FIN640 FINAL EXAM 2017

FIN 640 9040 Multinational Financial Management (2172)- FINAL EXAM

Question 1 (1 point)

Tiffany Co. will receive SF1,040,000 in 30 days. Use the following information to determine the total dollar amount received (after accounting for the option premium) if the firm purchases and exercises a put option:

Exercise price = $0.63

Premium = $0.05

Spot rate = $.60

Expected spot rate in 30 days = $.56

30?day forward rate = $.62

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Question 2 (1 point)

The forward rate of the Swiss franc is $.50. The spot rate of the Swiss franc is $0.42. The following interest rates exist:

U.S. Switzerland

360?day borrowing rate 0.07 .05

360?day deposit rate .06 0.04

You need to purchase SF200,000 in 360 days. If you use a money market hedge, the amount of dollars you need in 360 days is:

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Question 3 (1 point)

Assume that JASON Co. will need to purchase 100,000 Singapore dollars (S$) in 180 days. Today’s spot rate of the S$ is $.50, and the 180?day forward rate is $.53. A call option on S$ exists, with an exercise price of $.52, a premium of $.02, and a 180?day expiration date. A put option on S$ exists, with an exercise price of $.51, a premium of $.02, and a 180?day expiration date. JASON has developed the following probability distribution for the spot rate in 180 days:

Possible Spot Rate

in 90 Days Probability

$.48 10%

$.53 60%

$.55 30%

The probability that the forward hedge will result in a higher payment than the options hedge is _______ (include the amount paid for the premium when estimating the U.S. dollars required for the options hedge).

Question 3 options:

	0%
	10%
	30%
	70%

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Question 4 (1 point)

Delaney Inc. needs €1,020,000 in 30 days. Delaney can earn 0.05 annualized on a German security. The current spot rate for the euro is $1.00. Delaney can borrow funds in the U.S. at an annualized interest rate of .06. If Delaney uses a money market hedge, how much should it borrow in the U.S.?

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Question 5 (1 point)

LKL Corporation will need 220,000 Canadian dollars (C$) in 90 days to cover a payable position. Currently, a 90-day call option with an exercise price of $.75 and a premium of $.01 is available. Also, a 90-day put option with an exercise price of $.73 and a premium of $.01 is available. LKL plans to purchase options to hedge its payable position. Assuming that the spot rate in 90 days is $0.68, what is the net amount paid, assuming LKL wishes to minimize its cost?

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Question 6 (1 point)

Sasa (a U.S. firm) has no subsidiaries and presently has sales to Mexican customers amounting to MXP98 million, while its peso?denomin­ated expenses amount to MXP61 million. If it shifts its material orders from its Mexican suppliers to U.S. suppliers, it could reduce peso?denominated expenses by MXP19 million and increase dollar?denominated expenses by $1,800,000. This strategy would _______ the Sasa’s exposure to changes in the peso’s movements against the U.S. dollar. Regardless of whether the firm shifts expenses, it is likely to perform better when the peso is valued _______ relative to the dollar.

Question 6 options:

	reduce; high
	reduce; low
	increase; low
	increase; high

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Question 7 (1 point)

Assume that Baps Corporation is considering the establishment of a subsidiary in Norway. The initial investment required by the parent is $4,900,000. If the project is undertaken, Baps would terminate the project after four years. Baps’ cost of capital is 13%, and the project is of the same risk as Baps’ existing projects. All cash flows generated from the project will be remitted to the parent at the end of each year. Listed below are the estimated cash flows the Norwegian subsidiary will generate over the project’s lifetime in Norwegian kroner (NOK):

Year 1 Year 2 Year 3 Year 4

NOK9,600,000 NOK14,300,000 NOK16,900,000 NOK18,100,000

The current exchange rate of the Norwegian kroner is $.135. Baps’ exchange rate forecast for the Norwegian kroner over the project’s lifetime is listed below:

Year 1 Year 2 Year 3 Year 4

$.13 $.14 $.12 $.15

What is the net present value of the Norwegian project?

