Chapter 13
1. 1. Why do you think U.S. firms commonly use joint ventures as a strategy to enter China?
2. 2. What are some risks of international business that may not exist for local business?
Chapter 14
3. 3. Capital Budgeting With Hedging. Baxter Co. considers a project with Thailand’s government. If it accepts the project, it will definitely receive one lump sum cash flow of 10 million Thai baht in five years. The spot rate of the Thai baht is presently $0.03. The annualized interest rate for a 5-year period is 4% in the U.S. and 17% in Thailand. Interest rate parity exists. Baxter plans to hedge its cash flows with a forward contract. What is the dollar amount of cash flows that Baxter will receive in five years if it accepts this project?
4. Sensitivity of NPV to Conditions. Burton Co., based in the U.S., considers a project in which it has an initial outlay of $3 million and expects to receive 10 million Swiss francs (SF) in one year. The spot rate of the franc is $.80. Burton Co. decides to purchase put options on Swiss francs with an exercise price of $.78 and a premium of $.02 per unit to hedge its receivables. It has a required rate of return of 20 percent.
a. Determine the net present value of this project for Burton Co. based on the forecast that the Swiss franc will be valued at $.70 at the end of one year.
b. Assume the same information in part (a), but with the following adjustment. While Burton expected to receive 10 million Swiss francs, assume that there were unexpected weak economic conditions in Switzerland after Burton initiated the project. Consequently, Burton received only 6 million Swiss francs at the end of the year. Also assume that the spot rate of the franc at the end of the year was $.79. Determine the net present value of this project for Burton Co. if these conditions occur.
Homework Problems for Chapters 15 and 16
Due Week 8 and worth 40 points
WEEK 8:
Chapter 15: International Corporate Governance and Control
Chapter 16: Country Risk Analysis
Chapter 15
1. 1. What are some of the barriers to international acquisitions?
2. 2. Why a Foreign Acquisition May Backfire Provide two reasons why an MNC’s strategy of acquiring a foreign target could backfire. That is, explain why the acquisition might result in a negative NPV.
3. Valuation of a Foreign Target. Gaston Co. (a U.S. firm) is considering the purchase of a target company based in Mexico. The net cash flows to be generated by this target firm are expected to be 300 million pesos at the end of one year. The existing spot rate of the peso is $.14, while the expected spot rate in one year is $.12. All cash flows will be remitted to the parent at the end of one year. In addition, Gaston hopes to sell the company for 800 million pesos (after taxes) at the end of one year. The target has 10 million shares outstanding. If Gaston purchases this target, it would require a 25 percent return. The maximum value that Gaston should pay for this target company today is ____ pesos per share. Show your work.
4. Country Risk and Project NPV. Atro Co. (a U.S. firm) considers a foreign project in which it expects to receive 10 million euros at the end of one year. While it realizes that its receivables are uncertain, it decides to hedge receivables of 10 million euros with a forward contract today. As of today, the spot rate of the euro is $1.20, while the one-year forward rate of the euro is presently $1.24, and the expected spot rate of the euro in one year is $1.19. The initial outlay of this project is $7 million. Atro has a required return of 18%.
a. Estimate the NPV of this project based on the expectation of 10 million euros in receivables.
b. Now estimate the NPV based on the possibility that country risk could cause a reduction in foreign business, such that Atro Co. only receives 4 million euros instead of 10 million euros at the end of one year. Estimate the net present value of the project if this form of country risk occurs.
