Question Paper-1

Multinational Business Finance

Fifth Trimester

Duration –2`1/2 Hours Marks-75

Part –A Write answers or fill up the Blanks only

Each question carries one mark

1. ___________________ factoring means the factor assumes the credit. Political and foreign exchange risk of the receivables it purchases.

a. Non-recourse

b. Recourse

c. Resource

d. Risky

2, ____________ is the process that cancels via offset all, or part, of the debt owed by one entity to another related

entity.

a. Syndicated banking

b. Centralized depositing

c. Multilateral netting

d. Debt cancellation

3. A firm in Thailand has an account payable denominated in the Thai bhat. Their U.S. supplier has asked the Thai firm to pay the accounts payable earlier than currently

scheduled, and has offered the Thai company a discount to do so. The Thai firm is unwilling to pay early. In this circumstance, it most likely that

a. both the Thai firm and the U.S. firm expect the Thai bhat to appreciate.

b. both the Thai firm and the U.S. firm expect the Thai bhat to depreciate.

c. the U.S. firm expects the bhat to appreciate and the Thai firm expects the bhat to depreciate.

d. None of the above

Assume the following information about Russia and Canada for the production of cases of vodka and pallets of construction grade 2x4 lumber. With one unit of production (a mixture of land, labor, capital, and technology). Russia can produce 10 cases of vodka or 8 pallets of 2x4 lumber. Canada can produce 6 cases of vodka or 12 pallets of 2x4 lumber with each unit of production. Each country dedicates a total of 1000 units of production for vodka and lumber. This information is reproduced in the following table.

Country Vodka (Cases) Lumber (Pallests)

Russia 10 8

Canada 6 12

4,Russia has ________________________ over Canada in the production of vodka.

a. both a comparative and absolute advantage

b. a comparative advantage only

c. an absolute advantage only

d. no advantage whatsoever

5 . If Russia and Canada each dedicate 400 units of production to vodka and 600 units of production to lumber, what is the total amount of vodka and lumber that will be produced?

a. 10,000 cases of vodka and 12,000 pallets of lumber

b. 6,600 cases of vodka and 12,000 pallets of lumber

c. 9,600 cases of vodka and 8,000 pallets of lumber

d. 12,000 cases of vodka and 10,000 pallets of lumber

6 . If Russia and Canada decide to specialize in the production of vodka and lumber, what is the total amount of vodka and lumber that will be produced?

a. 12,000 cases of vodka and 10,000 pallets of lumber

b. 9,600 cases of vodka and 8,000 pallets of lumber

c. 10,000 cases of vodka and 12,000 pallets of lumber

d. 6,600 cases of vodka and 12,000 pallets of lumber

7 . It will be beneficial for both Russia and Canada to trade as long as the trading ratio of vodka to lumber is between _________________.

a. 10/6 and 5/4

b. 1/2 and 1/4

c. 4/5 and 2/1

d. 5/4, and _

8 . At a trading ratio of 7/8 (cases of vodka for pallets of lumber)

a. Russia gains 100% of the benefits of trade.

b. Canada gains 100% of the benefits of trade.

c. Canada and Russia evenly split the advantage brought about by trade.

d. In this example, neither country benefits from international trade.

9.TropiKana Inc. has just borrowed €1,000,000 to make improvements to an Italian fruit plantation and processing plant. If the interest rate is 5.50% per year and the Euro appreciates against the dollar from $1/€ at the time the loan was made to $1.05/€ at the

end of the first year, how much interest will TropiKana pay at the end of the first year (rounded)?

a. $55,000

b. $57,750

c. $52,250

d. $57,900

10. Which of the following foreign investments would be least subject to expropriation?

a. an oil well in an LDC that is providing needed foreign exchange

b. a coffee plantation that is producing beans for export

c. an assembly plant for automobiles located in an LDC

d. a tire making plant in an LDC that is substituting for tire imports

11. If you fear the dollar will rise against the Spanish peseta, with a resulting adverse change in the dollar value of the equity of your Spanish subsidiary, you can hedge by

a. selling pesetas forward in the amount of net assets

b. buying pesetas forward in the amount of net assets

c. reducing the liabilities of the subsidiary

d. selling pesetas forward in the amount of total assets

Ajax Manufacturing's German subsidiary has the following balance sheet:

Cash, marketable securities DM 250,000 Current liabilities DM 750,000

Accounts receivable

Inventory (at market.

