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MINI CASE
With the growth in demand for exotic foods, Possum Products' CEO Michael Munger is
considering expanding the geographic footprint of its line of dried and smoked low-fat
opossum, ostrich, and venison jerky snack packs. Historically, jerky products have
performed well in the southern United States, but there are indications of a growing
demand for these unusual delicacies in Europe. Munger recognizes that the expansion
carries some risk--Europeans may not be as accepting of opossum jerky as initial research
suggest--so the expansion will proceed in steps. The first step will be to set up sales
subsidiaries in France and Sweden (the two countries with the highest indicated demand),
and the second is to set up a production plant in France with the ultimate goal of product
distribution throughout Europe.
Possum Products' CFO, Kevin Uram, although enthusiastic about the plan, is
nonetheless concerned about how an international expansion and the additional risk that
entails will affect the firm's financial management process. He has asked you, the firm’s
most recently hired financial analyst, to develop a 1-hour tutorial package that explains the
basics of multinational financial management. The tutorial will be presented at the next
board of directors’ meeting. To get you started, Uram has supplied you with the following
list of questions.
a. What is a multinational corporation? Why do firms expand into other
countries?
Answer: Use the examples given here when discussing why firms “go international.”
1. To seek new markets. Coca-Cola and McDonald’s have expanded around the
2. To seek raw materials. U. S. Oil companies have searched around the world for
3. To seek new technology. No one country has the lead in all technologies, so
4. To avoid political and regulatory hurdles. The most prominent example here is
5. To diversify. By establishing worldwide production facilities and markets, firms
b. What are the six major factors which distinguish multinational financial
management from financial management as practiced by a purely domestic
firm?
Answer: 1. Different currency denominations. Cash flows in various parts of multinational
2. Economic and legal ramifications. Each country in which a firm operates will
have its own unique political and economic institutions, and institutional
3. Language differences. The ability to communicate is critical in all business
matters, and U. S. business men and women have been notoriously poor in
learning other languages. In effect, it is easier for foreign firms to invade our
4. Cultural differences. Different countries, and even different regions in a single
country, have unique cultural heritages that shape values and influence the role of
business in the society. Such differences affect consumption patterns, defining the
5. Role of governments. Except for certain industries, the role of government in the
U. S. is to create an environment which promotes free enterprise and competition.
6. Political risk. Nations exercise sovereign rights over their people and property.
c. Consider the following illustrative exchange rates.
U. S. Dollars required to buy
one unit of foreign currency
Euro 1.2500
Swedish krona 0.1481
U.S. Dollars Required to Buy
One Unit of Foreign Currency
Units of Foreign Currency
Required to Buy One U.S. Dollar
c. 1. What is a direct quotation? What is the direct quote for euros??
Answer: From a U.S. perspective, the quotes in the first column are called direct quotes
c. 2. What is an indirect quotation? What is the indirect quotation for kronor (the
plural of krona is kronor).
Answer: Indirect quotations are the number of units of foreign currency that can be purchased
c. 3. The euro and British pound usually are quoted as direct quotes. Most other
currencies are quoted as indirect quotes. How would you calculate the indirect quote for a
euro? How would you calculate the direct quote for a krona?
Answer: Indirect quotations are the reciprocal of the direct quotation, and direct quotations are
the reciprocal of the indirect quotation.
c. 4. What is a cross rate? Calculate the two cross rates between euros and kronor.
Answer: The exchange rate between any two currencies which does not involve U. S. Dollars
is a cross rate. Use the exchange rates versus the dollar, so use the direct for the
dollars per euro and the indirect for kronor per dollar. Here is the cross rate for kronor
per euro:
Cross rate =
Euros
Dollars
Dollar
Kronor
c. 5. Assume Possum Products can produce a package of jerky and ship it to France
for $1.75. If the firm wants a 50 percent markup on the product, what should
the jerky sell for in France?
Price∈euros=2.625 dollars
[
1.25 dollars
euro
]
=
[
2.625
1.25
][
dollars
1
][
euros
dollars
]
=2.10 euros
r
c. 6. Now assume Possum Products begins producing the same package of jerky in
France. The product costs 2.0 euros to produce and ship to Sweden, where it can
be sold for 20 kronor. What is the dollar profit on the sale?
Answer: Using the unrounded cross rate of 8.50 kronor per euro, we get:
c. 7. What is exchange rate risk?
Answer: The volatility inherent in a floating exchange rate system increases the uncertainty of
d. Briefly describe the current International Monetary System. How does the
current system differ from the system that was in place prior to August 1971?
Answer: Prior to 1971, the world operated on a fixed exchange rate system. The value of the
U. S. Dollar was linked to gold at the fixed price of $35 per ounce, and the values of
other currencies were then tied to the dollar. For example, in 1964, the British pound
The current international monetary system for most industrialized nations is a
floating rate system. In this system, currency exchange rates are allowed to fluctuate
Central banks, like the U. S. Federal Reserve and the Bank of England, do
intervene in the currency markets to smooth out fluctuations, but it is impossible for a
Eighteen participating countries in the European Monetary Union (as of Spring
Many countries still used a fixed exchange rate that is “pegged,” or fixed, with
When a currency increases in value relative to another currency, it is said to
appreciate. Under the fixed exchange rate system, strong currencies had to be
