?

Q: a. What are some of the major objectives of the IMF

a. What are some of the major objectives of the IMF? b. How is the IMF involved in international trade?

Q: Would the U.S. balance-of-trade deficit

Would the U.S. balance-of-trade deficit be larger or smaller if the dollar depreciates against all currencies, versus depreciating against some currencies but appreciating against others? Explain.

Q: A relatively small U.S. balance-of-trade

A relatively small U.S. balance-of-trade deficit is commonly attributed to a strong demand for U.S. exports. What do you think is the underlying reason for the strong demand for U.S. exports?

Q: Why do you think international trade volume has increased over time?

Why do you think international trade volume has increased over time? In general, how are inefficient firms affected by the reduction in trade restrictions among countries and the continuous increase i...

Q: Assume that during this semester, the euro appreciated against the dollar

Assume that during this semester, the euro appreciated against the dollar. Did the direct exchange rate of the euro increase or decrease? Did the indirect exchange rate of the euro increase or decreas...

Q: Explain how the existence of the euro may affect U.S

Explain how the existence of the euro may affect U.S. international trade

Q: When South Korea’s export growth stalled, some South Korean firms suggested

When South Korea’s export growth stalled, some South Korean firms suggested that South Korea’s primary export problem was the weakness in the Japanese yen. How would you interpret this statement?

Q: Explain why an MNC may invest funds in a financial market outside

Explain why an MNC may invest funds in a financial market outside its own country

Q: If the direct exchange rate of the euro is $1.

If the direct exchange rate of the euro is $1.25, what is the euro’s indirect exchange rate? That is, what is the value of a dollar in euros?

Q: Assume Poland’s currency (the zloty) is worth $0.

Assume Poland’s currency (the zloty) is worth $0.17 and the Japanese yen is worth $0.008. What is the cross exchange rate of the zloty with respect to yen? That is, how many yen equal one zloty?

Q: Explain how syndicated loans are used in international markets

Explain how syndicated loans are used in international markets

Q: Explain the process used by banks in the Eurocredit market to determine

Explain the process used by banks in the Eurocredit market to determine the rate to charge on loans.

Q: What is the function of the international money markets? Briefly describe

What is the function of the international money markets? Briefly describe the reasons for the development and growth of the European money market. Explain how the international money, credit, and bond...

Q: Briefly describe the historical developments that led to floating exchange rates as

Briefly describe the historical developments that led to floating exchange rates as of 1973.

Q: a. Explain the agency problem of MNCs. b.

a. Explain the agency problem of MNCs. b. Why might agency costs be larger for an MNC than for a purely domestic firm?

Q: Explain the relationship between transparency of firms and investor participation (or

Explain the relationship between transparency of firms and investor participation (or trading activity) in stock markets. Based on this relationship, how can governments of countries increase the amou...

Q: a. Explain how the theory of comparative advantage relates to the

a. Explain how the theory of comparative advantage relates to the need for international business. b. Explain how the product cycle theory relates to the growth of an MNC.

Q: a. Explain how the existence of imperfect markets has led to

a. Explain how the existence of imperfect markets has led to the establishment of subsidiaries in foreign markets. b. If perfect markets existed, would wages, prices, and interest rates among countri...

Q: a. Do you think the acquisition of a foreign firm or

a. Do you think the acquisition of a foreign firm or licensing will result in greater growth for an MNC? Which alternative is likely to have more risk? b. Describe a scenario in which the size of a c...

Q: a. What factors cause some firms to become more internationalized than

a. What factors cause some firms to become more internationalized than others? b. Why might the Internet have resulted in more international business?

Q: Identify some of the key factors that can allow for stronger governance

Identify some of the key factors that can allow for stronger governance, thereby increasing participation and trading activity in a stock market

Q: Explain how the appreciation of the Australian dollar against the U.

Explain how the appreciation of the Australian dollar against the U.S. dollar would affect the return to a U.S. firm that invested in an Australian money market security.

Q: Explain how the international integration of financial markets caused the credit crisis

Explain how the international integration of financial markets caused the credit crisis of 2008–2009 to spread across many countries

Q: Bloomington Co. is a large U.S.-based MNC

Bloomington Co. is a large U.S.-based MNC with large subsidiaries in Germany. It has issued stock in Germany to establish its business. As an alternative financing mechanism, it could have issued stoc...

Q: As of today, the interest rates in Countries X, Y

As of today, the interest rates in Countries X, Y, and Z are similar. In the next month, Country X is expected to have a weak economy, while Countries Y and Z are expected to experience a 6 percent in...

Q: In July 2015, Greece was negotiating to obtain its third bailout

In July 2015, Greece was negotiating to obtain its third bailout from several European governments over a five-year period. Greece argued that austerity measures should not be imposed. Offer some reas...

