International Finance Exam 3

Dubas Co. is a U.S.-based MNC that has a subsidiary in Germany and another subsidiary in Austria. Both subsidiaries frequently remit their earnings back to the parent company. The German subsidiary generated a net outflow of €2,000,000 this year, while the Austrian subsidiary generated a net inflow of €1,500,000. What is the net inflow or outflow as measured in U.S. dollars this year? The exchange rate for the euro is $1.05.

$525,000 outflow -2,000,000+1,500,000=-500,000*1.05= -525,000

Cerra Co. expects to receive 5 million euros tomorrow as a result of selling goods to the Netherlands. Cerra estimates the standard deviation of daily percentage changes of the euro to be 1 percent over the last 100 days. Assume that these percentage changes are normally distributed. Use the value-at-risk (VaR) method based on a 95 percent confidence level. What is the maximum one-day loss in dollars if the expected percentage change of the euro tomorrow is 0.5 percent? The current spot rate of the euro (before considering the maximum one-day loss) is $1.01.

-$57,500 .005-(1.65.01)= -.01155,000,000= -57,500

Cerra Co. expects to receive 5 million euros tomorrow as a result of selling goods to the Netherlands. Cerra estimates the standard deviation of daily percentage changes of the euro to be 1 percent over the last 100 days. Assume that these percentage changes are normally distributed. Use the value-at-risk (VaR) method based on a 95 percent confidence level. What is the maximum one-day percentage loss if the expected percentage change of the euro tomorrow is 0.5 percent?

-1.15%= .005-(1.65*.01)

Raton Co. is a U.S. company that has net inflows of 100 million Swiss francs and net outflows of 100 million British pounds. The present exchange rate of the Swiss franc is about $0.70 while the present exchange rate of the pound is $1.90. Raton Co. has not hedged these positions. The Swiss franc and British pound are highly correlated in their movements against the dollar. Explain whether Raton will be favorably or adversely affected if the dollar weakens against foreign currencies over time. Raton Co. will be __________1__________ affected because dollar outflows and inflows will be _________2_________, but the dollar value of ________3_________ is larger, and will be ________4_________ to a greater degree than the dollar value of _________5_________.

1) Adversely 2) Increased 3) Outflows 4) Increase 5) Inflows

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 The proposed acquisition is likely to be more feasible if the euro is expected to _________1___________ over the long run. Huskie would like to purchase the firm when the euro is ___________2__________. Then, after the purchase, a __________3__________ euro will convert the French firm's earnings remitted to the parent into a larger amount of U.S. dollars.

1) Appreciate 2) Weak 3) Strengthened

In the following table, indicate whether each of the statements is an argument for the relevance of exchange rate risk for MNCs, or an argument against the relevance of exchange rate risk for MNCs. 1) Exchange rate movements of many currencies, against the dollar, are highly correlated and will therefore not offset. 2) The adverse effects of exchange rate risk caused by the movements of some currency are offset by the favorable effects of others.

1) Argument for relevance 2) Argument against relevance Explanation: One argument for the relevance of exchange rate risk is that many currencies move in the same direction against the dollar. This correlation means that, for an MNC with cash flows in multiple currencies, movements in exchange rates across those currencies will not offset. Thus, when those currencies change in an unfavorable direction, there will be a net negative effect for the MNC. Thus, by this logic, exchange rate risk is a relevant consideration for an MNC. One argument against the relevance of exchange rate risk is that, for an individual MNC with cash flows in multiple currencies, the movements of the values of those currencies may offset, leading to no net effect of these currency movements. In such a case, exchange rate risk may not be relevant for an MNC

Consider Franco Co, the parent of a US-based multinational corporation (MNC) that uses forecasted exchange rates to assist with various business functions. Suppose that Franco Co. is deciding whether to invest funds in a substantial project that is located in Canada. Franco Co uses forecasted values of the Canadian dollar to help them decide whether investing in such a project would be profitable. This is an example of using exchange rate forecasting to assist with __________1________ decisions, with the goal of improving the value of the MNC via influencing the ____________2__________.

