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Exam 27: Multinational Financial Management

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Question 1

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A year ago, MC Hammer Company had inventory in Britain valued at 240,000 pounds. The exchange rate for dollars to pounds was 1£ = 2 U.S. dollars. This year the exchange rate is 1£ = 1.82 U.S. dollars. The inventory in Britain is still valued at 240,000 pounds. What is the gain or loss in inventory value in U.S. dollars as a result of the change in exchange rates?

A) -$240,000
B) -$ 43,200
C) $ 0
D) $ 43,200
E) $ 47,473

F) A) and B)
G) A) and C)

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Question 2

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Six 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?

A) -7.92%
B) -4.13%
C) 6.00%
D) 8.25%
E) 12.00%

F) A) and E)
G) A) and D)

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Question 3

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Trent Transport, 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 two years, and then a possible terminal value of $8 million. In addition, due to political risk factors, Trent believes that there is a 50 percent chance that the gross terminal value will be only $2 million and that there is a 50 percent chance that it will be $8 million. However, the government of the host country will block 20 percent of all cash flows. Thus, cash flows that can be repatriated are 80 percent of those projected. Trent's cost of capital is 15 percent, 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?

Suppose exchange rates 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?

Multinational financial management requires that financial analyses consider the effects of changing currency values.

The cash flows relevant for the analysis of a foreign investment should, from the parent company's perspective, include the financial cash flows that the subsidiary can legally send back to the parent company and the cash flows which must remain in the foreign country.

Swenser Corporation arranged a two-year, $1,000,000 loan to fund a foreign project. The loan is denominated in Mexican pesos, carries a 10 percent nominal rate, and requires equal semiannual payments. The exchange rate at the time of the loan was 5.75 pesos per dollar but immediately dropped to 5.10 (pesos per dollars) before the first payment came due. The loan carried no exchange rate protection and was not hedged by Swenser in the foreign exchange market. Thus, Swenser 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 Swenser end up paying on the foreign loan?

If a dollar will buy fewer units of a foreign currency in the forward market than in the spot market, then the forward currency is said to be selling at a premium to the spot rate.

Due to advanced technology and the similarity of general procedures, working capital management for multinational firms is no more complex than it is for domestic firms.

90-day investments in Britain have a 6 percent annualized return and a 1.5 percent quarterly (90-day) return. In the U.S., 90-day investments of similar risk have a 4 percent annualized return and a 1 percent quarterly (90-day) return. In the 90-day forward market, 1 British pound equals $1.65. If interest rate parity holds, what is the spot exchange rate?

When the value of the U.S. dollar appreciates against another country's currency, we may purchase more of the foreign currency per dollar.

Credit policy for the multinational firm 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.

Hockey skates sell in Canada for 105 Canadian dollars. Currently, 1 Canadian dollar equals 0.71 U.S. dollars. If purchasing power parity (PPP) holds, what is the price of hockey skates in the United States?

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

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

A box of candy costs 28.80 Swiss francs in Switzerland and $20 in the United States. Assuming that purchasing power parity (PPP) holds, what is the current exchange rate?

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

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.

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

The Eurodollar market is essentially a long-term market; most loans and deposits have maturities of longer than one year.