FINA521 FINAL EXAM Due Saturday March 30th 2013 at 10:00 PM

1. Apple Corporation will need 200,000 Canadian dollars (C$) in 90 days to cover a payable position. Currently, a 90-day call option with an exercise price of $.75 and a premium of $.01 is available. Also, a 90-day put option with an exercise price of $.73 and a premium of $.01 is available. Apple plans to purchase options to hedge its payable position. Assuming that the spot rate in 90 days is $.71, what is the net amount paid, assuming Apple wishes to minimize its cost? a. $144,000. b. $148,000. c. $152,000. d. $150,000.

2. A call option exists on British pounds with an exercise price of $1.60, a 90-day expiration date, and a premium of $.03 per unit. A put option exists on British pounds with an exercise price of $1.60, a 90-day expiration date, and a premium of $.02 per unit. You plan to purchase options to cover your future receivables of 700,000 pounds in 90 days. You will exercise the option in 90 days (if at all). You expect the spot rate of the pound to be $1.57 in 90 days. Determine the amount of dollars to be received, after deducting payment for the option premium. a. $1,169,000. b. $1,099,000. c. $1,106,000. d. $1,143,100. e. $1,134,000.

3. Which of the following is a reason to consider international business? a. economies of scale. b. exploit monopolistic advantages.

c. diversification. d. all of the above

4. Assume the following information: U.S. deposit rate for 1 year = 11% U.S. borrowing rate for 1 year = 12% Swiss deposit rate for 1 year = 8% Swiss borrowing rate for 1 year = 10% Swiss forward rate for 1 year = $.40 Swiss franc spot rate = $.39 Also assume that a U.S. exporter denominates its Swiss exports in Swiss francs and expects to receive SF600,000 in 1 year. Using the information above, what will be the approximate value of these exports in 1 year in U.S. dollars given that the firm executes a forward hedge? a. $234,000. b. $238,584. c. $240,000. d. $236,127.

5. Assume a U.S.-based subsidiary wants to raise $1,000,000 by issuing a bond denominated in Pakistani rupees (PKR). The current exchange rate of the rupee is $.02. Thus, the MNC needs ____ rupees to obtain the $1,000,000 needed. a. 50,000,000 b. 20,000 c. 1,000,000 d. none of the above

6. Which of the following is not an advantage of international acquisitions over the establishment of a new subsidiary? a. The firm can immediately expand its international business. b. An international acquisition typically generates quicker cash flows than the establishment of a new subsidiary. c. International acquisitions are generally cheaper than the establishment of a new subsidiary. d. An international acquisition typically generates larger cash flows than the establishment of a new subsidiary. e. All of the above are advantages of international acquisitions.

7. Which of the following would probably not cause the stock price of a foreign target to decrease? a. Its expected cash flows decline. b. General stock market conditions in the foreign country are deteriorating. c. Investors anticipate that the target will be acquired. d. All of the above will cause the target's stock price to decrease.

8. Mewsky, Inc., a U.S.-based MNC, has screened several targets. Based on economic and political considerations, only one eligible target remains in Malaysia. Mewsky would like you to value this target and has provided you with the following information: Mewsky expects to keep the target for three years, at which time it expects to sell the firm for 500 million Malaysian ringgit (MYR) after deducting the amount for any taxes paid. Mewsky expects a strong Malaysian economy. Consequently, the estimates for revenues for the next year are MYR300 million. Revenues are expected to increase by 9% over the following two years. Cost of goods sold are expected to be 60% of revenues.

 Selling and administrative expenses are expected to be MYR40 million in each of the next three years. The Malaysian tax rate on the target's earnings is expected to be 30%. Depreciation expenses are expected to be MYR15 million per year for each of the next three years. The target will need MYR9 million in cash each year to support existing operations. The target's current stock price is MYR35 per share. The target has 11 million shares outstanding. Any cash flows remaining after taxes are remitted by the target to Mewsky, Inc. Mewsky uses the prevailing exchange rate of the Malaysian ringgit as the expected exchange rate for the next three years. This exchange rate is currently $.23. Mewsky's required rate of return on similar projects is 13%. Based on the information provided above, the net present value of the Malaysian target is $____ million. a. 155.9 b. 111.5 c. 138.0 d. 143.0 e. none of the above Hint

9. Assume that Baps Corporation is considering the establishment of a subsidiary in Norway. The initial investment required by the parent is $5,000,000. If the project is undertaken, Baps would terminate the project after four years. Baps' cost of capital is 13%, and the project is of the same risk as Baps' existing projects. All cash flows generated from the project will be remitted to the parent at the end of each year. Listed below are the estimated cash flows the Norwegian subsidiary will generate over the project's lifetime in Norwegian kroner (NOK):

