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Chapter 19: Multinational Financial Management
Learning Objectives
511
Chapter 19
Multinational Financial Management
Learning Objectives
After reading this chapter, students should be able to:
◆ Identify the primary reasons companies choose to go “global.”
◆ Explain how exchange rates work and interpret different exchange rate quotations.
◆ Discuss the intuition behind interest rate parity and purchasing power parity.
◆ Explain the different opportunities and risks that investors face when they invest overseas.
◆ Identify some specific challenges that a multinational corporation faces and discuss how they
influence its capital budgeting, capital structure, and working capital policies.
512
Lecture Suggestions
Chapter 19: Multinational Financial Management
Lecture Suggestions
This chapter presents an overview of multinational financial management, including exchange rates,
interest rate and purchasing power parity, international capital markets, multinational capital budgeting,
and international capital structures.
DAYS ON CHAPTER: 3 OF 56 DAYS (50-minute periods)
Chapter 19: Multinational Financial Management
Answers and Solutions
513
Answers to End-of-Chapter Questions
19-1 Taking into account differential labor costs abroad, transportation, tax advantages, and so forth,
19-6 Purchasing power parity assumes there are neither transactions costs nor regulations that limit
19-7 A Eurodollar is a dollar deposit in a foreign bank, normally a European bank. The foreign bank
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Answers and Solutions
Chapter 19: Multinational Financial Management
Solutions to End-of-Chapter Problems
19-2 $1 = 3.48 Israeli shekels; $1 = 101.80 Japanese yen; Cross-exchange rate, yen/shekel = ?
19-3 rNOM, 6-month T-bills = 4%; rNOM of similar default-free 6-month Japanese bonds = 2.5%; Spot
exchange rate: 1 yen = $0.0098; 6-month forward exchange rate = ?
19-4 U.S. T.V. = $500; EMU T.V. = 312.5 euros; Spot rate between euro and dollar = ?
Chapter 19: Multinational Financial Management
Answers and Solutions
515
19-5 From Table 19.1:
U.S. Dollars
Required to
Buy One Unit of Purchase Price
Currency Foreign Currency 1,000 = in Dollars
British pound $1.6717 1,000 = $1,671.70
19-6 a. The answer to this problem depends on the date it is assigned. If the exchange rates taken
from
The Wall Street Journal Online
on September 29, 2014 are used; then the following
information is obtained:
U.S. Dollars
Required to
Buy One Unit of Purchase Price
Currency Foreign Currency 1,000 = in Dollars
British pound 1.6242 1,000 = $1,624.20
b. Pound = ($1,624.20 – $1,671.70)/$1,671.70 = -0.0284 = -2.84%.
19-9 The answer to this question would depend upon the rates existing at the time the assignment is
made. Using the rates quoted in the Foreign Exchange table of
The Wall Street Journal Online
on September 29, 2014:
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Answers and Solutions
Chapter 19: Multinational Financial Management
19-10 Spot rate: 1 yen = $0.00982; 90-day forward rate: 1 yen = $0.00983; rNOM of 90-day Japanese
risk-free securities = 2%; rNOM of 90-day U.S. risk-free securities = ?
19-11 $1 = 12.8 pesos; CD = $10.00; Price of CD in Mexico = ?
19-12 a. rNOM of 90-day U.S. risk-free securities = 3%; rNOM of 90-day British risk-free securities =
3.5%; Spot rate: 1 pound = $1.67; forward rate selling at premium or discount = ?
Chapter 19: Multinational Financial Management
Answers and Solutions
517
19-14 The U.S. dollar liability of the corporation falls from $0.92(5,000,000) = $4,600,000 to
19-16 D1 = 3 pounds; Exchange rate = $1.67/pound; Pound depreciates 5% against $1. Dividend
P0 =
D
1
19-17 a. If a U.S. based company undertakes the project, the rate of return for the project is a simple
calculation, as is the net present value.
b. According to interest rate parity, the following condition holds:
c. First, we must adjust the cash flows to reflect Solitaire's home currency.
Year CF ($) CF (SFrancs)
Chapter 19: Multinational Financial Management
Comprehensive/Spreadsheet Problem
519
Comprehensive/Spreadsheet Problem
Note to Instructors:
The solution to this problem is not provided to students at the back of their text. Instructors
can access the
Excel
file on the textbook’s website.
b.
We will convert the cost of each component to dollars, and find the total cost of the SY-20. We will do the same
to find the dollar sale price.
The dollar profit from the sale of the SY-20 is simply the sales revenue minus the total cost.
c.
If the dollar was to weaken by 10% against all foreign currencies, that could be expressed by multiplying the
Chapter 19: Multinational Financial Management
Comprehensive/Spreadsheet Problem
521
d.
Once again, we must reconstruct the currency table from the top of the worksheet. This time, however, we will
522
Comprehensive/Spreadsheet Problem
Chapter 19: Multinational Financial Management
e.
f.
Applying interest rate parity, we can determine the return on 1-year securities in Switzerland.
Purchasing power parity allows us to establish the following problem.
Chapter 19: Multinational Financial Management
Integrated Case
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Integrated Case
19-19
Citrus Products Inc.
Multinational Financial Management
Citrus Products Inc. is a medium-sized producer of citrus juice drinks with
groves in Indian River County, Florida. Until now, the company has confined
its operations and sales to the United States; but its CEO, George Gaynor,
wants to expand into the Pacific Rim. The first step is to set up sales
subsidiaries in Japan and Australia, then to set up a production plant in Japan,
and finally to distribute the product throughout the Pacific Rim. The firm’s
financial manager, Ruth Schmidt, is enthusiastic about the plan, but she
worries about the implications of the foreign expansion on the firm’s financial
management process. She 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, Schmidt has given you
the following list of questions.
A. What is a multinational corporation? Why do firms expand into
other countries?
Answer: [Show S19-1 through S19-3 here.] Use the examples given here
when discussing why firms “go international.”
1. To seek production efficiency. Companies in high-cost
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Integrated Case
Chapter 19: Multinational Financial Management
