citrus juice drinks with groves in Indian River County, Florida. Until now, the company has confined its
operations and sales to the United States, but its CEO, George Gaynor, wants to expand into the Pacific
Rim. The first step is to set up sales subsidiaries in Japan and Australia, then to set up a production plant in Japan, and finally to distribute the product throughout the Pacific Rim. The firm’s financial manager, Ruth Schmidt, is enthusiastic about the plan, but she worries about the implications of the foreign expansion on the firm’s financial management process. She has asked you, the firm’s most recently hired financial analyst, to develop a 1-hour tutorial package that explains the basics of multinational financial management. The tutorial will be presented at the next board of directors meeting. To get you started, Schmidt has given you the following list of questions:
a. What is a multinational corporation? Why do firms expand into other countries?
b. What are the five major factors that distinguish multinational financial management from financialmanagement as practiced by a purely domestic firm?
c. Consider the following illustrative exchange rates 1. Are these currency prices direct quotations or indirect quotations?
2. Calculate the indirect quotations for yen and Australian dollars.
3. What is a cross rate? Calculate the two cross rates between yen and Australian dollars.
4. Assume that Citrus Products can produce a liter of orange juice and ship it to Japan for $1.75. If the
firm wants a 50% markup on the product, what should the orange juice sell for in Japan?
5. Now assume that Citrus Products begins producing the same liter of orange juice in Japan. The
product costs 250 yen to produce and ship to Australia, where it can be sold for 6 Australian dollars.
What is the U.S. dollar profit on the sale?
6. What is exchange rate risk?
d. Briefly describe the current international monetary system. What are the different types of exchange
rate systems?
e. What is the difference between spot rates and forward rates? When is the forward rate at a premium
to the spot rate? When is it at a discount? f. What is interest rate parity? Currently, you can exchange 1 yen for 0.0095 U.S. dollar in the 30-day
forward market, and the risk-free rate on 30-day securities is 4% in both Japan and the United States.
Does interest rate parity hold? If not, which securities offer the highest expected return?
g. What is purchasing power parity (PPP)? If grapefruit juice costs $2 a liter in the United States and
purchasing power parity holds, what should be the price of grapefruit juice in Australia?
h. What effect does relative inflation have on interest rates and exchange rates?
i. 1. Briefly explain the three major types of international credit markets.
2. Briefly explain how ADRs work.
j. What is the effect of multinational operations on capital budgeting decisions?
k. To what extent do average capital structures vary across different countries?

Transcribed Image Text:U.S. Dollars Required to Buy One Unit of Foreign Currency Japanese yen 0.009 Australian dollar 0.650

Question

citrus juice drinks with groves in Indian River County, Florida. Until now, the company has confined its
operations and sales to the United States, but its CEO, George Gaynor, wants to expand into the Pacific
Rim. The first step is to set up sales subsidiaries in Japan and Australia, then to set up a production plant in Japan, and finally to distribute the product throughout the Pacific Rim. The firm’s financial manager, Ruth Schmidt, is enthusiastic about the plan, but she worries about the implications of the foreign expansion on the firm’s financial management process. She has asked you, the firm’s most recently hired financial analyst, to develop a 1-hour tutorial package that explains the basics of multinational financial management. The tutorial will be presented at the next board of directors meeting. To get you started, Schmidt has given you the following list of questions:
a. What is a multinational corporation? Why do firms expand into other countries?
b. What are the five major factors that distinguish multinational financial management from financialmanagement as practiced by a purely domestic firm?
c. Consider the following illustrative exchange rates 1. Are these currency prices direct quotations or indirect quotations?
2. Calculate the indirect quotations for yen and Australian dollars.
3. What is a cross rate? Calculate the two cross rates between yen and Australian dollars.
4. Assume that Citrus Products can produce a liter of orange juice and ship it to Japan for $1.75. If the
firm wants a 50% markup on the product, what should the orange juice sell for in Japan?
5. Now assume that Citrus Products begins producing the same liter of orange juice in Japan. The
product costs 250 yen to produce and ship to Australia, where it can be sold for 6 Australian dollars.
What is the U.S. dollar profit on the sale?
6. What is exchange rate risk?
d. Briefly describe the current international monetary system. What are the different types of exchange
rate systems?
e. What is the difference between spot rates and forward rates? When is the forward rate at a premium
to the spot rate? When is it at a discount? f. What is interest rate parity? Currently, you can exchange 1 yen for 0.0095 U.S. dollar in the 30-day
forward market, and the risk-free rate on 30-day securities is 4% in both Japan and the United States.
Does interest rate parity hold? If not, which securities offer the highest expected return?
g. What is purchasing power parity (PPP)? If grapefruit juice costs $2 a liter in the United States and
purchasing power parity holds, what should be the price of grapefruit juice in Australia?
h. What effect does relative inflation have on interest rates and exchange rates?
i. 1. Briefly explain the three major types of international credit markets.
2. Briefly explain how ADRs work.
j. What is the effect of multinational operations on capital budgeting decisions?
k. To what extent do average capital structures vary across different countries?

U.S. Dollars Required to
Buy One Unit of Foreign
Currency
Japanese yen
0.009
Australian dollar
0.650

Accepted Answer

Note:
This post contains several questions. 
The first three - questions a, b, and c have been…