International Financial Management
14th Edition
ISBN: 9780357130698
Author: Madura
Publisher: Cengage
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Consider a US-based MNC with a wholly owned Italian subsidiary. Following a depreciation of the dollar against the euro, which of the following conclusions are correct?
Group of answer choices
a. The cash flow in euros could be altered due a change in the firm's competitive position in the marketplace.
b. A given operating cash flow in euros will be converted to a higher US dollar cash flow.
c. Both A and B
d. None of the above
MNC Cash Flows and Exchange Rate Risk Asheville Co. has a subsidiary in Mexico that develops software for its parent. It rents a large facility in Mexico and hires many people in Mexico to work in the facility. Asheville Co. has no other international business. All operations are presently funded by Asheville’s parent. All the software is sold to U.S. firms by Asheville’s parent and invoiced in U.S. dollars.If the Mexican peso appreciates against the dollar, does this have a favorable effect, unfavorable effect, or no effect on Asheville’s value?
Suppose InBev Corporation (a non-U.S. MNC) buys Anheuser-Busch Corporation (a U.S. corporation) by paying the U.S. shareholders in cash. Which of the following can be said of the US capital account?
Group of answer choices
The acquisition of cash by US shareholders will decrease foreign ownership, which will be recorded as a debit.
The US federal reserve will increase its currency reserves.
InBev's reduction in cash will be recorded as a debit on the U.S. capital account..
InBev's increased ownership of US assets is recorded as a credit.
U.S. shareholders increased ownership in InBev will be recorded as a credit.
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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_forwardThe foreign subsidiary of a U.S. firm is profitable when profits are measured in the foreign currency but those profits become losses when measured in U.S. dollars. This is an example of which one of the following? A. Interest rate disparities B. Short-run exposure to exchange rate risk C. Long-run exposure to exchange rate risk D. Political risk associated with the foreign operations E. Translation exposure to exchange rate riskarrow_forwardExcess funds can be used for domestic or foreign short-term investments. In some instances short-term securities on the international market will have higher interest rates than domestic interest rates and will therefore be pursued by an MNC. However, what are all the possible conditions that are expected to hold and for the MNC to consider : A) International Fisher Effect B) Exchange Rate Forecasting results C) Negative Effective Yield of the investment D) Interest Rate Parity E) Non-Diversified options for cash across currencies on the international market 1. C, D and E 2. A, B and D 3. A, B and C 4. A, B, C and Darrow_forward
- International Investments U.S.-based MNCs commonly invest in foreign securities. Assume that the dollar is presently weak and is expected to strengthen over time. How will these expectations affect the tendency of U.S. investors to invest in foreign securities?arrow_forwardAn Australian mining company exports iron ore to other countries, such as China, South Korea and Japan. Its annual report states that the company is exposed to the risk of falling oil prices, increasing interest rates and exchange rates fluctuations of various foreign currencies. Discuss derivative products that can be used to hedge these risks?arrow_forward
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