1) Capital Budgeting 2) Dollar value of Foreign Cash Flows

Spencer Co. is a U.S. firm that has a large subsidiary in Singapore that generates a large amount of earnings. Spencer's stock is commonly valued at about 16 times its reported earnings per share. The earnings generated by the Singapore subsidiary in this period are the same as in the previous period. The Singapore dollar has depreciated substantially against the U.S. dollar during this period. None of the earnings generated by the Singapore subsidiary in this period will be remitted to the U.S. parent at this time. How will the stock price of Spencer Co. be affected (if at all) when the earnings are reported at the end of this period? Explain. The consolidated earnings will ______1_______ as a result of the translation effect. As the stock price tends to be a multiple of reported earnings, the stock price will ______2________.

1) Decline 2) Decline

The United Kingdom still has its own currency, the pound. The pound's interest rate has historically been higher than the euro's interest rate. The United Kingdom has considered adopting the euro as its currency. There have been many arguments about whether it should do so. Use your knowledge and intuition to discuss the likely effects if the United Kingdom adopts the euro. For each of the statements below, select either increase or decrease. To help you narrow your focus, follow these guidelines. Assume that the pound is more volatile than the euro. Do not base your answer on whether the pound would have been stronger than the euro in the future. Also, do not base your answer on an unusual change in economic growth in the United Kingdom or in the eurozone if the euro is adopted. A) The translation exposure of firms based in the eurozone that have British subsidiaries would _________1__________. B) The economic exposure of U.S. firms that conduct substantial business in the United Kingdom and have no other international business would _____________2______________. C) The translation exposure of U.S. firms with British subsidiaries would ___________3___________.

1) Decrease 2) Decrease 3) Decrease

If the peso depreciates, interest from investments in Mexico will likely _________1__________. However, if the peso appreciates, interest from those investments will __________2___________. If the peso depreciates, the cost of the firm's imported supplies, denominated in pesos, __________3___________. However, if the peso appreciates, the cost of the firm's imported supplies, denominated in pesos ___________4___________.

1) Decreases 2) Increases 3) Decreases 4) Increases

Raton Co. is a U.S. company that has net inflows of 100 million Swiss francs and net outflows of 100 million British pounds. The present exchange rate of the Swiss franc is about $0.70 while the present exchange rate of the pound is $1.90. Raton Co. has not hedged these positions. The Swiss franc and British pound are highly correlated in their movements against the dollar. Explain whether Raton will be favorably or adversely affected if the dollar strengthens against foreign currencies over time. Raton Co. will be __________1__________ affected because dollar outflows and inflows will be _________2_________, but the dollar value of ________3_________ is larger, and will be ________4_________ to a greater degree than the dollar value of _________5_________.

1) Favorably 2) Reduced 3) Outflows 4) Reduced 5) Inflows

Aggie Co. produces chemicals. It is a major exporter to Europe, where its main competition is from other U.S. exporters. All of these companies invoice the products in U.S. dollars. Is Aggie's transaction exposure likely to be significantly affected if the euro strengthens or weakens? Explain. If the euro strengthens, European customers can purchase Aggie's goods with ______1_______ euros. Since Aggie's competitors also invoice their exports in dollars, Aggie Company _________2_________ gain a competitive advantage. Nevertheless, the overall demand for the product could __________3___________ because the chemicals are now _______4_________ expensive to European customers. If the euro weakens, European customers will need to pay _______5_________ euros to purchase Aggie's goods. Since Aggie's competitors also invoice their exports in dollars, Aggie Company _____6_______ some of its market share. However, the overall European demand for chemicals could ______7_________ because the prices paid for them have ________8__________. 9) If the euro weakens for several years, can you think of any change that might occur in the global chemicals market? A) If the euro remained weak for several years, the U.S. companies could stop exporting chemicals to Europe because the chemicals' prices were not high enough to remain on the market. B) If the euro remained weak for several years, some companies in Europe may begin to produce the chemicals, so that customers could avoid purchasing dollars with weak euros. That is, the U.S. exporters could be priced out of the European market over time if the euro continually weakened. C) If the euro remained weak for several years, the European companies producing chemicals might be forced into bankruptcy as the chemicals from the U.S. are much cheaper than the chemicals produced in Europe.