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Question 8 (1 point)

Izzy Inc., a U.S.-based MNC, has screened several targets. Based on economic and political considerations, only one eligible target remains in Malaysia. Izzy would like you to value this target and has provided you with the following information:

· Izzy expects to keep the target for three years, at which time it expects to sell the firm for 500 million Malaysian ringgit (MYR) after deducting the amount for any taxes paid.

· Izzy expects a strong Malaysian economy. Consequently, the estimates for revenues for the next year are MYR300 million. Revenues are expected to increase by 11% over the following two years.

· Cost of goods sold are expected to be 50% of revenues.

· Selling and administrative expenses are expected to be MYR40 million in each of the next three years.

· The Malaysian tax rate on the target's earnings is expected to be 32%.

· Depreciation expenses are expected to be MYR15 million per year for each of the next three years.

· The target will need MYR9 million in cash each year to support existing operations.

· The target's current stock price is MYR40 per share. The target has 9,100,000 million shares outstanding.

· Any cash flows remaining after taxes are remitted by the target to Izzy, Inc. Izzy uses the prevailing exchange rate of the Malaysian ringgit as the expected exchange rate for the next three years. This exchange rate is currently $0.21.

· Izzy's required rate of return on similar projects is 13%.

The Malaysian target’s value based on its stock price is $___

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Question 9 (1 point)

The earnings of a private European firm are €5
million, and the average P/E ratio of publicly traded European firms in the
same industry is 10. This firm is considering the possibility of going public
in which it would issue one million shares. If the private firm has similar
growth potential and other characteristics similar to other publicly traded
firms in the industry, its value can be estimated as_______
million euros

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Question 10 (1 point)

If a U.S. firm’s expenses are more susceptible to exchange rate movements than revenue, the firm will _______ if the dollar _______.

Question 10 options:

	benefit; weakens
	benefit; strengthens
	be unaffected; weakens
	be unaffected; strengthens

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Question 11 (1 point)

LRW Corporation has a beta of 2.0. The risk-free rate of interest is 0.04, and the return on the stock market overall is expected to be 0.13. What is the required rate of return on LRW stock?

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Question 12 (1 point)

Assume the following information for Maximus Co., a U.S.-based MNC that is considering obtaining funding for a project in Germany:

U.S. risk-free rate = .04

German risk-free rate = .06

Risk premium on dollar-denominated debt provided by U.S. creditors = 0.03

Risk premium on euro-denominated debt provided by German creditors = .04

Beta of project = 1.2

Expected U.S. market return = .10

U.S. corporate tax rate = 0.25

German corporate tax rate = .40

What is Maximus’s cost of dollar-denominated debt?

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Question 13 (1 point)

A firm forecasts the euro’s value as follows for the next year:

Possible

Percentage Change Probability

-0.01 10%

0.02 50%

0.05 40%

The annual interest rate on euro is 7%. The expected value of the effective financing rate from a U.S. firm’s perspective is about:

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Question 14 (1 point)

Assume the U.S. interest rate is .075, the New Zealand interest rate is 0.045, the spot
rate of the NZ$ is $0.58, and the one?year forward rate of the NZ$ is $.50. At
the end of the year, the spot rate is $0.40. Based on this information, what is
the effective financing rate for a U.S. firm that takes out a one?year,
uncovered NZ$ loan?

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Question 15 (1 point)

Assume Keystone Corporation, a U.S.-based MNC, obtains a one-year loan of 1,500,000 Malaysian ringgit (MYR) at a nominal interest rate of 7%. At the time the loan is extended, the spot rate of the ringgit is $.25. If the spot rate of the ringgit in one year is $.28, the dollar amount initially obtained from the loan is $_______, and $_______ is needed to repay the loan.

Question 15 options:

	375,000; 449,400
	449,000; 375,000
	6,000,000; 5,357,143
	5,357,143; 6,000,000

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Question 16 (1 point)

A share of the ADR of a French firm represents one
share of that firm’s stock that is traded on the Paris stock exchange. The
share price of the firm was 21 euros when the French market closed. As the U.S.
market opens, the euro is worth $1.10. Thus, the price of the ADR should be:

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Question 17 (1 point)

The British Pound is equal to $1.54 and the Brazilian Real is equal to $0.32. The value of the British Pound in Brazilian Real is:

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Question 18 (1 point)

Assume the British pound appreciates against the dollar while the Japanese yen depreciates against the dollar. Which of the following is true?

