Week 7 Homework

930 Words Jun 30th, 2013 4 Pages
Week 7 Homework
Mohamed E. Abdelrahman
Prof: James Glenn
International Finance FIN: 535
Strayer University
Spring 2013

15. DFI Strategy:
A. What comparative advantage does JCPenney have when establishing a store in a foreign country, relative to an independent variety store?

B. Why might the overall risk of JCPenney decrease or increase as a result of its recent global expansion?

C. JCPenney has been more cautious about entering China. Explain the potential obstacles associated with entering China.

ANSWER:

A. J.C. Penney has name recognition, which could result in customer trust, and therefore a

stronger demand for its products. It also has marketing expertise that it applies to each store. It

also has
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In this case, it would have to pay back a lump sum total of 7 million Euros at the end of 8 years to repay the loan. There are no interest payments on this debt. The way in which this financing deal is structured, none of the payment is tax-deductible. Determine the NPV if Cantoon uses the forward rate instead of the spot rate to forecast the future spot rate of the euro, and elects to partially finance the acquisition.

ANSWER

a. Discount factor based on a required return of 20% for 8 years = .232

$ to be received in 8 years = 12,000,000 Euros × $1.2 = $14,400,000

PV = $14,400,000

(1 + .2)8 = $3,340,800

NPV = $3,340,800 – $4,000,000 = –$659,200

b. The forward rate premium is: p = (1 + .05)8 – 1 = (1.48)/1.718) – 1 = –13.85%

(1 + .07)8

FR premium over 8 years = –.13.85%

Forecast of euro in 8 years = $1.20 × [1 + (–13.85%)] = 1.0338.

Euros to be received in 8 years = 12 million Euros – 7 million Euros = 5 million Euros

Dollars to be received in 8 years = 5 million Euros × $1.0338 = $5,169,000

PV of $ to be received in 8 years = $5,169,000

(1 + .20)8 = $1,202,144

If 3 million Euros are borrowed, this covers the equivalent of $3,600,000, since the euro’s spot

rate is equal to $1.20. Therefore, the parent needs to provide an initial outlay of $400,000

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