International Financial Management
14th Edition
ISBN: 9780357130698
Author: Madura
Publisher: Cengage
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Assume that Blue Bell has expected cash flows of $325,000 from domestic operations, SF250,000 from Swiss operations, and 200,000 euros from Italian operations at the end of the year. The Swiss franc's value and euro's value are expected to be $.93 and $1.37 respectively, at the end this year. What are the expected dollar cash flows of Blue Bell?
Uncertainty Surrounding an MNC’s Cash Flows
Assume that Bangor Co. (a U.S. firm) knows that it will have cash inflows of $900,000 from domestic operations, cash inflows of 200,000 Swiss francs due to exports to Swiss operations, and cash outflows of 500,000 Swiss francs at the end of the year. While the future value of the Swiss franc is uncertain because it fluctuates, your best guess is that the Swiss franc’s value will be $1.10 at the end this year. What are the expected dollar cash flows of Bangor Co?
Assume that Concord Co. (a U.S. firm) is in the same industry as Bangor Co. There is no political risk that could have any impact on the cash flows of either firm. Concord Co. knows that it will have cash inflows of $900,000 from domestic operations, cash inflows of 700,000 Swiss francs due to exports to Swiss operations, and cash outflows of 800,000 Swiss francs at the end of the year. Is the valuation of the total cash flows of Concord Co. more uncertain or less uncertain than the…
Assessing Transaction Exposure
Your employer, a large MNC, has asked you to assess its transaction exposure. Its projected cash flows are as follows for the next year. Danish krone inflows equal DK50,000,000 while outflows equal DK40,000,000. British pound inflows equal £2,000,000 while outflows equal £1,000,000. The spot rate of the krone is $.15, while the spot rate of the pound is $1.50. Assume that the movements in the Danish krone and the British pound are highly correlated. Provide your assessment as to your firm’s degree of transaction exposure (as to whether the exposure is high or low).
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- FOREIGN INVESTMENT ANALYSIS After all foreign and U.S. taxes, a U.S. corporation expects to receive 2 pounds of dividends per share from a British subsidiary this year. The exchange rate at the end of the year is expected to be 1.30 per pound, and the pound is expected to depreciate 5% against the dollar each year for an indefinite period. The dividend (in pounds) is expected to grow at 10% a year indefinitely. The parent U.S. corporation owns 10 million shares of the subsidiary. What is the present value in dollars of its equity ownership of the subsidiary? Assume a cost of equity capital of 11% for the subsidiary.arrow_forward1. Perth International Co., an Australian multinational company, forecasts 63 million Australian dollars (A$) earnings next three years. It expects 50 million Chinese yuan (CNY), 44 million Indian rupees (INR) and 39 million Malaysian ringgit (MYR) proceeds of its three subsidiaries in year-one. It also forecasts the year-one exchange rates A$0.2447/CNY, A$0.043/INR and A$0.5791/MYR. Calculate the total Australian dollar (A$) cash flow for year-one. (enter the whole number with no sign or symbol) 2. Perth International anticipates a 5.06 per cent increase in the year-one income of its subsidiaries in year-two. It has information that the current 4.83 per cent, 8.76 per cent, 13.53 per cent and 11.08 per cent nominal interest rate in Australia, China, India and Malaysia, respectively, will remain the same in the next three years. Due to foreign currency higher nominal interest rate, subsidiaries will invest 23 per cent, 56 per cent and 45 per cent of their year-two earnings in China,…arrow_forward2. Bombs Away, an American gaming MNC with a subsidiary in Thailand expects to receive 30 million, 40 million, 40 million, and 50 million Thai bahts (TB) in net cash flows from its subsidiary during the next 4 years. The financial managers expect the exchange rates for the next 2 years will be $1=TB40 and the following 2 years $1=TB30. They have also computed their firm’s discount rate or the weighted average cost of capital to be 10%. What is the value of the subsidiary?arrow_forward
- Suppose that Cleveland Co. engages in international business, with transactions denominated in four different foreign currencies: the euro, the Canadian dollar, the Australian dollar, and the Mexican peso. The company wishes to measure its cash flows in a single currency, the dollar, over the next quarter. The following table shows the total cash inflows and outflows for each currency, along with the expected exchange rate for that currency. For each row in the table, enter the net inflow or outflow in that currency for the MNC. Then, enter the dollar value of that inflow or outflow in the last column of the table. Total Inflow (Millions) 30 euros Note: Remember to enter a negative sign if a value is negative. Currency Euro Net Inflow or Outflow (Millions) Total Outflow Expected Exchange (Millions) Rate Net Inflow or Outflow, In Dollars (Millions) 15 euros euros $1.20 Canadian Dollar $C30 $C20 C$ $0.90 +A Australian Dollar $A10 $A20 A$ $0.50 Mexican peso 20 pesos 30 pesos peso $0.10 +A…arrow_forwardVogl Co. is a U.S. firm conducting a financial plan for the next year. It has no foreign, subsidiaries, but more than half of it sale are form exports. Its foreign cash inflows to be received from exporting and cash outflow to be paid for imported supplies over the next year are shown n the following table: Currency total inflow total outflow Canadian dollar (C$) C $32,000,000 C $ 2,000,000 New Zealand dollar (NZ$) NZ $ 5,000,000 NZ $1,000,000 Mexican peso (MXP) MXP 11,000,000 MXP 10,000,000 Singapore dollar (s$) S$ 4, 000,000 8000,000 The spot rate and one-year forward rates as of today are shown below: Currency spot rate one-year forward rate C$ $.90 .93 NZ$ .60 .59 MXP .18 .15 S$ .65 .64 Questions 1. Based on the information provided, determine Vogl’s net exposure to each foreign currency in dollars. 