Finals

Question 1

What are the different forms of available domestic debt financing;

Answer 1

1. Loan from financial institutions
2. Credit
3. Commercial Paper
4. Overdrafts
5. Medium Term Notes
6. Bond Market

Question 2

What are the different forms of available international debt financing;

Answer 2

1. Euro-currency Loans
2. Euro-Notes
3. International Bond Market

Question 3

Benefits of swaps:

Answer 3

1. Limit or manage exposure to fluctuations in IRs or acquirer lower IRs than company normally could.
2. Hedge against IR exposure
3. Take advantage of the global markets more efficiently by bringing together two parties that have an advantage in different markets.
4. Hedging foreign exchange rate risks

Question 4

What are alternatives of foreign direct investment?

Answer 4

a) Exporting: MNCs continue producing domestically and invest in foreign countries.
b) Importing: by importing resources from overseas to create economics of scales.
c) Licensing
d) Technology Sales
e) Management Contracting
f) Turnkey Projects: setting up a new project overseas.
g) Portfolio Investment: we can using portfolio investment

Question 5

What techniques to assess the measurement of country risk:

Answer 5

a. Checklist approach: ratings assigned to various factors
b. Delphi technique: collection of independent opinions without group discussion
c. Quantitative analysis: use of models such as regression analysis
d. Inspection visits: Meetings with government officials, business executives, and consumers to clarify risk.
e. Combination of techniques: many MNCs have no formal method but use a combination of methods.

Question 6

What are the different ways country risk can be incorporated into the capital budgeting process?

Answer 6

a) Adjustment of the discount rate: lower risk rating implies higher risk and higher discount rate.- Risks likely to be unsystematic.
b) Adjustment of the estimated cash flows: adjust estimates for the probability that cash flows may not be realized.
c) Assessing Risk of Existing Projects: review country risk periodically after project has been implemented.
d) account for each factor that affects country risk : An alternative method of incorporating country risk analysis into capital budgeting is to explicitly account for each factor that affects country risk. For each possible form of risk, the MNC can recalculate the foreign project’s net present value under the condition that the event (such as blocked funds or increased taxes) occurs.