Question 18 options:

	Japanese exporters can increase American sales by shift­ing operations from their British subsidiaries to Japan.
	British exporters can increase American sales by shifting operations from their Japanese subsidiaries to Britain.
	American exporters can increase sales to Japan by shift­ing operations from Japanese subsidiaries to American subsidiaries.
	None of these are true.

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Question 19 (1 point)

Park Bank believes the Canadian dollar will depreciate over the next 3 days from $1.38 to $1.07. The following annual interest rates apply:

Currency Lending Rate Borrowing Rate

Canadian Dollars (C$) .0520 .0580

Dollars 0.059 .0595

Baylor Bank has the capacity to borrow either Canadian $104,000,000 or US $75,000,000. If Baylor Bank’s forecast if correct, what will its dollar profit be from speculation over the week (assuming it does not use any of its existing consumer deposits to capitalize on its expectations)?

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Question 20 (1 point)

RLW, Inc., based in the US, exports products to a Swedish firm and will receive payment of Krona 2,000,000 in three months. On June 1, the spot rate of the euro was $0.125, and the 3-month forward rate was $0.16. On June 1, RLW negotiated a forward contract with a bank to sell Krona 2,000,000 forward in three months. The spot rate of the euro on September 1 is $0.14. LRW will receive $_______ for the Kronas.

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Question 21 (1 point)

The 30-day forward rate for the Yen is $0.02300, while the current spot rate of the Yen is $0.01070. What is the annualized forward premium of the Yen?

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Question 22 (1 point)

Assume that a speculator purchases a put option on British pounds (with a strike price of $2.50) for $0.11 per unit. A pound option represents 63,000 units. Assume that at the time of the purchase, the spot rate of the pound is $2.51 and continually rises to $2.72 by the expiration date. The highest net profit possible for the speculator based on the information above is:

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Question 23 (1 point)

With regard to hedging translation exposure, translation losses _______; and gains on forward contracts used to hedge translation exposure _______.

Question 23 options:

	are not tax deductible; are taxed
	are tax deductible; are taxed
	are not tax deductible; are not taxed
	are tax deductible; are not taxed

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Question 24 (1 point)

A US company expects to pay 3,100,000 Japanese yen 30 days from now. It decides to hedge thee position by buying Japanese yen forward. The current spot rate of the yen is $.0089, while the forward rate is $0.0076. The firm expects the spot rate in 30 days to be $.0094. Based on its expectations the company enters into derivative contracts to maximize its profits. How many dollars will the company pay for the 5,000,000 yen 30 days from now?

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Question 25 (1 point)

Assume the following information:

Current spot rate of Australian dollar = $0.84

Forecasted spot rate of Australian dollar 1 year from now = $.83

One-year forward rate of the Australian dollar = $0.76

Annual interest rate on Australian dollars = .07

Annual interest rate on U.S. dollars = .09

Given the information in this question, the return from covered interest arbitrage by U.S. investors with $400,000 to invest is about _______

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Question 26 (1 point)

Assume the bid rate of a Swiss franc is $0.483 while the ask rate is $.475 at Bank X. Assume the bid rate of the Swiss franc is $.460 while the ask rate is $0.443 at Bank Y. Given this informa­tion, what would be your gain if you use $4,800,000 and execute locational arbitrage?

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Question 27 (1 point)

Consider a country that presently has a high level of unemployment because of weak economic conditions. Its income levels are very low. This country may be an attractive target as a result of _______ motives by U.S. firms that engage in direct foreign investment.

Question 27 options:

	revenue-related
	cost-related
	revenue-related AND cost-related
	none of these

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Question 28 (1 point)

According to the International Fisher effect, if U.S. investors expect a 0.05 rate of domestic inflation over one year, and a .03 rate of inflation in European countries that use the euro, and require a 0.01 real return on invest­ments over one year, the nominal interest rate on one?year U.S. Treasury securities would be:

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Question 29 (1 point)

Assume that interest rate parity holds. The U.S. five?year interest rate is 0.06 annualized, and the Mexican five?year interest rate is 0.03 annualized. Today’s spot rate of the Mexican peso is $0.30. What is the approximate 10?year forecast of the peso’s spot rate if the 10?year forward rate is used as a forecast?

