The MNC is a retail apparel store (shits, pants, dress) in BRAZIL exporting US apparel brands

International Financial Management BOOK is: Madura, J. (2015). International financial management (12th ed.). Cengage Learning

Using Currency Futures and Options

•How can you use currency futures to hedge the exchange rate risk of your MNC?

•How can you use currency options to hedge the exchange rate risk of your MNC?

Accessing Futures Quotes

•Go to the CME Group’s website. Determine the prevailing futures price of the main foreign currency for your business.

•Go to the Oanda Corporation’s website and determine the prevailing spot rate.

•What is the discount or premium of the futures price?

Determining Whether IFE Holds

•Use The Wall Street Journal or another data source to record the interest rate differential between the interest rate of the foreign country in which you plan to do business and the U.S. rate over the last five or so quarters.

•Then, review the exchange rate percentage change in the foreign currency of concern over each of those corresponding quarters to determine whether the international Fisher effect (IFE) appears to hold over those quarters for that currency.

Monitoring Exchange Rate Trends

•Use a business periodical or the Internet to determine how the value of the foreign currency of concern has changed in each of the last five weeks.

•Does it appear that there is a trend over the last five weeks?

•What is the mean percent-age change over these weeks?

•If you believed that the currency’s value would continue following the recent trend, would it appreciate or depreciate in the near future?

Writing Requirements (APA format)

•4-6 pages (approx. 300 words per page), not including title page or references page

 

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Chapter 11 Questions 

(11-2)  Operating cash flows, rather than accounting profits, are used in project analysis. What is

the basis for this emphasis on cash flows as opposed to net income?

(11-4)  Explain why sunk costs should not be included in a capital budgeting analysis but

opportunity costs and externalities should be included.

(11-5)  Explain how net operating working capital is recovered at the end of a project’s life and

why it is included in a capital budgeting analysis.

(11-7)  Why are interest charges not deducted when a project’s cash flows are calculated for use in

a capital budgeting analysis?

(11-8)  Most firms generate cash inflows every day, not just once at the end of the year. In capital

budgeting, should we recognize this fact by estimating daily project cash flows and then

using them in the analysis? If we do not, will this bias our results? If it does, would the

NPV be biased up or down? Explain.

(11-11)  In theory, market risk should be the only “relevant” risk. However, companies focus as

much on stand-alone risk as on market risk. What are the reasons for the focus on stand-

alone risk?

Chapter 11 Problems

(11-3)  Allen Air Lines must liquidate some equipment that is being replaced. The equipment

originally cost $12 million, of which 75% has been depreciated. The used equipment can

be sold today for $4 million, and its tax rate is 40%. What is the equipment’s after-tax net

salvage value?

(11-4)  Although the Chen Company’s milling machine is old, it is still in relatively good working

order and would last for another 10 years. It is inefficient compared to modern standards,

though, and so the company is considering replacing it. The new milling machine, at a

cost of $110,000 delivered and installed, would also last for 10 years and would produce

after-tax cash flows (labor savings and depreciation tax savings) of $19,000 per year. It

would have zero salvage value at the end of its life. The firm’s WACC is 10%, and its

marginal tax rate is 35%. Should Chen buy the new machine?

(11-6)  The Campbell Company is considering adding a robotic paint sprayer to its

production line. The sprayer’s base price is $1,080,000, and it would cost another

$22,500 to install it. The machine falls into the MACRS 3-year class, and it would be

sold after 3 years for $605,000. The MACRS rates for the first three years are 0.3333,

0.4445, and 0.1481. The machine would require an increase in net working capital

(inventory) of $15,500. The sprayer would not change revenues, but it is expected to

save the firm $380,000 per year in before-tax operating costs, mainly labor.

Campbell’s marginal tax rate is 35%.

a. What is the Year 0 net cash flow?

b. What are the net operating cash flows in Years 1, 2, and 3?

c. What is the additional Year-3 cash flow (i.e., the after-tax salvage and the return of

working capital)?

d. Based on your IRR analysis, if the project’s cost of capital is 12%, should the machine be purchased?

Chapter 12 Problems

(12-1)  Broussard Skateboard’s sales are expected to increase by 15% from $8 million in

2013 to $9.2 million in 2014. Its assets totaled $5 million at the end of 2013.

