Free Download Chapter 26 Solution Manual Financial Management by Brigham

Chapter 26Multinational Financial ManagementANSWERS TO END-OF-CHAPTER QUESTIONS

 

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QUESTIONS

(26-1) Define each of the following terms:

a. Multinational corporation

b. Exchange rate; fixed exchange rate system; floating exchange rates

c. Trade deficit; Devaluation; revaluation

d. Exchange rate risk; convertible currency; Pegged exchange rates

e. Interest rate parity; purchasing power parity

f. Spot rate; forward exchange rate; Discount on forward rate; premium on forward rate

g. Repatriation of earnings; political risk

h. Eurodollar; Eurobond; international bond; foreign bond

i. The euro

(26-2) Under the fixed exchange rate system, what was the currency against which all other currency values were defined? Why?

(26-3) Exchange rates fluctuate under both the fixed exchange rate and floating exchange rate systems. What, then, is the difference between the two systems?

(26-4) If the Swiss franc depreciates against the U.S. dollar, can a dollar buy more or fewer euros as a result?

(26-5) If the United States imports more goods from abroad than it exports, foreigners will tend to have a surplus of U.S. dollars. What will this do to the value of the dollar with respect to foreign currencies? What is the corresponding effect on foreign investments in the United States?

(26-6) Why do U.S. corporations build manufacturing plants abroad when they could build them at home?

(26-7) Should firms require higher rates of return on foreign projects than on identical projects located at home? Explain.

(26-8) What is a Eurodollar? If a French citizen deposits $10,000 in Chase Manhattan Bank in New York, have Eurodollars been created? What if the deposit is made in Barclay’s Bank in London? Chase Manhattan’s Paris branch? Does the existence of the Eurodollar market make the Federal Reserve’s job of controlling U.S. interest rates easier or more difficult? Explain.

(26-9) Does interest rate parity imply that interest rates are the same in all countries?

(26-10) Why might purchasing power parity fail to hold?

SELF-TEST PROBLEMS (SOLUTIONS APPEAR IN APPENDIX A)

(ST-1) Suppose the exchange rate between U.S. dollars and EMU euros is 0.98 = $1.00, and the exchange rate between the U.S. dollar and the Canadian dollar is $1.00 = C$1.5291. What is the cross rate of euros to Canadian dollars?

PROBLEMS Answers appear in Appendix B

(26-1) A currency trader observes that in the spot exchange market, 1 U.S. dollar can be exchanged for 9 Mexican peso or for 111.23 Japanese yen. What is the cross rate between the yen and the peso; that is, how many yen would you receive for every peso exchanged?

 (26-2) Six-month T-bills have a nominal rate of 7%, while default-free Japanese bonds that mature in 6 months have a nominal rate of 5.5%. In the spot exchange market, 1 yen equals $0.009. If interest rate parity holds, what is the 6-month forward exchange rate?

(26-3) A television set costs $500 in the United States. The same set costs 725 euros. If purchasing power parity holds, what is the spot exchange rate between the euro and the dollar?

(26-4) If British pounds sell for $1.50 (U.S.) per pound, what should dollars sell for in pounds per dollar?

(26-5) Suppose that 1 Swiss Franc could be purchased in the foreign exchange market for 60 U.S. cents today. If the Franc appreciated 10% tomorrow against the dollar, how many Franc would a dollar buy tomorrow?

(26-6) Suppose the exchange rate between the U.S. dollar and the Swiss Franc was SFr1.6 = $1, and the exchange rate between the dollar and the British pound was £1 = $1.50. What was the exchange rate between Swedish Franc and pounds?

(26-7) Assume that interest rate parity holds. In both the spot market and the 90-day forward market 1 Japanese yen equals 0.0086 dollar. The 90-day risk-free securities yield 4.6% in Japan. What is the yield on 90-day risk-free securities in the United States?

(26-8) In the spot market 7.8 pesos can be exchanged for 1 U.S. dollar. A compact disc costs $15 in the United States. If purchasing power parity holds, what should be the price of the same disc in Mexico?