Q: During the Hong Kong crisis, the Hong Kong stock market declined

During the Hong Kong crisis, the Hong Kong stock market declined substantially over a four-day period due to concerns in the foreign exchange market. Why would stock prices decline due to such concern...

Q: Explain how the appreciation of the Japanese yen against the U.

Explain how the appreciation of the Japanese yen against the U.S. dollar would affect the return to a U.S. firm that borrowed Japanese yen and used the proceeds for a U.S. project.

Q: List some of the important characteristics of bank foreign exchange services that

List some of the important characteristics of bank foreign exchange services that MNCs should consider.

Q: Utah Bank’s bid price for Canadian dollars is $0.7938

Utah Bank’s bid price for Canadian dollars is $0.7938 and its ask price is $0.8100. What is the bid/ask percentage spread?

Q: Compute the bid/ask percentage spread for Mexican peso retail transactions

Compute the bid/ask percentage spread for Mexican peso retail transactions in which the ask rate is $0.11 and the bid rate is $0.10.

Q: The Wolfpack Corp. is a U.S. exporter that

The Wolfpack Corp. is a U.S. exporter that invoices its exports to the United Kingdom in British pounds. If it expects that the pound will appreciate against the dollar in the future, should it hedge...

Q: Explain the foreign exchange situation for countries that use the euro when

Explain the foreign exchange situation for countries that use the euro when they engage in international trade among themselves.

Q: Assume the spot rate of the British pound is $1.

Assume the spot rate of the British pound is $1.73. The expected spot rate one year from now is assumed to be $1.66. What percentage depreciation does this reflect?

Q: Every month, the U.S. trade deficit figures are

Every month, the U.S. trade deficit figures are announced. Foreign exchange traders often react to this announcement and even attempt to forecast the figures before they are announced. a. Why do you...

Q: Explain why the value of the British pound against the dollar will

Explain why the value of the British pound against the dollar will not always move in tandem with the value of the euro against the dollar.

Q: In some historical periods, Brazil’s inflation rate has been very high

In some historical periods, Brazil’s inflation rate has been very high. Explain why this places pressure on the Brazilian currency

Q: On August 26, 1998, the day that Russia decided to

On August 26, 1998, the day that Russia decided to let the ruble float freely, the ruble declined by about 50 percent. N the following day, called bloody Thursday, stock markets around the world (incl...

Q: Analysts commonly attribute the appreciation of a currency to expectations that economic

Analysts commonly attribute the appreciation of a currency to expectations that economic conditions will strengthen. Yet, this chapter suggests that when other factors are held constant, increased nat...

Q: If Asian countries experience a decline in economic growth (and experience

If Asian countries experience a decline in economic growth (and experience a decline in inflation and interest rates as a result), how will their currency values (relative to the U.S. dollar) be affec...

Q: Why do you think most crises in countries cause the local currency

Why do you think most crises in countries cause the local currency to weaken abruptly? Is it because of trade flows or capital flows

Q: How do you think weaker U.S. economic conditions could

How do you think weaker U.S. economic conditions could affect capital flows? If capital flows are affected, how would this influence the value of the dollar (holding other factors constant)?

Q: Tarheel Co. plans to determine how changes in U.S

Tarheel Co. plans to determine how changes in U.S. and Mexican real interest rates will affect the value of the U.S. dollar. (See Appendix C for the basics of regression analysis.) a. Describe a regr...

Q: Mexico tends to have much higher inflation than the United States as

Mexico tends to have much higher inflation than the United States as well as much higher interest rates than the United States. Inflation and interest rates are much more volatile in Mexico than in in...

Q: Assume that the United States invests heavily in government and corporate securities

Assume that the United States invests heavily in government and corporate securities of Country K. In addition, residents of Country K invest heavily in the United States. Approximately $10 billion wo...

Q: Assume that the U.S. inflation rate becomes high relative

Assume that the U.S. inflation rate becomes high relative to Canadian inflation. Other things being equal, how should this affect (a) the U.S. demand for Canadian dollars, (b) the supply of Canadian...

Q: Blue Demon Bank expects that the Mexican peso will depreciate against the

Blue Demon Bank expects that the Mexican peso will depreciate against the dollar from its spot rate of $0.15 to $0.14 in 10 days. The following interbank lending and borrowing rates exist: Assume tha...

Q: Diamond Bank expects that the Singapore dollar will depreciate against the U

Diamond Bank expects that the Singapore dollar will depreciate against the U.S. dollar from its spot rate of $0.43 to $0.42 in 60 days. The following interbank lending and borrowing rates exist: Diam...