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Exam 27: Multinational Financial Management

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Question 1

Multiple Choice

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Tashakori Trucking,a U.S.-based company,is considering expanding its operations into a foreign country.The required investment at Time = 0 is $10 million.The firm forecasts total cash inflows of $4 million per year for 2 years,$6 million for the next 2 years,and then a possible terminal value of $8 million.In addition,due to political risk factors,Tashakori believes that there is a 50% chance that the gross terminal value will be only $2 million and a 50% chance that it will be $8 million.However,the government of the host country will block 20% of all cash flows.Thus,cash flows that can be repatriated are 80% of those projected.Tashakori's cost of capital is 15%,but it adds one percentage point to all foreign projects to account for exchange rate risk.Under these conditions,what is the project's NPV?

A) $1.01 million
B) $2.77 million
C) $3.09 million
D) $5.96 million
E) $7.39 million

F) C) and E)
G) B) and C)

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B

Question 2

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Which of the following statements is NOT CORRECT?

A) Foreign bonds and Eurobonds are two important types of international bonds.
B) Foreign bonds are bonds sold by a foreign borrower but denominated in the currency of the country in which the issue is sold.
C) The term Eurobond applies only to foreign bonds denominated in U.S. currency.
D) A foreign bond might pay a higher nominal interest rate than a U.S. bond.
E) Any bond sold outside the country of the borrower is called an international bond.

F) D) and E)
G) C) and E)

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Question 3

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Credit policy for multinational firms is generally more risky due in part to the additional consideration of exchange rates and also due to uncertainty regarding the credit worthiness of many foreign customers.

A Eurodollar is a U.S.dollar deposited in a bank outside the United States.

Suppose that 1 British pound currently equals 1.62 U.S.dollars and 1 U.S.dollar equals 1.62 Swiss francs.What is the cross exchange rate between the pound and the franc?

Suppose a foreign investor who holds tax-exempt Eurobonds paying 9% is considering investing in an equivalent-risk domestic bond in a country with a 28% withholding tax on interest paid to foreigners.If 9% after-tax is the investor's required return,what before-tax rate would the domestic bond need to pay to provide the required after-tax return?

Suppose a U.S.firm buys $200,000 worth of stereo speaker wire from a Mexican manufacturer for delivery in 60 days with payment to be made in 90 days (30 days after the goods are received) .The rising U.S.deficit has caused the dollar to depreciate against the peso recently.The current exchange rate is 5.50 pesos per U.S.dollar.The 90-day forward rate is 5.45 pesos/dollar.The firm goes into the forward market today and buys enough Mexican pesos at the 90-day forward rate to completely cover its trade obligation.Assume the spot rate in 90 days is 5.30 Mexican pesos per U.S.dollar.How much in U.S.dollars did the firm save by eliminating its foreign exchange currency risk with its forward market hedge?

The interest rate paid on Eurodollar deposits depends on the particular bank's lending rate and on rates available on U.S.money market instruments.

Exchange rates influence a multinational firm's inventory policy because changing currency values can affect the value of inventory.

A U.S.-based importer,Zarb Inc.,makes a purchase of crystal glassware from a firm in Switzerland for 39,960 Swiss francs,or $24,000,at the spot rate of 1.665 francs per dollar.The terms of the purchase are net 90 days,and the U.S.firm wants to cover this trade payable with a forward market hedge to eliminate its exchange rate risk.Suppose the firm completes a forward hedge at the 90-day forward rate of 1.682 francs.If the spot rate in 90 days is actually 1.638 francs,how much will the U.S.firm have saved or lost in U.S.dollars by hedging its exchange rate exposure?

Suppose the exchange rate between U.S.dollars and Swiss francs is SF 1.41 = $1.00,and the exchange rate between the U.S.dollar and the euro is $1.00 = 1.64 euros.What is the cross-rate of Swiss francs to euros?

Suppose one U.S.dollar can purchase 144 yen today in the foreign exchange market.If the yen depreciates by 8.0% tomorrow,how many yen could one U.S.dollar buy tomorrow?

Legal and economic differences among countries,although important,do NOT pose significant problems for most multinational corporations when they coordinate and control worldwide operations of subsidiaries.

LIBOR is an acronym for London Interbank Offer Rate,which is an average of interest rates offered by London banks to smaller U.S.corporations.

Suppose Yates Inc.,a U.S.exporter,sold a consignment of antique American muscle-cars to a Japanese customer at a price of 143.5 million yen,when the exchange rate was 140 yen per dollar.In order to close the sale,Yates agreed to make the bill payable in yen,thus agreeing to take some exchange rate risk for the transaction.The terms were net 6 months.If the yen fell against the dollar such that one dollar would buy 154.4 yen when the invoice was paid,what dollar amount would Yates actually receive after it exchanged yen for U.S.dollars?

Because political risk is seldom negotiable,it cannot be explicitly addressed in multinational corporate financial analysis.

The United States and most other major industrialized nations currently operate under a system of floating exchange rates.

Suppose 6 months ago a Swiss investor bought a 6-month U.S.Treasury bill at a price of $9,708.74,with a maturity value of $10,000.The exchange rate at that time was 1.420 Swiss francs per dollar.Today,at maturity,the exchange rate is 1.324 Swiss francs per dollar.What is the annualized rate of return to the Swiss investor?

Suppose it takes 1.82 U.S.dollars today to purchase one British pound in the foreign exchange market,and currency forecasters predict that the U.S.dollar will depreciate by 12.0% against the pound over the next 30 days.How many dollars will a pound buy in 30 days?

A U.S.-based company,Stewart,Inc.,arranged a 2-year,$1,000,000 loan to fund a project in Mexico.The loan is denominated in Mexican pesos,carries a 10.0% nominal rate,and requires equal semiannual payments.The exchange rate at the time of the loan was 5.75 pesos per dollar,but it dropped to 5.10 pesos per dollar before the first payment came due.The loan was not hedged in the foreign exchange market.Thus,Stewart must convert U.S.funds to Mexican pesos to make its payments.If the exchange rate remains at 5.10 pesos per dollar through the end of the loan period,what effective interest rate will Stewart end up paying on the loan?