978-1259578113 Chapter 12 Solutions Manual

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OPENING CASE: Alibaba’s Record-Setting IPO

Summary

The opening case explores the $231 billion initial public offering of Chinese e-commerce

company Alibaba. Initially, Alibaba considered making an IPO in Hong Kong, but concerns over

a rule that would cause founder Jack Ma and his colleagues to lose ownership control of the

company caused them to turn to the New York Stock Exchange. The decision proved to be

beneficial for Alibaba, and the IPO drew enormous interest from investors. When it launched on

September 18, 2014, Alibaba’s IPO was the largest in history. Discussion of the case can revolve

around the following questions:

QUESTION 1: Why did Alibaba’s owners decide to take the company public? What benefits did

the decision offer the company?

QUESTION 2: Why did Jack Ma decide to list his company on the New York Stock Exchange

rather than in Hong Kong? Was it a good decision for his company?

QUESTION 3: Why did Alibaba attract so much interest from investors? Should investors expect

to earn significant profits from shares in Alibaba?

Another Perspective: For more information on Alibaba’s historic IPO, go to

{https://www.nyse.com/network/article/Alibaba-Lists-on-the-NYSE}.

CRITICAL THINKING AND DISCUSSION QUESTIONS

QUESTION 1: Why has the global capital market grown so rapidly in recent decades? Do you

think this growth will continue throughout the next decade? Why?

QUESTION 2: In 2008-2009, the world economy retrenched in the wake of a global financial

crisis. Did the globalization of capital markets contribute to this crisis? If so, what can be done

to stop global financial contagion in the future?

Another Perspective: To learn more about G20 efforts to prevent future financial crises consider

{http://seoul.usembassy.gov/p_econ_apec_111210.html}.

QUESTION 3: A firm based in Mexico has found that its growth is restricted by the limited

liquidity of the Mexican capital market. List the firm’s options for raising money on the global

capital market. Discuss the pros and cons of each option, and make a recommendation. How

might your recommended options be affected if the Mexican peso depreciates significantly on

the foreign exchange markets over the next two years?

QUESTION 4: Happy Company wants to raise $2 million with debt financing. The funds are

needed to finance working capital, and the firm will repay them with interest in one year. Happy

Company’s treasurer is considering three options:

a. Borrowing U.S. dollars from Security Pacific Bank at 8 percent.

b. Borrowing British pounds from Midland Bank at 14 percent.

c. Borrowing Japanese yen from Sanwa Bank at 5 percent.

If Happy borrows foreign currency, it will not cover it; that is, it will simply change foreign

currency for dollars at today’s spot rate and buy the same foreign currency a year later at the spot

rate that is in effect. Happy Company estimates the pound will depreciate by 5 percent relative to

the dollar and the yen will appreciate 3 percent relative to the dollar in the next year. From

which bank should Happy Company borrow?

CLOSING CASE: Declining Cross-Border Capital Flows: Retreat or Reset?

Summary

The closing case explores the factors contributing to the decline of cross-border capital flows

after 2007 and the associated financial crisis. After the U.S. government chose not to save

Lehman Brothers, a major financial institution, capital markets plunged into crisis. Several

national governments worked in a coordinated fashion to return stability to markets. Five years

after the crisis hit, the global capital market had not fully recovered from its 2007 peak.

Discussion of the case can revolve around the following questions:

QUESTION 1: Do you think that something like the financial crisis that occurred in 2007–2008

could happen again? If it did, what would the impact be on the ability of firms to raise capital to

fund investments, and on the global economy?

QUESTION 2: In retrospect, were central banks justified in stepping in as aggressively as they

did to shore up the global financial system? If they had not done so, and instead let more large

financial institutions fail, what would have been the consequence?

QUESTION 3: How can the risk of occurrence of crises such as the 2007–2008 global financial

crisis be mitigated in the future?

QUESTION 4: Why do you think that global capital flows were still significantly below their

2007 peak five years after the crisis hit? What are the implications of this for the ability of

multinational firms to finance their investments by raising outside capital?