1) Fewer 2) Will not 3) Increase 4) Less 5) More 6) May not necessarily lose 7) Decline 8) Increased 9) B

Kopetsky Co. has net receivables in several currencies that are highly correlated with each other. What does this imply about the firm's overall degree of transaction exposure? Its exposure is _______1________ since all currencies move in _______2________. If one of these currencies depreciates substantially against the firm's local currency, all other currencies will ______3______, and the value of these net receivables will ________4________. Are currency correlations perfectly stable over time? _______5_______, past correlations ______6_______ serve as perfect forecasts of future correlations. 7) What does your answer imply about Kopetsky Co. or any other firm using past data on correlations as an indicator for the future? a) Firms can presume that past correlations will be perfectly accurate forecasts of the future regardless of the stability of the general ranking of correlations. b) Firms can presume that past correlations will be perfectly accurate forecasts of the future only if Kopetsky Co.'s local currency is highly correlated with all other currencies. c) Firms cannot presume that past correlations will be perfectly accurate forecasts of future correlations. Yet, historical data may still be useful if the general ranking of correlations is somewhat stable.

1) High 2) Tandem 3) Depreciate 4) Decrease 5) No 6) Will Not 7) C

Lubbock, Inc., produces furniture and has no international business. Its major competitors import most of their furniture from Brazil and then sell it out of retail stores in the United States. How will Lubbock, Inc., be affected if Brazil's currency (the real) strengthens over time? If the Brazilian real strengthens, U.S. retail stores and their customers will likely have to pay ___________1_________ prices for the furniture from Brazil. Consequently, it may ________2_________ the demand on furniture produced by Lubbock Inc. Thus, Lubbock Inc. is expected to be _______3________ affected by a strong Brazilian real.

1) Higher 2) Increase 3) Favorably

Describe in general terms how future depreciation 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? The future depreciation of the euro would ______1_______ the parent since the euro earnings would be worth less ______2________ when remitted and converted to dollars. The sensitivity of the project will be affected when the percentage of earnings remitted to the parent each year is ______3__________.

1) Hurt 2) Less 3) Large

Minnesota Co. is a U.S. firm that exports computer parts to Japan. Its main competition is from firms that are based in Japan, which invoice their products in yen. Minnesota's exports are invoiced in U.S. dollars. The prices charged by Minnesota and its competitors will not change during the next year. Will Minnesota's revenue increase or decrease if the spot rate of the yen appreciates over the next year? Briefly explain. The revenue will ________1________, since the demand by Japanese customers for Minnesota's products should _________2________. Japanese customers can purchase dollars with ________3_______ yen and therefore can purchase the products exported by Minnesota at a _________4__________ cost.

1) Increase 2) Increase 3) Fewer 4) Lower

Consider a period in which the U.S. dollar weakens against the euro. How will this affect the reported earnings of a U.S.-based MNC with European subsidiaries? The consolidated earnings will be _________1___________ due to the strength of the subsidiaries' local currency (the euro).

1) Increased

How should depreciation of a firm's home currency generally affect its cash inflows? Depreciation of the firm's home currency __________1__________ inflows since the foreign demand for the firm's goods is ________2________ and foreign competition is _______3________.

1) Increases 2) Increases 3) Reduced

Suppose that Kittle Co. is a U.S. based MNC that is considering setting up a subsidiary in Singapore. Kittle would like this subsidiary to produce and sell guitars locally in Singapore and needs assistance with capital budgeting. The duration of this project is four years. Kittle is deliberating between using parent financing or subsidiary financing when taking out a loan for a large office building for the subsidiary in Singapore. In this case, if the rate on the loan to the parent is much higher than the rate on the loan to the subsidiary then, all else equal, parent financing will be _______1___________ desirable than subsidiary financing. If Kittle elects to use parent financing then, all else equal, exchange rate risk is likely to be ________2________ than if it used subsidiary financing.

