Please see attached file
Essay Section Group I – Complete all essays ( 10 points each) 1. The Describe the two methods for the translation of foreign subsidiary financial statements into the parent company's consolidated statements. Identify when each technique should be used and the major advantage(s) of each. 2.There are as many different approaches to foreign exchange transaction exposure management as there are firms and no real consensus exists regarding the best approach. List and discuss three different exposures you can hedge and three different types of hedges. 3. Diversification is possibly the best technique for reducing the problems associated with international transactions. Provide one example each of international financial diversification and international operational diversification and explain how the action reduces risk. Group 2 – ( 10 points each) 1. What are blocked funds? List and explain two of the three methods the authors list in this chapter for dealing with blocked funds. 2. Explain what a letter of credit (L/C) is, who the principle parties are, what the principle advantage is, and how the L/C facilitates international trade. Problems – Follow the instructions in the guidelines and show all the work to get full credit ( show data, write an objective, interpret the answer) Problem 1 – 25 points KAL has just signed a contract with Boeing to purchase two new 747-400's for a total of $60,000,000, with payment in two equal tranches. The first tranche of $30,000,000 has just been paid. The next $30,000,000 is due three months from today. KAL currently has excess cash of 25,000,000,000 won in a Seoul bank, and it is from these funds that KAL plans to make its next payment. The current spot rate is won 800/$, and permission has been obtained for a forward rate (90 days), won 794/$. The 90 day Eurodollar interest rate is 6.000%, while the 90 day Korean won deposit rate (there is no Euro-won rate) is 5.000%. KAL can borrow in Korea at 6.250%, and can probably borrow in the U.S. dollar market at 9.375%. A three month call option on dollars in the over-the-counter market, for a strike price of won 790/$ sells at a premium of 2.9%, payable at the time the option is purchased. A 90 day put option on dollars, also at a strike price of won 790/$, sells at a premium of 1.9% (assuming a 12% volatility). KAL's foreign exchange advisory service forecasts the spot rate in three months to be won792/$. How should KAL plan to make the payment to Boeing if KAL's goal is to maximize the amount of won cash left in the bank at the end of the three month period? Make a recommendation and defend it. Problem 2 – 25 points HP a US based corporation exports computer printers to Brazil, whose currency, the reais (symbol R$) has been trading at R$3.40/US$. Exports to Brazil are currently 50,000 printers per year at the reais equivalent of $200 each. A strong rumor exists that the reais will be devalued to R$4.00/$ within two weeks by the Brazilian government. Should the devaluation take place, the reais is expected to remain unchanged for another decade. Accepting this forecast as given, HP faces a pricing decision which must be made before any actual devaluation: HP may either (1) maintain the same reais price and in effect sell for fewer dollars, in which case Brazilian volume will not change, or (2) maintain the same dollar price, raise the reais price in Brazil to compensate for the devaluation, and experience a 20% drop in volume. Direct costs in the U.S. are 60% of the U.S. sales price. What would be the short-run (one-year) implication of each pricing strategy? Which do you recommend? Homework Assignment Module 7 Global Capital Budgeting A. Finisterra, S.A. Finisterra, S.A., located in the state of Baja California, Mexico, manufactures frozen Mexican food, which enjoys a large following in the U.S. states of California and Arizona to the north. In order to be closer to its U.S. market, Finisterra is considering moving some of its manufacturing operations to southern California. Operations in California would begin in year 1 and have the following attributes. Assumptions Value Sales price per unit, year 1 (US$) $5.00 Sales price increase, per year 3.00% Initial sales volume, year 1, units 1,000,000 Sales volume increase, per year 10.00% Production costs per unit, year 1 $ 4.00 Production cost per unit increase, per year 4.00% General and administrative expenses, per year $100,000 Depreciation expenses, per year $ 80,000 Finisterra’s WACC (pesos) 16.00% Terminal value discount rate 20.00% Spot exchange rate (Ps/$) Year 0 8.00 Spot exchange rate (Ps/$) Year 1 9.00 Spot exchange rate (Ps/$) Year 2 10.00 Spot exchange rate (Ps/$) Year 3 11.00 1. The operations in California will pay 80% of their accounting profit to Finisterra as an annual cash dividend. Mexican taxes are calculated on grossed-up dividends from foreign countries, with a credit for host-country taxes already paid. What is the maximum U.S. dollar price Finisterra should offer in year 1 for the investment? B. Grenouille Properties. This is an extra credit assignment. Grenouille Properties (U.S.) expects to receive cash dividends from a French joint venture over the coming three years. The first dividend, to be paid December 31, 2011, is expected to be €720,000. The dividend is then expected to grow 10.0% per year over the following two years. The current exchange rate (December 30, 2010) is $1.3603/€. Grenouille’s weighted average cost of capital is 12%. a. What is the present value of the expected euro dividend stream if the euro is expected to appreciate 4.00% per annum against the dollar? b. What is the present value of the expected dividend stream if the euro were to depreciate 3.00% per annum against the dollar? C. Natural Mosaic. Natural Mosaic Company (U.S.) is considering investing Rs50,000,000 in India to create a wholly owned tile manufacturing plant to export to the European market. After five years, the subsidiary would be sold to Indian investors for Rs100,000,000. A pro forma income statement for the Indian operation predicts the generation of Rs7,000,000 of annual cash flow, as listed in the following table. Sales revenue 30,000,000 Less cash operating expenses (17,000,000) Gross income 13,000,000 Less depreciation expenses (1,000,000) Earnings before interest and taxes 12,000,000 Less Indian taxes at 50% (6,000,000) Net income 6,000,000 Add back depreciation 1,000,000 Annual cash flow 7,000,000 The initial investment will be made on December 31, 2011, and cash flows will occur on December 31st of each succeeding year. Annual cash dividends to Philadelphia Composite from India will equal 75% of accounting income. The U.S. corporate tax rate is 40% and the Indian corporate tax rate is 50%. Because the Indian tax rate is greater than the U.S. tax rate, annual dividends paid to Natural Mosaic will not be subject to additional taxes in the United States. There are no capital gains taxes on the final sale. Natural Mosaic uses a weighted average cost of capital of 14% on domestic investments, but will add six percentage points for the Indian investment because of perceived greater risk. Natural Mosaic forecasts on the rupee/dollar exchange rate as of December 31st for the next six years are listed next. R$/$ R$/$ 2011 50 2014 62 2012 54 2015 66 2013 58 2016 70 What are the net present value and internal rate of return on this investment?