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Question 30 (1 point)

If the foreign currency _______ by the time the acquirer makes payment, the acquisition will be more costly, and the cost of the acquisition changes _______ the change in the exchange rate.

Question 30 options:

	appreciates; by a lesser percentage then
	depreciates; in the same proportion as
	appreciates; in the same proportion as
	appreciates; by a greater percentage than

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Question 31 (1 point)

A Japanese yen is worth $0.0060, and a Fijian dollar (F$) is worth $0.4650. What is the value of the yen in Fijian dollars (i.e., how many Fijian dollars do you need to buy a yen)?

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Question 32 (1 point)

BFB Bank believes the New Zealand dollar will appreciate over the next five days from $.48 to $.50. The following annual interest rates apply:

Currency Lending Rate Borrowing Rate

Dollars .071 0.0729

New Zealand dollar (NZ$) 0.0551 .0725

BFB Bank has the capacity to borrow either NZ$10,000,000 or $4,900,000. If BFB Bank’s forecast if correct, what will its dollar profit be from speculation over the five?day period (assuming it does not use any of its existing consumer deposits to capitalize on its expectations)?

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Question 33 (1 point)

The primary purpose of country risk analysis when applied to capital budgeting is usually to:

Question 33 options:

	measure the effect of country risk on sales.
	measure the effect of country risk on the consolidated balance sheet.
	measure the effect of country risk on the consolidated income statement.
	measure the effect of country risk on cash flows.

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Question 34 (1 point)

A firm wants to use an option to hedge 12,200,000 in receivables from New Zealand firms. The premium is $0.05. The exercise price is $0.53. If the option is exercised, what is the total amount of dollars received (after accounting for the premium paid)?

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Question 35 (1 point)

You purchase a call option on pounds for a premium of $0.02 per unit, with an exercise price of $1.51; the option will not be exercised until the expiration date, if at all. If the spot rate on the expiration date is $1.60, your net profit per unit is:

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Question 36 (1 point)

Assume the U.S. financing rate is 10 percent and that the financing rate in Germany is 9 percent. An MNC would be indifferent between financing in dollars and financing in euros next year if the euro is expected to _______.

Question 36 options:

	appreciate by 0.92%.
	depreciate by 0.92%.
	appreciate by 1.00%.
	depreciate by 1.00%.

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Question 37 (1 point)

You are a speculator who sells a call option on Swiss francs for a premium of $0.04, with an exercise price of $0.69. The option will not be exercised until the expiration date, if at all. If the spot rate of the Swiss franc is $0.77 on the expiration date, your net profit per unit, assuming that you have to buy Swiss francs in the market to fulfill your obligation, is:

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Question 38 (1 point)

Eurenasia is a country that has frequently been assigned low macro-assessment ratings of country risk in the recent past due to its tendency to war with neighboring nations. MNC A is considering the establishment of a subsidiary to manufacture personal computers, while MNC B is considering the establishment of a subsidiary to manufacture tanks. Which of the two MNCs is likely to be less affected by the low macro-assessment?

Question 38 options:

	MNC A
	MNC B
	Both MNC A and MNC B will be equally affected, since the macroassessment does not vary.
	None of the above

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Question 39 (1 point)

A U.S. corporation has purchased currency put options to hedge a 100,000 Canadian dollar (C$) receivable. The premium is $0.02 and the exercise price of the option is $.75. If the spot rate at the time of maturity is $0.90, what is the net amount received by the corporation if it acts rationally?

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Question 40 (1 point)

When determining whether a particular proposed project in a foreign country is feasible:

Question 40 options:

	country risk analysis should be incorporated within the capital budgeting analysis.
	the effect of country risk on sales revenue is more important than the effect on cash flows
	the project with the highest country risk rating (lowest country risk) should be accepted.
	country risk analysis should be incorporated within the capital budgeting analysis AND the project with the highest country risk rating (lowest country risk) should be accepted.

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