Question

1. Describe in general terms how future appreciation of the euro will likely affect the value (from the parent’s perspective) of a project established in Germany today by a U.S.-based MNC. Will the sensitivity of the project value be affected by the percentage of earnings remitted to the parent each year?

(4 pts) Huskie Industries, a U.S.‑based MNC, considers purchasing a small manufacturing company in France that sells products only within France. Huskie has no other existing business in France and no cash flows in euros. Would the proposed acquisition likely be more feasible if the euro is expected to appreciate or depreciate over the long run? Explain.

2. (4 pts) Flagstaff Corp. is a U.S.‑based firm with a subsidiary in Mexico. It plans to reinvest its earnings in Mexican government securities for the next 10 years since the inter­est rate earned on these securities is so high. Then, after 10 years, it will remit all accumulated earnings to the United States. What is a drawback of using this approach? (Assume the securities have no default or interest rate risk.

Answer 1

i)

From the parent's perspective valuation for the euro would be good since the euro inflows would some time or another be changed over to more u.s dollars .There will be increase in the yearly cash flows and continues from the acknowledgment of salvage value to be gotten by the parent . As the attractive quality of the task is chosen from parent's perspective,the affectability of the undertaking gets influenced by the percentage of earnings transmitted to the parent each year.The cash flows got by the parent are dependent upon the overall exchanging rate and furthermore the time value of money for calculating present worth which may vary from year to year.

==============================================================

ii)

From the parent's perspective valuation for the euro would be good since the euro inflows would some time or another be changed over to more u.s dollars .There will be increase in the yearly cash flows and continues from the acknowledgment of salvage value to be gotten by the parent . As the attractive quality of the task is chosen from parent's perspective,the affectability of the undertaking gets influenced by the percentage of earnings transmitted to the parent each year.The cash flows got by the parent are dependent upon the overall exchanging rate and furthermore the time value of money for calculating present worth which may vary from year to year.

Future depreciation of euro would be ominous since the debilitated euro would change over to less u.s dollars after some time .There will be decline in the yearly cash flows and continues from the acknowledgment of salvage value to be gotten by the parent.

Subsequently the proposed acqusition would be progressively attainable if the euro acknowledges over the long run.

==============================================================

iii)

Reinvestment of acquiring's at a high financing cost is liable to financing cost risk and furthermore the risk of default.Since it is accepted that there is no interest rate risk or default risk ,still there is a disadvantage of utilizing this approach.The continues to be received by the parent from this investment are dependent upon corporate duty of mexico just as the future exchange rate of mexican money against U.S dollar . On the off chance that the mexican money deteriorates in future against dollar ,the high pace of interest from the investment will be set off against the misfortune because of devaluation of mexican currency.If the IRP and worldwide fisher impact hold great ,increment in the interest rates will cause deterioration of that nation's currency . Thus the profits/returns are subjects to the disadvantage of deterioration of mexican currency.