1) Less 2) Higher

PepsiCo recently decided to invest more than $300 million for expansion in Brazil. Brazil offers considerable potential because it has 150 million people and their demand for soft drinks is increasing. However, the soft drink consumption is still only about one-fifth of the soft drink consumption in the United States. PepsiCo's initial outlay was used to purchase three production plants and a distribution network of almost 1,000 trucks to distribute its products to retail stores in Brazil. The expansion in Brazil was expected to make PepsiCo's products more accessible to Brazilian consumers. A) Given that PepsiCo's investment in Brazil was entirely in dollars, describe its exposure to exchange rate risk resulting from the project. Explain how the size of the parent's initial investment and the exchange rate risk would have been affected if PepsiCo had financed much of the investment with loans from banks in Brazil. As the earnings in Brazil are remitted, they will be converted to dollars. If Brazil's currency depreciates against the dollar over time, there will be ________1________ dollar earnings received. If PepsiCo borrowed funds from banks in Brazil, the parent's initial investment would have been ______2_________. The payments by the subsidiary on loans in Brazil would cause _________3_______ remitted earnings over time and ________4________ exchange rate risk. PepsiCo's parent was responsible for assessing the expansion in Brazil. Yet PepsiCo already had some existing operations in Brazil. When capital budgeting analysis was used to determine the feasibility of this project, should the project have been assessed from a Brazilian perspective or a U.S. perspective? Explain. Since the PepsiCo's parent uses its own funds to support expansion, the project should have been assessed from ____________5__________.

1) Less 2) Smaller 3) Less 4) Less 5) U.S. Perspective

Consider two U.S.-based firms, Mason Co. and Dayton Co. Suppose that Dayton generates a large portion of sales to foreign countries via exporting, while Mason generates a large portion of sales via the international business conducted by its subsidiary in Argentina, where the value of the peso fluctuates unpredictably. _________1_________is likely subject to more translation exposure than _________2________.

1) Mason 2) Dayton

Woodsen, Inc., of Pittsburgh, Pennsylvania, considered the development of a large subsidiary in Greece. In response to a crisis in Greece, its expected cash flows and earnings from this acquisition were reduced only slightly. Yet the firm decided to retract its offer because of changes in its required rate of return on the project, which caused the NPV to be negative. Explain how the required rate of return on its project may have changed. Because of the crisis in Greece, Woodsen's cash flows were subject to _________1_________ risk. Therefore, the required rate of return has __________2_________ to reflect a ________3________ risk premium.

1) More 2) Increased 3) Higher

Huge Corp. has just initiated a market-based forecast system using the forward rate as an estimate of the future spot rate of the Japanese yen (¥) and the Australian dollar (A$). Listed below According to this information w are the forecasted and realized values for the last period: A$: Forecasted Value: $0.60 Realized Value: $0.55 J$: Forecasted Value: $0.0067 Realized Value: $0.0069 According to this information and using the absolute forecast error as a percentage of the realized value, the forecast of the yen by Huge Corp. is _______1________ the forecast of the Australian dollar.

1) More Accurate Then

Assume that a less developed country called LDC encourages direct foreign investment (DFI) in order to reduce its unemployment rate, currently at 15 percent. Also assume that several MNCs are likely to consider DFI in this country. The inflation rate in recent years has averaged 4 percent. The hourly wage in LDC for manufacturing work is the equivalent of about $5 per hour. When Piedmont Co. develops cash flow forecasts to perform a capital budgeting analysis for a project in LDC, it assumes a wage rate of $5 in year 1 and applies a 4 percent increase for each of the next 10 years. The components produced are to be exported to Piedmont's headquarters in the United States, where they will be used in the production of computers. Do you think Piedmont will overestimate or underestimate the net present value of this project? Why? (Assume that LDC's currency is tied to the dollar and will remain that way.) The net present value will likely be _____________1_____________ because the labor costs in LDC will probably increase at a _________2________ rate than 4 percent per year. DFI in LDC will cause the demand for labor to rise _________3__________ than in previous years.