Fixed Assets

Total assets

1,000,000

2,700,000

5,100,000

-----------------

DM 9,050,000

Long-term debt

Equity

Total liabilities

plus equity

3,400,000

4,900,000

---------------

DM 9,050,000

Suppose the DM appreciates from $0.70 to $0.76 during the period.

12.Under the current/noncurrent method, what is Ajax's translation gain (loss).?

a. a gain of $294,000

b. a gain of $192,000

c. a loss of $174,000

d. a loss of $12,000

13. Under the temporal method, what is Ajax's translation gain (loss).?

a. a gain of $294,000

b. a gain of $192,000

c. a loss of $174,000

d. a loss of $12,000

14.Under the current rate method, what is Ajax's translation gain (loss).?

a. a gain of $294,000

b. a gain of $192,000

c. a loss of $174,000

d. a loss of $12,000

15.Under the monetary/non-monetary method, what is Ajax's translation gain (loss)?

a. a gain of $294,000

b. a gain of $192,000

c. a loss of $174,000

d. a loss of $12,000

Part B Answer in not more than 15 lines

Each question carries 6 marks

1. Suppose the quote on pounds is $1.624-31.

a. If you converted $10,000 to pounds and then back to dollars, how many dollars would you end up with?

b. Suppose you could buy pounds at the bid rate and sell them at the ask rate. How many dollars would you have to transact in order to earn $1,000 on a round-trip transaction (buying pounds for dollars and then selling the pounds for dollars)?

2 DaimlerChrysler’s Chrysler division exports vans to Europe in competition with the Japanese. Similarly, Compaq exports computers to Europe. However, its biggest competitors are all American companies--IBM, Hewlett-Packard, and Tandem. Assuming all else is equal, which of these companies--Chrysler or Digital--is likely to benefit more from a weak dollar? Explain.

3. A U.S. Subsidiary in Spain produce and sells in Spain. Exchange rate is 1 peseta = 0.01$. Transaction- Selling price 100000, Device cost 40000 and margin 60000 pesetas respectively. Inflation in Spain during the year is 20% and Spain devalues its currency by 20%. What is the Spain's dollor profit margin on the transaction given above after devaluation?

4. SmithKline Beckman, the health-care products multinational (now part of laxoSmithKline, has 105 affiliates worldwide. There is a great deal of intercompany sales, dividend flows, and fee and royalty payments. Each unit makes its intercompany credit, payments, and hedging decisions independently. What advantages might SKB realize from centralizing international cash management and foreign exchange management?

5. Kao Corporation is a highly innovative and efficient Japanese company that has managed to take on and beat Proctor & Gamble in Japan. Two of Kao's revolutionary innovations include disposable diapers with greatly enhanced absorption capabilities and concentrated laundry detergent. However, Kao has had difficulty in establishing the kind of market-sensitive foreign subsidiaries that P&G has built.

a. What competitive advantages might P&G derive from its global network of market-sensitive subsidiaries?

b. What competitive disadvantages does Kao face if it is unable to replicate P&G's global network of subsidiaries?

Part- c Answer not more than 25 lines

Each Question carries 10 Marks

1 Becoming a multinational is not matter of choice but, rather one of survival. What

are the strategies followed to survive as a global player? Discuss the success strategy followed by Japanese product marketers in USA practiced to surive as a

global player.

2. Comment on the following statement. “one should borrow in those currencies expected to depreciate and invest in those expected to appreciate” Evaluate the

statement in the context of weaking dollor and your recommendations for

business partners in emerging economies.

3, If economists argue for the return of gold standard era in foreign exchange

management. what are the merits of the system . Explain