Answers and Solutions: 17 – 11
website, in whole or in part.
SOLUTION TO SPREADSHEET PROBLEM
17-15 The detailed solution for the spreadsheet problem, Ch 17 P15 Build a Model
Solution.xlsx, is available on the textbook’s Web site.
Mini Case: 17 – 12
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?
Mini Case: 17 – 13
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
corporate systems will be denominated in different currencies. Hence, an analysis
of exchange rates, and the effect of fluctuating currency values, must be included
in all financial analyses.
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 appropriate firm goals, attitudes toward risk taking, dealings with employees,
and so on. For example, most Japanese workers view their jobs as a lifetime
commitment, while many American workers view theirs as temporary until
something better comes along. To give another illustration, consider PepsiCo’s
move into the Japanese market by its Frito-Lay subsidiary. At first, Frito-Lay
However, in many countries, the government takes a much more active role in
business affairs, and in some countries, a multinational firm must deal directly
with the government to conduct business.
Thus, a government can seize the assets of a multi-national corporation, or restrict
the repatriation of earnings from the country, and the affected company has no
recourse for recovery.
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
Mini Case: 17 – 15
c. 1. What is a direct quotation? What is the direct quote for euros??
c. 2. What is an indirect quotation? What is the indirect quotation for kronor (the
plural of krona is kronor).
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?
Mini Case: 17 – 16
c. 4. What is a cross rate? Calculate the two cross rates between euros and kronor.
Cross rate =
Euros
Dollars
Dollar
Kronor
= 7 1.2500 = 8.750 kronor per euro.
Euros per krona cross rate = 1/(8.750 kronor per euro)
= 0.1143 euros per krona.
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?
euro ]= [.
r
Now, there are 0.1481 dollar per krona, so The dollar profit is (2.5 kronor)/ (7 kronor
c. 7. What is exchange rate risk?
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
market to keep the pound in the range of $2.77 to $2.83. When the pound fell, the
in response to market conditions with a minimum of governmental intervention.
Changes in currency demand can be due to trade deficits (i.e., one nation imports
more from another nation than it exports, causing there to be higher relative demand
for the currency of the bigger exporter). It can also be due to capital movements. For
example, if interest rates are relatively high in one country, then investors might seek
market forces move the exchange rate outside one of these ranges, there is little that
the countries can do other than adjust the target range.
which is pegged to a basket of currencies that includes the dollar and the Barbados
dollar, which is pegged to the U.S. dollar.