Chapter 13 #5

Question 1

Define globalization

Answer 1

Refers to removal of barriers to free trade and closer integration of international economies

Question 2

Define multinational Corporation

Answer 2

Is a business firm that operates in more than one country but is headquartered or based in its home country. Owned by a mixture of domestic & foreign stockholders

Question 3

Define transnational corporations

Answer 3

Multinational firms that have widely dispersed ownership and are managed from a global perspective rather than a firm residing in a particular country

Question 4

Define exchange rate risk

Answer 4

The uncertainty of future exchange rate movements

Question 5

How do differences in legal systems & fax codes also impact the way firms operate in foreign countries?

Answer 5

Legal and tax differences financial decisions concerning what assets to acquire, how to organize the firm and what capital structure to use

Question 6

What is the business language?

Answer 6

English

Question 7

US, Canada, and India operate under what legal system?

Answer 7

British common law

Question 8

Western European countries operate under what legal system?

Answer 8

French Napoleon codes

Question 9

What does an economic system determine?

Answer 9

How a country mobilizes its resources to produce goods and Services needed by society, as well as how production is distributed

Question 10

Define the two basic economic systems

Answer 10

Centrally planned economies: directed by the government & have no Financial markets or banking systems to allocate Capital flows
Market economies: directed by market forces rather than government they are more efficient than central economies

Question 11

Define country risk

Answer 11

Refer to political uncertainty associated with a particular country

Question 12

Define expropriate

Answer 12

Government takes over a business assets within the country

Question 13

What is the main goal for Financial management of US, UK, Australia, India, Canada?

Answer 13

Maximize stockholder value

Question 14

What is the main goal for Financial management in Continental Europe?

Answer 14

. Maximize corporate wealth
- stockholders treated no differenty from stakeholders
-

Question 15

What is the main goal for Financial management in Japan?

Answer 15

To increase the wealth and growth of the keiretsu
- keiretsu: interlocking business groups
- focus on maximising market share rather than stockholder wealth

Question 16

What is the main goal for Financial management in China?

Answer 16

State-owned companies: overall goal of maintaining full employment in the economy
Private sector firms: fully embrace Western standard of stockholder value maximization

Question 17

International Financial management

Answer 17

Basic principals remain the same for manager finance, whether a transaction is domestic or international
- same models used for valuing Capital assets, bonds, stocks, entire firm
- input variables changed used to make Financial calculations like
Required rates of retime, cash flows, tax codes & accounting standards

Question 18

How to report foreign currency?

Answer 18

Balance sheet: reposed at the current rate ( date of the balance sheet)
Income statement: reported at the average rate

Question 19

What is a foreign exchange market?

Answer 19

Group of international markets connected electronically where currencies are bought and sold in wholesale amounts

Question 20

What are the 3 basic economic benefits?

Answer 20

1) mechanism to transfer purchasing power from individuals who deal with one currency to people who deal in a different currency

2) way for corporations to pass the risk associated with foreign exchange price fluctuations to professional risk takers

3) channel for importers and exporters to acquire credit for international business transactions

Question 21

____ is the largest foreign exchange trading Center while____ is second, and_____ third

Answer 21

London is by far the largest foreign exchange trading center, while New York
City is second, and Tokyo is third

Question 22

How are participants linked in foreign exchange markets?

Answer 22

Through telephone, telegraph, and cable

Question 23

Who are the major participants in a foreign exchange market?
Who intervenes in the market?

Answer 23

multinational commercial banks, large investment banking firms, and small currency boutiques that specialize in foreign exchange transactions

central banks, which intervene in the markets primarily to smooth out fluctuations in their exchange rates

Question 24

What is the equilibrium exchange rate?

Answer 24

Equilibrium occurs at the price at which the quantity of the currency demanded exactly equals the quantity supplied

Question 25

Define floating currency

Answer 25

exchange rates are allowed to freely fluctuate with supply and demand on the foreign exchange market

Question 26

Define peg

Answer 26

fix exchange rate to another major currency (dollars and euros) in order to maintain stability in the exchange rate and to ensure that their goods and services remain competitively priced in export markets

Question 27

What is a spot rate?

Answer 27

is the cost of buying a foreign currency today “on the spot”

Question 28

What is bid & ask rates? What is the difference called & how is it calculated?

Answer 28

The bid quote represents the rate at which the dealer will buy foreign currency The ask quote is the rate at which the dealer will sell foreign currence difference between the two is the dealers spread Calculated as ask rate minus bid rate/ ask rate

Question 29

What is cross rate and how to calculate cross rate?

Answer 29

one is given two quotes of foreign exchange rates involving three currencies, it is possible to find the exchange rate between the third pair of currencies, and this is known as the cross rate Calculation: a dealer is interested in finding the exchange rate between the Canadian dollar and the euro but only knows the exchange rate between each of these currencies and the U.S. dollar: C$1.3480/$ and €0.9430/$. The dealer can calculate the desired cross rate as follows: C$/ U.S$ divided by €/ U.S= C$/€

Question 30

Define forward rate and forward/premium discount

Answer 30

Forward rate: rates at which one agrees to buy or sell a currency on some future date Forward premium/discount - The difference between the forward rate and the spot rate Calculated (forwards rate - spot rate/ spot rate) x (360/n) x 100

Question 31

What does hedging a currency transaction mean?

Answer 31

Means to engage in a financial transaction to reduce risk - example: toward transactions

Question 32

When a multinational firm wants to consider overseas capital projects, the financial manager faces what decision?

Answer 32

decision of which capital projects should be accepted on a company-wide basis

Question 33

What is the financial managers goal in international Capital budgeting?

Answer 33

Seek out domestic & oversees Capital projects whose cash flows yield a positive present value (NPV) - decision to accept international projects with a positive NPV increases the value of the firm & is consistent with the fundamental goal of Financial management ( maximize stockholders equity)

Question 34

When financial managers evaluate a capital project overseas, they must……

Answer 34

estimate the same inputs to compute the NPV for that project they would for a domestic project 1) the project's incremental after-tax free cash flows 2) the appropriate discount rate

Question 35

What is repatriation of earnings restrictions?

Answer 35

are restrictions placed by a foreign government on the amount of cash that can be returns to a parent company by a subsidiary doing business in the foreign country

Question 36

What ave some ways a company can affect the risk of a foreign project?

Answer 36

Change tax laws Impose laws related to labor, wages, and prices that are more restrictive than those applicable for domestic firms Disallow any remittance of funds from the subsidiary to the parent firm Require that the subsidiary be headed by a local citizen or have a local firm as a major equity partner Impose tariffs and quotas on any imports

Question 37

Once management has determined a capital project’s country risk, that risk must be incorporated into…,,,,

Answer 37

The capital project country risk - for example, adjusting the firm’s discount rate for the additional risk - If a firm is located in a country with a relatively unstable political environment, management will require a higher rate of return on capital projects as compensation for the additional risk '

Question 38

How to calculate NPV?

Answer 38

Initial investment + Cash flow/ (1+r)^n