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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: 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 financial management as practiced by a purely domestic firm? 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. 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?

BuyFind

Fundamentals of Financial Manageme...

15th Edition
Eugene F. Brigham + 1 other
Publisher: Cengage Learning
ISBN: 9781337395250
BuyFind

Fundamentals of Financial Manageme...

15th Edition
Eugene F. Brigham + 1 other
Publisher: Cengage Learning
ISBN: 9781337395250

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Chapter
Section
Chapter 19, Problem 19IC
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?

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Chapter 19 Solutions

Fundamentals of Financial Management (MindTap Course List)
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Ch. 19 - Why do U.S. corporations build manufacturing...Ch. 19 - If the euro depreciates against the U.S. dollar,...Ch. 19 - If the United States imports more goods from...Ch. 19 - Should firms require higher rates of return on...Ch. 19 - Does interest rate parity imply that interest...Ch. 19 - Why might purchasing power parity fail to hold?Ch. 19 - What is a eurodollar? If a French citizen deposits...Ch. 19 - EXCHANGE RATE If British pounds sell for 1.30...Ch. 19 - CROSS RATE A currency trader observe that in the...Ch. 19 - INTEREST RATE PARITY Six-month T-bills have a...Ch. 19 - PURCHASING POWER PARITY A television costs 750 in...Ch. 19 - EXCHANGE RATES Table 19.1 lists foreign exchange...Ch. 19 - EXCHANGE RATES Use the foreign exchange section of...Ch. 19 - CURRENCY APPRECIATION Suppose that 1 Danish krone...Ch. 19 - CROSS RATES Suppose the exchange rate between the...Ch. 19 - CROSS RATES Use the foreign exchange section of a...Ch. 19 - INTEREST RATE PARITY Assume that interest rate...Ch. 19 - PURCHASING POWER PARITY In the spot market, 17.6...Ch. 19 - INTEREST RATE PARITY Assume that interest rate...Ch. 19 - SPOT AND FORWARD RATES Arvin Australian Imports...Ch. 19 - EXCHANGE GAINS AND LOSSES You are the vice...Ch. 19 - RESULTS OF EXCHANGE RATE CHANGES Early in June...Ch. 19 - FOREIGN INVESTMENT ANALYSIS After all foreign and...Ch. 19 - FOREIGN CAPITAL BUDGETING Sandrine Machinery is a...Ch. 19 - MULTINATIONAL FINANCIAL MANAGEMENT Yohe...Ch. 19 - MULTINATIONAL FINANCIAL MANAGEMENT Citrus Products...

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