Year 1 NOK10,000,000

Year 2 NOK15,000,000

Year 3 NOK17,000,000

Year 4 NOK20,000,000

The current exchange rate of the Norwegian kroner is $.135. Baps' exchange rate forecast for the Norwegian kroner over the project's lifetime is listed below: Year 1 $.13 Year 2 $.14 Year 3 $.12 Year 4 $.15

What is the net present value of the Norwegian project?

a. b. c. d. $5,803,848. $1,048,829. none of the above

10. When an MNC is considering financing a portion of a foreign project within the foreign country, the best method to account for a foreign project's risk is to: a. b. c. d. derive net present values based on the WACC. adjust the weighted average cost of capital for the risk differential. derive the net present value of the equity investment. none of the above

11. Assume a U.S.-based subsidiary wants to raise $1,000,000 by issuing a bond denominated in Pakistani rupees (PKR). The current exchange rate of the rupee is $.02. Thus, the MNC needs ____ rupees to obtain the $1,000,000 needed. a. b. c. d. 50,000,000 20,000 1,000,000 none of the above

12. To hedge a ____ in a foreign currency, a firm may ____ a currency futures contract for that currency. a. receivable; purchase b. payable; sell c. payable; purchase d. none of the above

13. Assume the British pound appreciates against the dollar while the Japanese yen depreciates against the dollar. Which of the following is true? a. Japanese exporters can increase American sales by shifting operations from their British subsidiaries to Japan. b. British exporters can increase American sales by shifting operations from their Japanese subsidiaries to Britain. c. American exporters can increase sales to Japan by shifting operations from Japanese subsidiaries to American subsidiaries. d. B and C

14. Even if production costs are higher in a foreign country, a U.S. firm may establish a manufacturing plant in the foreign country now if: a. the host government of that country eliminates all quotas. b. the host government of that country reduces all quotas. c. the host government of that country increases all quotas. d. the host government of that country eliminates all tariffs.

15. Blake Inc. needs 1,000,000 in 30 days. It can earn 5 percent annualized on a German security. The current spot rate for the euro is $1.00. Blake can borrow funds in the U.S. at an annualized interest rate of 6 percent. If Blake uses a money market hedge to hedge the payable, what is the cost of implementing the hedge? a. $1,000,000. b. $1,055,602. c. $1,000,830. d. $1,045,644.

16. Samson Inc. needs 1,000,000 in 30 days. Samson can earn 5 percent annualized on a German security. The current spot rate for the euro is $1.00. Samson can borrow funds in the U.S. at an annualized interest rate of 6 percent. If Samson uses a money market hedge, how much should it borrow in the U.S.? a. $952,381. b. $995,851. c. $943,396. d. $995,025.

17. Which of the following is not directly considered in the decision by a U.S.-based MNC to divest a subsidiary? a. the required rate of return on the subsidiary. b. forecasted exchange rates of the subsidiary's currency relative to the dollar. c. the initial outlay on the project. d. the possible selling price of the project.

18. Whitewater Co. is a U.S. company with sales to Canada amounting to C$8 million. Its cost of materials attributable to the purchase of Canadian goods is C$6 million. Its interest expense on Canadian loans is C$4 million. Given these exact figures above, the dollar value of Whitewater's "earnings before interest and taxes" would ____ if the Canadian dollar appreciates; the dollar value of Whitewater's cash flows would ____ if the Canadian dollar appreciates. a. increase; increase b. decrease; increase c. decrease; decrease d. increase; decrease e. increase; be unaffected

19. An MNC that plans to acquire a target would prefer to make a bid at a time when the local stock market prices are generally ____. Assume that economic conditions are held constant when completing this statement. a. low b. high c. volatile d. none of the above

20. Linden Co. has 1,000,000 euros as payables due in 90 days, and is certain that euro is going to depreciate substantially over time. Assuming the firm is correct, the ideal strategy is to: a. sell euros forward b. purchase euro currency put options. c. purchase euro currency call options. d. purchase euros forward. e. remain unhedged

21.

Direct foreign investment would typically be welcomed if:

a. the products to be produced are substitutes for other locally produced products. b. people from the country of the company's headquarter are transferred to the foreign country to work at the subsidiary. c. the products to be produced are going to be exported. d. all of the above

22. The best means to accomplish the revenue-related motive of attracting new sources of demand is to: a. acquire a competitor that has controlled its local market. b. establish a subsidiary or acquire a competitor in a new market. c. establish a subsidiary in a market where tougher trade restrictions will adversely affect the firm's export volume. d. establish subsidiaries in markets whose business cycles differ from those where existing subsidiaries are based.