2. Assume that today’s spot rate is used as a forecast of the future spot rate one year from now. The New Zealand dollar, Mexican peso, and Singapore dollars are expected to move in…arrow_forwardPerth International Co., an Australian multinational company, forecasts 63 million Australian dollars (A$) earnings next three years. It expects 50 million Chinese yuan (CNY), 44 million Indian rupees (INR) and 39 million Malaysian ringgit (MYR) proceeds of its three subsidiaries in year-one. It also forecasts the year-one exchange rates A$0.2447/CNY, A$0.043/INR and A$0.5791/MYR. Calculate the total Australian dollar (A$) cash flow for year-one. (enter the whole number with no sign or symbol) Perth International anticipates a 5.06 per cent increase in the year-one income of its subsidiaries in year-two. It has information that the current 4.83 per cent, 8.76 per cent, 13.53 per cent and 11.08 per cent nominal interest rate in Australia, China, India and Malaysia, respectively, will remain the same in the next three years. Due to foreign currency higher nominal interest rate, subsidiaries will invest 23 per cent, 56 per cent and 45 per cent of their year-two earnings in China, India…arrow_forward
- International financial management: MCQ An UK- based MNC expect to receive £20,000 from domestic operations and 20,000 Euro (€) from a business in Belgium. If the pound’s value is €1.05, the expected total cash flows in pound are: (a) £41,000 (b) £39,470 (c) £45,000 (d) none of the abovearrow_forwardA U.S.-based multinational company has two subsidiaries, one in Mexico (local currency, Mexicanpeso, MP) and one in Japan (local currency, yen, ¥). Forecasts of business operations indicate the following short-term financing position for each subsidiary (in equivalent U.S. dollars): Mexico:$80 million excess cash to be invested (lent) Japan: $60 million funds to be raised (borrowed) Currency Item US $ MP ¥ Spot exchange rates MP11.60/US$ ¥108.25/US$ Forecast percentage change −3.00% +1.50% Interest rates Nominal Euromarket 4.00% 6.20% 2.00% Domestic 3.75% 5.90% 2.15% Effective Euromarket Domestic Euromarket and the domestic market; then indicate where the funds should be invested and raised.…arrow_forwardOrbital Communications has operating plants in over 100 countries. It also keeps funds for transaction purposes in many foreign countries. Assume that in 2010 it held 100,000 kronas increased 6 percent aganist the dollar. What it the value of the holdings based on U.S. dollars, at the end of the year.arrow_forward
- 4. P Company is a U.S. firm conducting a financial plan for the next year. It has no foreign subsidiaries, but more than half of its sales are from exports. Its foreign cash inflows to be received from exporting and cash outflows to be paid for imported supplies over the next year are disclosed below: Currency Total Inflow Canadian dollars (C$) C$ 35,000,000 German mark (DM) DM 5,500,000 French franc (FF) FF 15,000,000 Swiss franc (SF) SF 6,000,000 The spot rates and one-year forward rates as of today are: Currency Spot Rate $0.90 $0.62 $0.16 $0.65 Total Outflow C$ 2,500,000 DM 1,600,000 FF 12,000,000 SF 8,000,000 One Year Forward Rate C$ $0.95 DM $0.59 FF $0.14 SF $0.69 Based on the information provided, determine the net exposure of each foreign currency in dollar. [P.T.O.arrow_forwardSteiner Co. recently established a subsidiary in Belarus. Given its immediate success, a rival company has offered Steiner Co. 10 million rubles to purchase the subsidiary today. The Belarusian ruble currently trades at $0.30, and Steiner internally forecasts the ruble to appreciate to $0.33 next year and $0.35 the following. If Steiner continues operating its subsidiary, the company expects to generate 5 million rubles in free cash next year and 10 million rubles the following. These cash flows would be remitted back to the parent in the U.S. at the end of the year in which they are earned. Steiner's required rate of return on similar projects is 20 percent. How much more/(less) would Steiner make by selling the company vs. running its subsidiary for the next two years? $805,556 O (-$327,270) O $1,111,111 O $908,750arrow_forwardMNC Cash Flows and Exchange Rate Risk Asheville Co. has a subsidiary in Mexico that develops software for its parent. It rents a large facility in Mexico and hires many people in Mexico to work in the facility. Asheville Co. has no other international business. All operations are presently funded by Asheville’s parent. All the software is sold to U.S. firms by Asheville’s parent and invoiced in U.S. dollars.If the Mexican peso appreciates against the dollar, does this have a favorable effect, unfavorable effect, or no effect on Asheville’s value?arrow_forward
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