QUESTION 5: What actions do you think a multinational firm can take to limit the impact of

future crises in the global financial system on the ability of the enterprise to raise capital to pay

its short-term bills and fund long-term investments?

MHE INTERNATIONAL BUSINESS VIDEO LIBRARY

Please click here to visit our International Business Video Library on Pinterest, which is updated

on a monthly basis. While there, be sure to “like” the clips that work well for you, and add notes

that might be helpful to your colleagues.

INCORPORATING globalEDGE™ EXERCISES

Use the globalEDGE™ site {globaledge.msu.edu/} to complete the following exercises:

Exercise 1

The top management team of your not-for-profit organization would like to find out more about

investing in environmentally responsible companies in Europe. FTSE develops various indexes

for the global financial markets. A series of indexes, called ESG, cover social, environmental,

and good governance standards. One of these is the Environmental Europe 40 Index. Download

the index’s factsheet for your analysis. Evaluate the top 10 companies, countries, and industries

represented in this index. What patterns do you see?

Additional Info:

FTSE publishes and tracks numerous indices. One of these is the FTSE4Good Environmental

Leaders Europe 40 index, tracking European companies with leading environmental practices.

Exercise 2

The Bureau of Economic Analysis is an agency of the U.S. Department of Commerce. It lists data

about the U.S. economic accounts, including current investment positions and the amount of

direct investment by multinational corporations in the United States and abroad. Prepare a brief

report regarding the direct investments of other countries in the U.S. Include in your report the

leading countries in foreign direct investment.

Exercise 2 Answer

End of Part Case Notes

Part Four

The South Korean Currency Crisis

1. What role did the Korean government play in creating the 1997 crisis?

Answer: The Korean government played multiple roles in the 1997 crisis beginning with the

1993 decision of the then newly elected president Kim-Young Sam’s decision to urge businesses

to invest in export-oriented industries as a means of pulling the country out of its mild recession.

2. What role did Korean enterprises play in creating the 1997 crisis?

Answer: Korean companies contributed to the country’s 1997 financial crisis by making large,

3. Why was the Korean central bank unable to stop the decline in the value of the won?

Answer: The central bank began to implement policies designed to prop up the ailing won in

mid-1997. Many troubled companies were filing for bankruptcy pushing the value of the

4. In late 1997, the IMF stepped in with a rescue package that included $55 billion in emergency

loans to support the currency. These loans had the effect of stabilizing the won and over the next

few years South Korea enjoyed a strong recovery. If the IMF had not stepped in, what might

have occurred?

Answer: Many students will probably agree that without the assistance of the IMF the situation

The Russian Ruble Crisis and Its Aftermath

1. What were the causes of the surge in inflation in Russia during the early 1990s? Could this

have been avoided? How?

Answer: Inflation in Russia surged in the 1990s following the removal of traditional price

controls. During the Communist regime, ongoing shortages of many goods in the market led to

2. What does the decline in the value of the ruble against the dollar between 1992 and 1998 teach

you about the relationship between inflation rates and currency values?

Answer: The decline in the value of the ruble against the dollar between 1992 and 1998

3. During the mid 1990s, the IMF wanted Russia to raise tax rates, close loopholes in the tax

system, and cut public spending. Russia was unable to do this. Why?

4. In the early 2000s Russia cut tax rates for individuals and corporations, and government tax

revenues surged. Why? Does this result suggest that the IMF policy prescriptions were wrong?

Caterpillar: Competing in a World of Fluctuating Currencies

1. In the 1980s a stronger dollar hurt Caterpillar’s competitive position, but in 2008 a stronger

dollar did not seem to have the same effect. What had changed?

2. How did Caterpillar use strategy as a “real hedge” to reduce its exposure to foreign exchange

risk? What is the downside of its approach?

3. Explain the difference between transaction exposure and translation exposure using the

material in the Caterpillar case to illustrate your answer.