Broussard is already at full capacity, so its assets must grow at the same rate as

projected sales. At the end of 2013, current liabilities were $1.4 million, consisting

of $450,000 of accounts payable, $500,000 of notes payable, and $450,000 of

accruals. The after-tax profit margin is forecasted to be 6%, and the forecasted

payout ratio is 40%. Use the AFN equation to forecast Broussard’s additional funds

needed for the coming year.

(12-8)  Stevens Textiles’s 2013 financial statements are shown here:

Balance Sheet as of December 31, 2013 (Thousands of Dollars)

Cash                                         $  1,080          Accounts payable                          $  4,320

Receivables                                 6,480          Accruals                                               2,880

Inventories                                  9,000          Line of credit                                             0

Total current assets               $16,560         Notes payable                                   2,100

Net fixed assets                         12,600        Total current liabilities                 $  9,300

                                                                          Mortgage bonds                               3,500

                                                                          Common stock                                  3,500

                                                   ______         Retained earnings                            12,860

   Total assets                           $29,160            Total liabilities and equity        $ 29,160

Income Statement for December 31, 2013 (Thousands of Dollars)

Sales                                                                $36,000

Operating costs                                               32,440

Earnings before interest and taxes           $  3,560

Interest                                                                   460

Pre-tax earnings                                              $ 3,100

Taxes (40%)                                                         1,240

Net income                                                       $ 1,860

Dividends (45%)                                                  $  837

Addition to retained earnings                       $ 1,023

a. Suppose 2014 sales are projected to increase by 15% over 2013 sales. Use the

forecasted financial statement method to forecast a balance sheet and income

statement for December 31, 2014. The interest rate on all debt is 10%, and cash

earns no interest income. Assume that all additional debt in the form of a line of

credit is added at the end of the year, which means that you should base the

forecasted interest expense on the balance of debt at the beginning of the year. Use

the forecasted income statement to determine the addition to retained earnings.

Assume that the company was operating at full capacity in 2013, that it cannot sell

off any of its fixed assets, and that any required financing will be borrowed as

notes payable. Also, assume that assets, spontaneous liabilities, and operating costs

are expected to increase by the same percentage as sales. Determine the additional

funds needed.

b. What is the resulting total forecasted amount of the line of credit?

 

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Chapter 5 Questions

(5-2)  “Short-term interest rates are more volatile than long-term interest rates, so short-term

bond prices are more sensitive to interest rate changes than are long-term bond prices.”

Is this statement true or false? Explain.

(5-3)  The rate of return on a bond held to its maturity date is called the bond’s yield to maturity.

If interest rates in the economy rise after a bond has been issued, what will happen to the

bond’s price and to its YTM? Does the length of time to maturity affect the extent to which

a given change in interest rates will affect the bond’s price? Why or why not?

(5-4)  If you buy a callable bond and interest rates decline, will the value of your bond rise by as

much as it would have risen if the bond had not been callable? Explain.

(5-5)  A sinking fund can be set up in one of two ways. Discuss the advantages and

disadvantages of each procedure from the viewpoint of both the firm and its bondholders.

Chapter 5 Problems

(5-1)  Jackson Corporation’s bonds have 12 years remaining to maturity. Interest is paid

annually, the bonds have a $1,000 par value, and the coupon interest rate is 8%. The

bonds have a yield to maturity of 9%. What is the current market price of these bonds?

(5-2)  Wilson Wonders’s bonds have 12 years remaining to maturity. Interest is paid annually,

the bonds have a $1,000 par value, and the coupon interest rate is 10%. The bonds sell at a

price of $850. What is their yield to maturity?

(5-5)  A Treasury bond that matures in 10 years has a yield of 6%. A 10-year corporate bond has

a yield of 9%. Assume that the liquidity premium on the corporate bond is 0.5%. What is

the default risk premium on the corporate bond?

(5-6)  The real risk-free rate is 3%, and inflation is expected to be 3% for the next 2 years. A 2-year

Treasury security yields 6.3%. What is the maturity risk premium for the 2-year security?

(5-7)  Renfro Rentals has issued bonds that have a 10% coupon rate, payable semiannually.

The bonds mature in 8 years, have a face value of $1,000, and a yield to maturity of 8.5%.

What is the price of the bonds?

(5-8)  Thatcher Corporation’s bonds will mature in 10 years. The bonds have a face value of

$1,000 and an 8% coupon rate, paid semiannually. The price of the bonds is $1,100.