1) Overestimated 2) higher 3) Much greater

Suppose that Wilson Co., a U.S.-based MNC, is considering a project to be undertaken by one of its foreign subsidiaries. If the funds from the project will be remitted back to Wilson, and the tax on remittance funds is very high, then the project is less likely to be feasible from the perspective of the ___________1___________.

1) Parent

Dakota Co must pay 20 million Mexican pesos by tomorrow, in exchange for supplies that it has agreed to purchase from a supplier in Mexico. The peso appreciated today against the dollar by 2 percent. Using time series data of past currency fluctuations, Dakota observes whenever the peso appreciates against the dollar by more than 1 percent, then the peso tends to appreciate again by about 60 percent of the initial change. Given the results of the ________1________ forecasting by Dakota Co, the firm will most likely decide to _________2________. PT2: Assume that the foreign exchange market is not weak-form efficient. 3) True or False: In this case, further technical forecasting will be useful in forecasting exchange rate movements.

1) Technical 2) make its payment today instead of tomorrow. 3) True

Ventura Corp., a U.S.-based MNC, plans to establish a subsidiary in Japan. It is confident that the Japanese yen will appreciate against the dollar over time. The subsidiary will retain only enough revenue to cover expenses and will remit the rest to the parent each year. Will Ventura benefit more from exchange rate effects if its parent provides equity financing for the subsidiary or if the subsidiary is financed by local banks in Japan? Explain. The Ventura would benefit more from exchange rate effects if the financing of subsidiary was provided by ________1__________ because this would result in a _______2________ remittance each year.

1) The Parent 2) Larger

______1_______exposure is the degree to which the value of contractual transactions can be affected by exchange rate fluctuations.

1) Transaction

Sooner Co. is a U.S. wholesale company that imports expensive high-quality luggage and sells it to retail stores around the United States. Its main competitors also import high-quality luggage and sell it to retail stores. None of these competitors hedge their exposure to exchange rate movements. Why might Sooner's market share be more volatile over time if it hedges its exposure? If Sooner Company hedged its imports, then it would have an advantage over the competition when the dollar __________1___________ and could possibly gain market share or would have a higher profit margin. It would be at a disadvantage relative to the competition when the dollar ___________2____________ and may lose market share or be forced to accept a lower profit margin.

1) Weekend 2) Strengthened

If an MNC has a net inflow in one currency and a net outflow of about the same amount in another currency, then the MNCs' transaction exposure is __1__ if the two currencies are __2__ correlated.

1) high 2) negatively

If it was determined that the movement of exchange rates was related to previous exchange rate values, this implies that a ______1______ is valuable for forecasting exchange rate movements.

1) technical forecast technique

Which of the following forecasted characteristics are usually required for multinational capital budgeting? Check all that apply. 1) Remitted Funds 2) The Parents Initial Investment 3) Tax Laws 4) Costs 5) RROR 6) Salvage Value 7) Exchange Rates

1, 2, 3, 5, 6, 7

____________ is relevant input required for a multinational capital budgeting analysis, given that it is conducted from the parent's viewpoint.

All of the above are inputs required for capital budgeting analysis.

Your employees have estimated the net present value of Project X to be $1.2 million. Their report says that they have not accounted for risk but that, with such a large NPV, the project should be accepted because even a risk-adjusted NPV would likely be positive. You have the final decision as to whether to accept or reject the project. What is your decision? A) Since the NPV value of the project is large, the project should be accepted under any conditions. B) The project should not be accepted until the risk analysis is not provided. C) The project should not be accepted even if the positive risk-adjusted NPV is the indicator of good project performance.

B) The project should not be accepted until the risk analysis is not provided.