23. Springfield Co., based in the U.S., has a cost from orders of foreign material that exceeds its foreign revenue. All foreign transactions are denominated in the foreign currency of concern. This firm would ____ a stronger dollar and would ____ a weaker dollar. a. benefit from; be unaffected by b. benefit from; be adversely affected by c. be unaffected by; be adversely affected by d. be unaffected by; benefit from e. benefit from; benefit from

24. If revenues and costs are equally sensitive to exchange rate movements, MNCs may reduce their economic exposure by restructuring their operations to shift the sources of costs or revenues to other locations so that: a. cash inflows exceed cash outflows in each foreign currency. b. cash outflows exceed cash inflows in each foreign currency. c. cash inflows match cash outflows in each foreign currency. d. none of the above

25. Mercury Co. has a subsidiary based in Italy and is exposed to translation exposure. Mercury forecasts that its earnings next year will be 10 million. Mercury decides to hedge the expected earnings by selling 10 million forward. During the next year, the euro appreciated. Mercury's consolidated earnings were ____ affected by the euro's movement, and Mercury's hedge position was ____ affected by the euro's movement. a. favorably; favorably b. favorably; adversely c. adversely; favorably d. adversely; adversely

26. According to information in the text, a host government would be least likely to provide incentives for direct foreign investment (DFI) into its country if the firm planning DFI: a. would compete with local firms of the host country. b. would produce a good not currently available in the host country. c. would produce a good and export it to other countries. d. B and C

27. Assume a U.S.-based MNC has a Chilean subsidiary that annually remits 30 million Chilean pesos to the U.S. If the peso ____, the dollar amount of remitted funds ____. a. b. c. d. e. appreciates; decreases depreciates; is unaffected appreciates; is unaffected depreciates; decreases B and C

28. An international project's NPV is ____ related to the size of the initial investment and ____ related to the project's required rate of return. a. b. c. d. positively; positively positively; negatively negatively; positively negatively; negatively

29. From the concept of an "efficient frontier," the point on a frontier that is optimal for all firms: a. is the top point. b. is the point closest to the vertical axis. c. is the point half way between the two end points. d. cannot be determined since firms vary in their willingness to accept risk.

30.

Assume the following information:

U.S. deposit rate for 1 year = 11% U.S. borrowing rate for 1 year = 12% New Zealand deposit rate for 1 year = 8% New Zealand borrowing rate for 1 year = 10% New Zealand dollar forward rate for 1 year = $.40 New Zealand dollar spot rate = $.39 Also assume that a U.S. exporter denominates its New Zealand exports in NZ$ and expects to receive NZ$600,000 in 1 year. You are a consultant for this firm. Using the information above, what will be the approximate value of these exports in 1 year in U.S. dollars given that the firm executes a money market hedge?

a. $238,584. b. $240,000. c. $234,000. d. $236,127. Hint: Steps are: Borrow, Convert, Invest

31. When a foreign currency is perceived by a firm to be __________, the firm will probably __________ direct foreign investment in that country. a. undervalued; consider b. undervalued; not consider c. overvalued; not consider d. A and C e. B and C

32. The cost of capital can vary among countries because: a. MNCs based in some countries do not have a competitive advantage over others. b. MNCs may be able to adjust their international operations and sources of funds to capitalize on differences in the cost of capital among countries. c. of country differences in tax laws or monetary supply. d. none of the above.

33. A U.S. firm has a Canadian subsidiary that remits some of its earnings to the parent on an annual basis. The firm has no other foreign business. The firm could best reduce its exposure to exchange rate risk by issuing bonds denominated in: a. U.S. dollars. b. Canadian dollars. c. multiple currencies. d. euros.

34. From the concept of an "efficient frontier," the point on a frontier that is optimal for all firms: a. is the top point. b. is the point closest to the vertical axis. c. is the point half way between the two end points. d. cannot be determined since firms vary in their willingness to accept risk.

35. Assume the British pound appreciates against the dollar while the Japanese yen depreciates against the dollar. Which of the following is true? a. Japanese exporters can increase American sales by shifting operations from their British subsidiaries to Japan. b. British exporters can increase American sales by shifting operations from their Japanese subsidiaries to Britain. c. American exporters can increase sales to Japan by shifting operations from Japanese subsidiaries to American subsidiaries. d. B and C

36 . A U.S. firm has received a large amount of cash inflows periodically in Swiss francs as a result of exporting goods to Switzerland. It has no other business outside the U.S. It could best reduce its exposure to exchange rate risk by: a. issuing Swiss franc-denominated bonds. b. purchasing Swiss franc-denominated bonds. c. purchasing U.S. dollar-denominated bonds. d. issuing U.S. dollar-denominated bonds.