(26-9) You are the vice-president of International InfoXchange, headquartered in Chicago, Illinois. All shareholders of the firm live in the United States. Earlier this month, you obtained a loan of 5 million Canadian dollars from a bank in Toronto to finance the construction of a new plant in Montreal. At the time the loan was received, the exchange rate was 75 U.S. cents to the Canadian dollar. By the end of the month, it has unexpectedly dropped to 70 cents. Has your company made a gain or loss as a result, and by how much?

(26-10) Early in September 1983, it took 245 Japanese yen to equal $1. More than 20 years that exchange rate had fallen to 108 yen to $1. Assume the price of a Japanese manufactured automobile was $8,000 in September 1983 and that its price changes were in direct relation to exchange rates.

a. Has the price, in dollars, of the automobile increased or decreased during the 20-year period because of changes in the exchange rate?

b. What would the dollar price of the car be assuming that the car’s price changes only with exchange rates?

(26-11) Boisjoly Watch Imports has agreed to purchase 15,000 Swiss watches for 1 million Francs at today’s spot rate. The firm’s financial manager, James, has noted the following current spot and forward rates:

                                                                U.S. DOLLAR/FRANC                       FRANC/U.S. DOLLAR

Spot                                                       1.6590                                                   0.6028

30-day forward                                                 1.6540                                                   0.6046

90-day forward                                                 1.6460                                                   0.6075

180-day forward                               1.6400                                                   0.6098

On the same day, Churchill agrees to purchase 15,000 more watches in 3 months at the same price of 1 million Francs.

a. What is the price of watches, in U.S. dollars, if it is purchased at today’s spot rate?

b. What is the cost, in U.S. dollars, of the second 15,000 batch if payment is made in 90 days and the spot rate at that time equals today’s 90-day forward rate?

c. If the exchange rate for the Swiss Franc is 0.50 to $1 in 90 days, how much will have to pay for the watches(in U.S. dollars)?

(26-12) Assume that interest rate parity holds and that 90-day risk-free securities yield 5 percent in the United States and 5.3 percent in Britain. In the spot market 1 pound equals 1.65 dollars.

a. Is the 90-day forward rate trading at a premium or discount relative to the spot rate?

b. What is the 90-day forward rate?

(26-13) After all foreign and U.S. taxes, a U.S. corporation expects to receive 3 pounds of dividends per share from a British subsidiary this year. The exchange rate at the end of the year is expected to be $1.60 per pound, and the pound is expected to depreciate 5% against the dollar each year for an indefinite period. The dividend (in pounds) is expected to grow at 10% a year indefinitely. The parent U.S. Corporation owns 10 million shares of the subsidiary. What is the present value in dollars of its equity ownership of the subsidiary? Assume a cost of equity capital of 15 percent for the subsidiary.

(26-14)

Citrus Products Inc. is a medium-sized producer of citrus juice drinks with groves in Indian River County, Florida.  Until now, the company has confined its operations and sales to the United States, but its CEO, George Gaynor, wants to expand into Europe.  The first step would be to set up sales subsidiaries in Spain and Sweden, then to set up a production plant in Spain, and, finally, to distribute the product throughout the European Common Market.  The firm’s financial manager, Ruth Schmidt, is enthusiastic about the plan, but she is worried about the implications of the foreign expansion on the firm’s financial management process.  She has asked you, the firm’s most recently hired financial analyst, to develop a 1-hour tutorial package that explains the basics of multinational financial management.  The tutorial will be presented at the next board of director’s meeting.  To get you started, Schmidt has supplied you with the following list of questions.

a.       What is a multinational corporation?  Why do firms expand into other countries?

b.      What are the six major factors which distinguish multinational financial management from financial management as practiced by a purely domestic firm?

c.       Now assume Citrus Products begins producing the same liter of orange juice in Spain.  The product costs 2.0 euros to produce and ship to Sweden, where it can be sold for 20 kronas.  What is the dollar profit on the sale?

d.      Briefly describe the current International Monetary System.  How does the current system differ from the system that was in place prior to August 1971?

e.       Remaining questions are also available in the solution… ok