International Financial Management
14th Edition
ISBN: 9780357130698
Author: Madura
Publisher: Cengage
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Firms use a variety of methods to conduct business internationally.
Consider the case of an MNC conducting international business via the use of international trade.
When this method of conducting international business is used, cash inflows come from ? while cash outflows flow to ? .
Case 1
ABC beauty Group, incorporated in China, has its head office in China. It operates several beauty retailing shops in China, Malaysia and Indonesia, and the operations are financed by local letters of credit or bank loans from the respective location. ABC sources its beauty products from France and United States and settles payable in euros and US Dollar. All the net cash inflows after deducted the local operating expenses are remitted to China.
Required:Which currency should be used as ABC’s functional currency based on IAS 21?
Discuss two general functions involved in international cash management and explain how the MNC’s optimization of cash flow can distort the profits of a subsidiary that is based in North America.
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- Suppose that Salem Co, a U.S.-based MNC that both purchases supplies from Canada and sells exports in Canada, is seeking to measure the economic exposure of its cash flows. Salem wishes to analyze how its cash flows might change under different exchange rates for the Canadian dollar (the only foreign currency in which it deals). Salem believes that the value of the Canadian dollar will be $0.70, $0.75, or $0.80, and seeks to analyze its cash flows under each of these scenarios. The following table shows Salem’s cash flows under each of these exchange rates. Use the table to answer the question that follows. Exchange Rate Scenario Exchange Rate Scenario Exchange Rate Scenario C$1=$0.70 C$1=$0.75 C$1=$0.80 (Millions) (Millions) (Millions) Sales (1) U.S. Sales $315 $315 $315 (2) Canadian Sales $3.50 $4.00 $4.00 (3) Total Sales in U.S. $ $318.50 $318.75 $319.00 Cost of Materials and Operating Expenses (4)…arrow_forwardABC beauty Group, incorporated in China, has its head office in China. It operates several beauty retailing shops in China, Malaysia and Indonesia, and the operations are financed by local letters of credit or bank loans from the respective location. ABC sources its beauty products from France and United States and settles payable in euros and US Dollar. All the net cash inflows after deducted the local operating expenses are remitted to China. Required: Discuss which currency should be used as ABC’s functional currencyarrow_forwardAllocating resources in the most efficient manner maximizes the wealth of any country. It is generally acknowledged that financial information plays an important role in efficient resource allocation. Required: Given that both of the preceding statements are correct, why are the financial reporting rules in some countries (e.g., Canada and the United States) designed to be very helpful to external investors whereas in other countries (e.g., Germany and Japan) they are intended to be less helpful? Step-by-step solution Step1of3 A country’s finandial reporting philosophy evolves and reflects the specific legal,political and financial institutions within the country. External investors are the more important source of financial capital in Canada and the United States than they have historically been in Germany and Japan. Consequently, finandial accounting and reporting standards in Canada and the U.S. have evolved to meet this public financial market demand for information-what the…arrow_forward
- Consider Firm A and Firm B that both produce the same product. Firm A would more likely have more stable cash flows if its percentage of foreign sales were ____ and the number of foreign countries it sold products to was ____. A. higher; small B. lower; small C. higher; large D. higher; largearrow_forwardSuppose you work at the FOREX desk of a multinational bank. No particular country is the home country for you as your responsibility is to conduct foreign exchange trade in whichever way is profitable for the bank. Using this as your guideline, consider the following data: S0 = ¥92/US$ S180 = ¥92/US$ IUS = 2% per annum IJapan = 0.09% per annum With a starting amount of US$10 million or its Yen equivalent, can you make a UIA profit? What if a CIA was conducted at F180 of ¥90/US$? What are your observations?arrow_forwardIf you are the manager, you should understand which of the operations do not create benefit from depreciation of the firm's local currency. I. Borrowing in a foreign country and converting the funds to the local currency prior to the depreciation. II. Purchasing foreign supplies. III. Investing in foreign bank accounts denominated in foreign currencies prior to depreciation of the local currency. A. I, IV B. II, IV C. I, II D. II, IIIarrow_forward
- Transaction Exposure Fischer, Inc., exports products from Florida to Europe. It obtains supplies and borrows funds locally. How would appreciation of the euro likely affect its net cash flows? Why?arrow_forwardWhich of the following involves a financial outflow from the U.S. economy? a. returns paid on U.S. investments in France b. returns paid on U.S. investments in France c. Chinese investors buy real estate across the U.S. d. U.S. firms buying logging rights to China's forestsarrow_forwardQUESTION 1. If Commonwealth Bank, an Australian Bank, borrows short-term funds from the United States Government, then from the United States point of view, this would be called: (a) Inward Foreign Direct Investment (FDI). (b) Inward Portfolio Investment. (c) Outward Foreign Direct Investment (FDI). (d) Outward Portfolio Investment. Explain why. QUESTION 2. Consider a standard Heckscher-Ohlin model with two countries: Germany is capital-abundant; Malaysia is labour-abundant. Each country uses labour and capital to produce two goods: Good 1 is labour-intensive and Good 2 is capital-intensive. Under free trade, the world relative price of Good 2 will be: (a) Lower than the relative price of Good 2 under autarky in Malaysia. (b) Lower than the relative price of Good 2 under autarky in Germany. (c) Lower than the autarky relative price of Good 2 in both countries. (d) Higher than the autarky relative price of Good 2 in both countries. Explain why. QUESTION 3. If Indonesia (which is a…arrow_forward
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