The bonds are callable in 5 years at a call price of $1,050. What is their yield to maturity?

What is their yield to call?

(5-10) The Brownstone Corporation’s bonds have 5 years remaining to maturity.

Interest is paid annually, the bonds have a $1,000 par value, and the coupon interest

rate is 9%.

            a. What is the yield to maturity at a current market price of (1) $829 or (2) $1,104?

            b. Would you pay $829 for one of these bonds if you thought that the appropriate rate

                 of interest was 12%—that is, if rd = 12%? Explain your answer.

 (5-14)  A bond that matures in 7 years sells for $1,020. The bond has a face value of $1,000 and a

yield to maturity of 10.5883%. The bond pays coupons semiannually. What is the bond’s

current yield?

(5-18)  The real risk-free rate is 2%. Inflation is expected to be 3% this year, 4% next year, and

then 3.5% thereafter. The maturity risk premium is estimated to be 0.0005 × (t − 1), where

t = number of years to maturity. What is the nominal interest rate on a 7-year Treasury

security?

(5-21)  Suppose Hillard Manufacturing sold an issue of bonds with a 10-year maturity, a $1,000

par value, a 10% coupon rate, and semiannual interest payments.

            a. Two years after the bonds were issued, the going rate of interest on bonds such as

                 these fell to 6%. At what price would the bonds sell?

            b. Suppose that 2 years after the initial offering, the going interest rate had risen to 12%.

                 At what price would the bonds sell?

            c. Suppose that 2 years after the issue date (as in part a) interest rates fell to 6%.

                Suppose further that the interest rate remained at 6% for the next 8 years. What

                would happen to the price of the bonds over time?

 

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Chapter 3 Questions

(3-3)  Over the past year, M. D. Ryngaert & Co. has realized an increase in its current ratio and a

drop in its total assets turnover ratio. However, the company’s sales, quick ratio, and fixed

assets turnover ratio have remained constant. What explains these changes?

(3-5)  How might (a) seasonal factors and (b) different growth rates distort a comparative ratio

analysis? Give some examples. How might these problems be alleviated?

(3-6)  Why is it sometimes misleading to compare a company’s financial ratios with those of

other firms that operate in the same industry?

Chapter 3 Problems

(3-1)  Greene Sisters has a DSO of 20 days. The company’s average daily sales are $20,000. What

is the level of its accounts receivable? Assume there are 365 days in a year.

(3-2)  Vigo Vacations has $200 million in total assets, $5 million in notes payable, and $25

million in long-term debt. What is the debt ratio?

(3-3)  Winston Washers’s stock price is $75 per share. Winston has $10 billion in total assets. Its

balance sheet shows $1 billion in current liabilities, $3 billion in long-term debt, and

$6 billion in common equity. It has 800 million shares of common stock outstanding.

What is Winston’s market/book ratio?

(3-7)  Ace Industries has current assets equal to $3 million. The company’s current ratio is 1.5,

and its quick ratio is 1.0. What is the firm’s level of current liabilities? What is the firm’s

level of inventories?

(3-11)  Complete the balance sheet and sales information in the table that follows for J. White

Industries using the following financial data:

Total assets turnover: 1.5

Gross profit margin on sales: (Sales – Cost of goods sold)/Sales = 25%

Total liabilities-to-assets ratio: 40%

Quick ratio: 0.80

Days sales outstanding (based on 365-day year): 36.5 days

Inventory turnover ratio: 3.75

Partial Income Statement Information

Sales                                    _______

Cost of goods sold            _______

Balance Sheet

Cash                                    _______       Accounts payable                  ______

Accounts receivable        _______       Long-term debt                       50,000

Inventories                        _______        Common stock                        ______

Fixed assets        _______                     Retained earnings                    100,000

Total assets        $400,000                   Total liabilities and equity       ______

(3-13)  Data for Lozano Chip Company and its industry averages follow.

a. Calculate the indicated ratios for Lozano.

b. Construct the extended Du Pont equation for both Lozano and the industry.

c. Outline Lozano’s strengths and weaknesses as revealed by your analysis.

