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Fundamentals of Financial Manageme...

14th Edition
Eugene F. Brigham + 1 other
ISBN: 9781285867977

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BuyFindarrow_forward

Fundamentals of Financial Manageme...

14th Edition
Eugene F. Brigham + 1 other
ISBN: 9781285867977
Textbook Problem

MULTINATIONAL FINANCIAL MANAGEMENT Citrus Products Inc. is a medium-sized producer of 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:

  1. a. What is a multinational corporation? Why do firms expand into other countries?
  2. b. What are the five major factors that distinguish multinational financial management from financial management as practiced by a purely domestic firm?
  3. c. Consider the following illustrative exchange rates:
  U.S. Dollars Required to Buy One Unit of Foreign Currency
Japanese yen 0.009
Australian dollar 0.650
  1. 1. Are these currency prices direct quotations or indirect quotations?
  2. 2. Calculate the indirect quotations for yen and Australian dollars.
  3. 3. What is a cross rate? Calculate the two cross rates between yen and Australian dollars.
  4. 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?
    1. 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?
  5. 6. What is exchange rate risk?
    1. d. Briefly describe the current international monetary system. What are the different types of exchange rate systems?
      1. 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?
      2. 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?
      3. 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?
      4. h. What effect does relative inflation have on interest rates and exchange rates?
      5. i. 1. Briefly explain the three major types of international credit markets.

2. Briefly explain how ADRs work.

  1. j. What is the effect of multinational operations on capital budgeting decisions?
  2. k. To what extent do average capital structures vary across different countries?

a.

Summary Introduction

To explain: The Multinational Corporation and reasons behind to expand its business in foreign countries.

Introduction:

Multinational Corporation

It refers to that type of corporation, which maintains its operation in the home country and in other countries except for home country. Such corporation always establishes its headquarters in its home country.

Explanation

Multinational Corporation is that corporation which operates their works into the foreign country from their home country. They generate the revenue from the outside country.

The reasons behind to expand its business in foreign countries are mentioned below:

  • Low-cost production
  • Avoidance of government rules and regulations
  • Large market
  • Availability of raw material

Low-cost production: The companies can easily get the benefit by the establishment of manufacturing plants in such countries, which will be proved low-cost region because high production cost reduces the profits of the company. For example availability of cheap labor...

b.

Summary Introduction

To Explain: Difference between multinational and domestic financial management

Introduction:

Multinational Corporation:

Multinational Corporation is that corporation which operates their works into the foreign country from their home country. They generate the revenue from the outside country.

c.

1.

Summary Introduction

To identify: The given prices of currencies are direct quotations or indirect quotations.

Introduction:

Exchange Rate:

The rate, which indicates the conversion rate for the currency of a country obtained through the exchange of currency of another country, is an exchange rate.

2.

Summary Introduction

To determine: The indirect quotations for Japanese yen and Australian dollar.

3.

Summary Introduction

To determine: The meaning of cross rate and cross rates between yen and Australian dollar.

4.

Summary Introduction

To determine: The selling price of juice in J Country.

5.

Summary Introduction

To determine: The amount of profit in terms of US dollar.

6.

Summary Introduction

To explain: The meaning of exchange rate risk.

d.

Summary Introduction

To explain: Current international monitory system and also explain the type of exchange rate system.

e.

Summary Introduction

To explain: The difference between spot rates and forward, when the forward rate is at a premium to the spot rate and when it is at a discount.

Introduction:

Interest Rate Parity:

It refers to the theory, which indicates the difference of interest rates provided by two different countries is to be same as the difference of two types of the exchange rate, which are forward exchange rate and spot exchange rate.

f.

Summary Introduction

To determine: the rate of return of securities in S country.

Introduction:

Interest Rate Parity:

It refers to that theory which indicates the difference of interest rates provided by two different countries is to be same as the difference of two types of the exchange rate which are: forward exchange rate and spot exchange rate.

g.

Summary Introduction

To determine: The price of juice in the A Country.

Introduction:

Purchasing Power Parity (PPP):

It refers to that relationship, which indicates the same cost of same kinds of products in the market of various countries after adjustment of exchange rates of currencies. This relationship of common price can be termed as the law of one price.

h.

Summary Introduction

To explain: The effect of relative inflation on interest rate and on exchange rate.

i.

1.

Summary Introduction

To explain: The three major types of international credit market.

Introduction:

International Credit Market:

The international credit market is the market that provides credit facility to the countries government as well as to the companies.

2.

Summary Introduction

To explain: the working of ADR.

Introduction:

American Depositary Receipts (ADR):

American depositary receipts are a type of negotiable security it represents the securities of the non-US companies that are used to trade in US financial market.

j.

Summary Introduction

To explain: The effect of multinational operations on capital budgeting decisions.

k.

Summary Introduction

To explain: to what extent the average capital structure varies across different countries.

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