Dow Chemical, a US-based firm, seeks to hedge most of the
exposure of its European operations by borrowing in Swiss francs
(CHF). At the same time the French tire manufacturer Michelin is
seeking US dollars to finance additional investment in its US
manufacturing plants. Both firms want the equivalent of $150
million US dollars in fixed-rate financing for 10 years. Dow can
issue dollar-denominated debt at an interest rate of 7.5 percent
per year, or Swiss franc denominated debt at...
On October 10, 2019, the exchange rate for the US Dollar vs. the Swedish Krona was $1 = SEK 9.95. Over the following year, the US Dollar weakened vs. the Swedish Krona and the exchange rate was $1 = SEK 8.78 on October 10, 2020. Imagine you are an executive at a Swedish company that manufactures all of its products in Sweden. You are thinking of expanding to the United States. These two questions affect of the weakening of...
(1)A US based MNC plans to invest in a new project
EITHER in US or in Mexico. The new project is expected to take up a
quarter of the firm’s total investment fund. The balance of the
corporation’s investment is exclusively in an existing US project.
The features of the proposed new project are as
follows:
Existing
US project US project (new) Mexico project (new)
Expected rate of return E(R) 10% 15% 15%
Standard deviation of E(R) 0.10 0.11 0.12...
4. GR Inc is a US based MNC that conducts a part of its business
in Singapore. Its US sales are denominated in US dollars while its
sales in Singapore are denominated in Singaporean dollars. Its
pro-forma income statement for the next year is shown below. Assume
US Sales will be unaffected by the exchange rate. Also Assume the
Singaporean dollar earning will be remitted to the US at the end of
the period.
The average rate is USD 0.6956/...
GR Inc is a US based MNC that conducts a part of its business in
Singapore. Its US sales are denominated in US dollars while its
sales in Singapore are denominated in Singaporean dollars. Its
pro-forma income statement for the next year is shown below. Assume
US Sales will be unaffected by the exchange rate. Also Assume the
Singaporean dollar earning will be remitted to the US at the end of
the period.
The average rate is USD 0.6956/ SGD...
4. Spartan Inc. (a US based MNC) is planning to open a
subsidiary in Switzerland to manufacture shoes. The new plant will
cost SF 1.0 billion. The salvage value of the plant at the end of
the 4 yr economic life is estimated to be SF 200 million net of any
tax effects. This plant will also call for extra inventory holding
of SF 300 million, and extra accounts payables of SF 200 million.
Projected sales from this new plant...
Backward Industries - a US based MNC - projects it will receive
50,000 Brazilian Real (BRZ) from a Brazilian customer in 3 months,
however, it is only 50% certain that the money will actually be
paid out as the customer is currently in financial distress.
Backward wants to reduce its exposure to foreign exchange rate
risk. Which of the following is the best option for Backward in
this situation?
A.
Tell your Brazilian customer not to pay
B.
Enter into...
IBM., a successful US-based MNC, is considering how to obtain
funding for a project in Argentina during the next year. It
considers the following information:
• US Risk free rate= 8%
• Argentine risk free rate=12%
• Risk premium on dollar-denominated debt provided by US
creditors=3%
• Risk premium on peso-denominated debt provided by US
creditors=5%
• Beta of project (expected sensitivity of project returns to US
investors
response to the US market)=1.5
• Beta of project (expected sensitivity of...
(a)Identify and the briefly explain the motivation for
direct foreign investment.
(b)A US based MNC plans to
invest in a new project either in the U.S. or in
Mexico. Currently 75% of its investment is
in the U.S. Historical records show
that the variability of returns on this
existing investment measured by the
standard deviation is 0.08. A four year
forecast of the strategic features of the
proposed new project are summarized below
as follows:
If
located in U.S. If...
Assume that you are a US based MNC. Please tell me how you would
assess and reduce the economic exposure for a company that the US
MNC owns in Lebanon.