Cieplak, Inc., is a U.S.-based MNC that has expanded into Asia. Its U.S. parent exports to some Asian countries, with its exports denominated in the Asian currencies. It also has a large subsidiary in Malaysia that serves that market. Offer a reason related to exposure to exchange rates that explain why Cieplak's earnings were reduced during the Asian crisis in 1997. A) The earnings generated by the Malaysian subsidiary were translated to fewer dollars on the consolidated income statement due to the appreciation of the Asian currencies even if it did not remit any earnings to the parent. B) Any funds remitted by the Malaysian subsidiary converted to fewer dollars for the parent due to the depreciation of the Asian currencies. C) Cieplak's receivables from its exports were converted to fewer dollars due to the appreciation of the Asian currencies.

C

When Walt Disney World considered establishing a theme park in France, were the forecasted revenues and costs associated with the French park sufficient to assess the feasibility of this project? Were there any other "relevant cash flows" that deserved to be considered? A) There were no other relevant cash flows to be considered since the forecasted revenues and costs are sufficient cash flows to assess the feasibility of the project. B) In connection with the expected blocking of funds by the host country for a month, the blocked cash flows should be considered when assessing the feasibility of the theme park in France. C) Due to the reduction in the amount of European customers that would have visited Disney's U.S. theme parks, the forgone cash flows should have been considered when assessing the feasibility of the theme park in France.

C

Assume the euro's spot rate is presently equal to $1.00. All of the following firms are based in New York and are the same size. While these firms concentrate on business in the United States, their entire foreign operations for this quarter are provided here. Company A expects its exports to cause cash inflows of 9 million euros and imports to cause cash outflows equal to 3 million euros. Company B has a subsidiary in Portugal that expects revenue of 5 million euros and has expenses of 1 million euros. Company C expects exports to cause cash inflows of 9 million euros and imports to cause cash outflows of 3 million euros, and will repay the balance of an existing loan equal to 2 million euros. Company D expects zero exports and imports to cause cash outflows of 11 million euros. Company E will repay the balance of an existing loan equal to 9 million euros. Which of the five companies described here has the highest degree of translation exposure?

Company B has the greatest degree of translation exposure. Company B has the greatest degree of translation exposure because it has a subsidiary whose financial statements must be consolidated with the U.S. operations.

Consider an MNC that uses market-based forecasting to estimate future exchange rates. Note: Assume efef represents the percentage change in the value of currency of interest. If an MNC uses the current spot rate of a currency as its forecast for the future spot rate of that currency, then it must assume that E(ef) > 0E(ef) > 0.

False

True or False: Technical forecasting of exchange rates has shown to be more consistent and reliable than the other primary forecasting methods.

False

True or False: Technical, fundamental, and market-based forecasting typically yield similar exchange rate forecasts.

False

Generally, MNCs with more foreign costs than foreign revenues will be __1__ affected by a __2__ foreign currency.

Favorably, Weaker

Which of the following is not true regarding economic exposure?

In general, depreciation of the firm's home country currency causes a decrease in both cash inflows and outflows.

Which of the following is not true regarding the use of simulation in multinational capital budgeting?

It can only be used for one variable at a time.

Perfectly Forecasted Line

The perfect forecast line is the 45-degree line. It represents the points on the graph where the forecasted value of the pound is exactly equal to the realized value of the pound. In other words, it represents points here the realized value of the pound was forecasted perfectly. Points that are closer to this line represent better forecasts than points that are farther away. The region of upward bias is the area below the perfect forecast line. These points represent forecasts for which the forecasted value of the pound was greater than the realized value. In other words, these forecasts overestimated the value of the pound. The region of downward bias is the area above the perfect forecast line. These points represent forecasts for which the forecasted value of the pound was less than the realized value. In other words, these forecasts underestimated the value of the pound.

Assume that an MNC is considering establishing a subsidiary in a foreign country. True or False: A lower tax rate in the host country will increase periodic cash flows.

True

One argument for the irrelevance of exchange rate risk is that:

individuals can invest in a diversified set of MNCs, and can take positions in currencies on their own to offset any exchange rate exposure of MNCs.