37. Petrus Company has a unique opportunity to invest in a two-year project in Australia. The project is expected to generate 1,000,000 Australian dollars (A$) in the first year and 2,000,000 Australian dollars in the second. Petrus would have to invest $1,500,000 in the project. Petrus has determined that the cost of capital for similar projects is 14%. What is the net present value of this project if the spot rate of the Australian dollar for the two years is forecasted to be $.55 and $.60, respectively? a. $2,905,817. b. $94,183. c. $916,128. d. none of the above

38. An MNC is considering establishing a two-year project in New Zealand with a $30 million initial investment. The firm's cost of capital is 12%. The required rate of return on this project is 18%. The project is expected to generate cash flows of NZ$12 million in Year 1 and NZ$30 million in Year 2, excluding the salvage value. Assume no taxes, and a stable exchange rate of $.60 per NZ$ over the next two years. All cash flows are remitted to the parent. What is the break-even salvage value? a. about NZ$11 million. b. about NZ$15 million. c. about NZ$31 million. d. about NZ$37 million. e. about NZ$25 million.

39. Which of the following tax-related factors need not be considered in assessing a foreign target? a. corporate tax rates in the host country. b. withholding tax rates in the host country. c. withholding tax rates in the home country. d. corporate tax rates in the home country. e. all of the above must be considered in assessing a foreign target.

40. Which of the following is not a reason why the valuation of a foreign target may vary among MNCs? a. Differences in estimated cash flows to be generated by the foreign target b. Differences in estimated exchange rates c. Differences in required rates of return d. All of the above are possible reasons why the valuation of a foreign target may vary among MNCs

41. As far as the managerial talent of the target is concerned: a. the manner in which the acquirer plans to deal with the managerial talent will affect the estimated cash flows to be generated by the target. b. downsizing will reduce expenses and increase productivity and revenues. c. governments of some countries are likely to intervene and prevent the acquisition if downsizing is anticipated. d. all of the above e. A and C only

42. The most important variable in determining a country's degree of overall country risk: a. is political risk. b. is financial risk. c. is the probability of a host government takeover. d. may often vary with the country of concern.

43. When determining whether a particular proposed project in a foreign country is feasible: a. a country risk rating can adequately substitute for a capital budgeting analysis. b. country risk analysis should be incorporated within the capital budgeting analysis. c. the effect of country risk on sales revenue is more important than the effect on cash flows. d. the project with the highest country risk rating (lowest country risk) should be accepted. e. B and D

44. An MNC considers direct foreign investment in Germany. It is mainly concerned with the subsidiary's ability to generate sufficient sales there. The country risk characteristic that would best address this concern is: a. the host government's tax rates charged on remitted earnings. b. the possibility of blocked funds. c. the state of the economy in Germany. d. the possibility of a withholding tax imposed by the German government.

45. A mild form of political risk is a tendency of residents to purchase only: a. imported products. b. locally produced products. c. products produced by MNCs. d. none of the above

46. Assume the following information for Pexi Co., a U.S.-based MNC that is considering obtaining funding for a project in Germany: U.S. risk-free rate = 4% German risk-free rate = 5% Risk premium on dollar-denominated debt provided by U.S. creditors = 3% Risk premium on euro-denominated debt provided by German creditors = 4% Beta of project = 1.2 Expected U.S. market return = 10% U.S. corporate tax rate = 30% German corporate tax rate = 40%

What is Pexi's cost of dollar-denominated debt? a. 7.0%. b. 8.0%. c. 6.3%. d. 4.9%.

47. Assume the following information for Pexi Co., a U.S.-based MNC that is considering obtaining funding for a project in Germany: U.S. risk-free rate = 4% German risk-free rate = 5% Risk premium on dollar-denominated debt provided by U.S. creditors = 3% Risk premium on euro-denominated debt provided by German creditors = 4% Beta of project = 1.2 Expected U.S. market return = 10% U.S. corporate tax rate = 30% German corporate tax rate = 40%

What is Pexi's cost of dollar-denominated equity? a. b. c. d. 12.0%. 11.2%. 10.0%. 7.2%.

48. Which of the following is probably the best method of incorporating country risk into a capital budgeting analysis? a. Adjusting the discount rate upward b. Adjusting the input variables to estimate the sensitivity of the project's NPV c. Adjusting the political risk rating to obtain a more favorable NPV d. Country risk should be ignored in capital budgeting, since it is a subjective analysis.

49. Spears Co. will receive SF1,000,000 in 30 days. Use the following information to determine the total dollar amount received (after accounting for the option premium) if the firm purchases and exercises a put option: Exercise price = $.61 Premium = $.02 Spot rate = $.60 Expected spot rate in 30 days = $.56 30-day forward rate = $.62 a. $630,000. b. $610,000. c. $600,000. d. $590,000. e. $580,000.

50. Assume a U.S.-based subsidiary wants to raise $1,000,000 by issuing a bond denominated in Pakistani rupees (PKR). The current exchange rate of the rupee is $.02. Thus, the MNC needs ____ rupees to obtain the $1,000,000 needed. a. b. c. d. 50,000,000 20,000 1,000,000 none of the above