Lozano Chip Company: Balance Sheet as of December 31, 2013 (Thousands

of Dollars)

Cash                                  $  225,000       Accounts payable                 $  601,866

Receivables                       1,575,000       Notes payable                           326,634

Inventories                       1,125,000       Other current liabilities           525,000

Total current assets       $2,950,000            Total current liabilities   $1,453,500

Net fixed assets                1,350,000       Long-term debt                     1,068,750

                                      __________          Common equity                   1,752,750

Total assets                     $4,275,000       Total liabilities and equity  $4,275,000

Lozano Chip Company: Income Statement for Year Ended December 31, 2013

(Thousands of Dollars)

Sales                                                                            $  7,500,000

Cost of goods sold                                                          6,375,000

Selling, general, and administrative expenses             825,000

Earnings before interest and taxes (EBIT)                  $  300,000

Interest expense                                                                111,631

Earnings before taxes (EBT)                                          $  188,369

Federal and state income taxes (40%)                            75,348

Net income                                                                      $  113,022

Ratio                                                                       Lozano                    Industry Average

Current assets/Current liabilities               __________                          2.0

Days sales outstanding (365-day year)    __________                         35.0 days

COGS/Inventory                                             __________                           6.7

Sales/Fixed assets                                         __________                         12.1

Sales/Total assets                                          __________                          3.0

Net income/Sales                                          __________                          1.2%

Net income/Total assets                               __________                          3.6%

Net income/Common equity                      __________                          9.0%

Total debt/Total assets                                __________                       30.0%

Total liabilities/Total assets                          __________                       60.0%

 

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Activity Instructions

Read the following scenarios and complete the corresponding questions. Please remember to answer in complete and grammatically correct sentences.  I am looking for your thought process in the answers to the questions, so be complete in your answers and clearly demonstrate your acquired knowledge.

Scenario 1 (length: 0.5 page)

Some recent Super Bowl advertisements have spent very little time mentioning anything about their product–or even the name of the company. For example, the two-minute long Ram Trucks “Farmer” commercial ( http://www.youtube.com/watch?v=AMpZ0TGjbWE ) had only a few brief and almost unidentifiable views of their product until the last ten seconds of the commercial. Further, the name of the company was only mentioned in the last five seconds of that commercial. Explain how commercials of this type demonstrate the concept of signaling. In other words, why should consumers be convinced that the product being “advertised” is of high quality because of the airing of that commercial during the Super Bowl?

Scenario 2 (length: as needed)

Suppose there are two types of people who need health insurance; high-risk and low-risk consumers. High-risk consumers have a relatively high probability of needing expensive medical care and on average incur $2,000 of medical expenses per year. The high-risk consumers would be willing to pay up to $2,500 for insurance that covers all their medical bills. Low-risk consumers would be willing to pay up to $1,400 for full-coverage insurance and on average would incur on average $1,200 in medical bills.  Assume 1/3 of all consumers are high-risk and the remaining 2/3 of consumers are low-risk. Consumers know whether they are high-risk or low-risk. The insurance company knows 2/3 of all consumers are low-risk but cannot identify which consumers are low-risk.

1. If all consumers bought insurance, what price must the insurance company charge to break even in expectation?  That is, what price must the insurance company charge so that the expected payments equals the premium?

2. Which consumers would purchase insurance at that price?

3. Are there wealth-creating transactions that are not consummated because of the information asymmetry?

4. If the low-risk consumers were willing to pay $1,500 for the insurance, how would your answers to questions 2 and 3 change?

Scenario 3 (length: 0.5 – 1 page)

A struggling company currently has a total value of $700,000. It owes $500,000 from debt financing (assume these are loans from the bank if you wish). The value of the company to the owners is the difference between the total value and the amount owed to the debt holders. What is the current value of the firm to the owners?

Now assume that a project is presented to the owners that results in a loss of the entire value of the company with a probability of 50% and results in a gain in value of $500,000 with probability 50% (resulting in a total value of $1,200,000). Show that this in expectation decreases the firm’s value, and explain why, in spite of that, the owners of the company would want to undertake the project.

Writing Requirements

•Length: as needed (Show your calculations where appropriate)

•1-inch margins

•Double spaced

•12-point Times New Roman font

Grading and Assessment

This activity will be graded based on thoroughness and correctness of responses. For the numerical and graphical questions, to achieve full marks you must also show your work.

1. Master the basic techniques of microeconomic analysis such as demand, supply and equilibrium; production and cost theory; and market structure and pricing.

2. Apply economic reasoning to understand and improve managerial decision-making and grasp the analytical foundations underlying a firm’s competitive strategy.

 

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