Marathon, Inc., considers a one-year project with the Belgian government. Its euro revenue would be guaranteed. Its consultant states that the percentage change in the euro is represented by a normal distribution and that, based on a 95 percent confidence interval, the percentage change in the euro is expected to be between 0 and 6 percent. Marathon uses this information to create three scenarios: 0, 3, and 6 percent for the euro. It derives an estimated NPV based on each scenario and then determines the mean NPV. The NPV was positive for the 3 and 6 percent scenarios, but it was slightly negative for the 0 percent scenario. This led Marathon to reject the project. Its manager stated that it did not want to pursue a project that had a one-in-three chance of having a negative NPV. Do you agree with the manager's interpretation of the analysis? Explain. A) No, the likelihood of the project's negative NPV is much lower because the probability distribution is presumed to be normal, implying a lower probability for the extremes than the middle of the range. B) Yes, the likelihood that the project's NPV will be negative is sufficiently high (about 30%). C) Yes, even if the likelihood of the project's negative NPV is lower (only one-third) the probability distribution is presumed to be normal, implying a higher probability for the extremes than the middle of the range.

a

An MNC considers establishing a two-year project in New Zealand with a $30 million initial investment. The firm's cost of capital is 12 percent. The required rate of return on this project is 18 percent. The project is expected to generate cash flows of NZ$12 million in Year 1 and NZ$30 million in Year 2, excluding the salvage value. Assume no taxes and a stable exchange rate of $.60 per NZ$ over the next two years. All cash flows are remitted to the parent. What is the break-even salvage value?

about NZ$25 million

When the U.S. dollar strengthens against other currencies,

an MNC's U.S. sales will probably decrease.

Assume a U.S.-based MNC has a Swiss subsidiary that annually remits 50 million Swiss francs to the United States. If the franc ____, the dollar value of remitted funds ____.

appreciates; increases

Compare and contrast transaction exposure and economic exposure. Choose the correct statement. a) Economic exposure is due only to international transactions by a firm. Transaction exposure includes any form by which the firm's cash flow will be affected by exchange rate movements. b) Transaction exposure is due only to international transactions by a firm. Economic exposure includes any form by which the firm's cash flow will be affected by exchange rate movements. c) Transaction exposure is due only to changes in competition among firms caused by exchange rate movements. Economic exposure is the exposure of consolidated financial statements to exchange rate movements. d) Economic exposure is due only to changes in competition among firms caused by exchange rate movements. Transaction exposure is the exposure of consolidated financial statements to exchange rate movements.

b

Other things being equal, a blocked funds restriction is more likely to have a significant adverse effect on a project if the currency of that country is expected to ____ over time, and if the interest rate in that country is relatively ____.

depreciate; low

Which of the following is a method of forecasting exchange rate volatility?

deriving the exchange rate's implied standard deviation from the currency option pricing model

If Chicago Company establishes a foreign manufacturing subsidiary that buys components from the parent, the cash flows from existing operations would likely be ____ affected by the project. If Boston Company exports to Canada and then establishes a subsidiary to produce and sell the same product in Canada, cash flows from existing operations would likely be ____ affected by the project.

favorably; adversely

Which of the following forecasting techniques would be most likely to use relationships between interest rates and exchange rate movements to forecast the future exchange rate?

fundamental forecasting

The dollar value of foreign cash flows remitted to a U.S. parent

is normally very difficult to forecast.

A foreign project in Hungary and another in Japan had the same perceived value from the U.S. parent's perspective. Then, the exchange rate expectations were revised, downward for the value of the Hungarian forint and upward for the Japanese yen. The break-even salvage value for the project in Japan would now be ____ from the parent's perspective.

lower than that for the Hungarian project

The discrepancy between the feasibility of a project in a host country from the perspective of the U.S. parent versus the subsidiary administering the project is likely to be greater for projects in countries where

the currency of the host country is expected to appreciate consistently against the dollar .

New York Company establishes a subsidiary in a country where it has no other existing business. The present value of cash flows from this subsidiary to the parent is more sensitive to exchange rate movements when:

the parent finances the entire investment.

Which of the following is not normally a reason for an MNC to forecast exchange rates?

to decide whether to speculate in foreign exchange markets

The exposure of a firm's financial statements to exchange rate movements is referred to as

translation exposure