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ST. JOSEPH’S COLLEGE OF COMMERCE (AUTONOMOUS)
END SEMESTER EXAMINATION – OCTOBER 2013
M.COM – III SEMESTER
INTERNATIONAL FINANCIAL MANAGEMENT
Duration: 3 hours Max. Marks: 100
SECTION- A
I) Answer any SEVEN questions. (7×5=35)
1. What are the most common strategies used to reduce exposure to a host
government takeover?
2. Depict the registration process of FIIs in India diagrammatically.
3. Show the process of remitting subsidiary earnings to parent
diagrammatically and explain briefly.
4. What are the various methods to conduct international business?
5. Why is a weak home currency not a perfect solution to correct a BOT
deficit?
6. A company exports highly advanced phone system components to its
subsidiary shops on islands in the Caribbean. The components are
purchased by consumers to improve their phone systems. These
components are not produced in other countries. Explain how political
risk factors could adversely affect the profitability of the company.
7. What are the factors influencing Working Capital requirements?
8. Why do firms pursue international business?
9. What are the various factors affecting International Trade Flows?
10. If the exchange rate at the end of 2007-2008 is INR43.91/USD and if the
rate of inflation in India and USA during 2008-2009 is respectively 7%
and 4%. Find the exchange rate at the end of 2008-2009. Which exchange
rate theory does this follow?
SECTION -B
II) Answer any THREE questions. (3×15=45)
11. Distinguish between Risk & Exposure. What are the different types of
Foreign Exchange Exposures & how are they managed?
12. Should Multinational Capital Budgeting be conducted from the viewpoint
of the subsidiary or the parent? What are the financial and political risk
factors in country risk?
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13. Write a note for receiving FDI by an Indian company. Highlight the
sectors where FDI is not allowed in India. Also give a note on the financial
instruments available for FII investment and their consideration for
application.
14. Sun Pharma Ltd. an Indian based foreign MNC is evaluating an overseas
investment proposal. Sun Pharma Ltd. exporter of pharmaceutical
products is considering building a plant in US. The plant will entail an
initial outlay of $20 M and it is expected to give the following cash flow
over its life of 4 years.
Year Cash Flow
(USD M)
1 30
2 40
3 50
4 60
The current spot exchange rate is INR 65/USD and risk free rate of
interest in India is 12% and in the US it is 7%. Sun Pharma requires a
rupee return of 15% on the above project.
Calculate NPV under both home currency approach and foreign currency
approach.
15. (a) Find out the Balance of Trade and balance of Current Account, if:
Inflow on account of services: $1000; outflow on account of services: $800;
outflow of dividend, royalty etc: $1100; inflow of dividend etc: $560;
export of goods: $10,000; import of goods: $12000; remittances: $1200;
short-term movement of funds ($200)
(b) How would a relatively high home inflation rate and an increase in a
country’s national income affect the home country’s current account,
other things being equal?
P.T.O………
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SECTION -C
III) Case Study: (20 marks)
16. Threads Woven Corp. currently have no existing business in South Africa
but are considering establishing a subsidiary there. The following
information has been gathered to assess this project:
• The initial investment required is ZAR (South African Rand) 100 M.
Given the existing spot rate of $0.50 per ZAR, the initial investment in
US$ is $ 50M.
• The project will be terminated at the end of Year 3 when the subsidiary
will be sold.
• The fixed costs such as overhead expenses are estimated to be ZAR 12
M per year.
• The exchange rate of the ZAR is expected to be $0.52 at the end of year
1, $ 0.54 at the end of year 2, and $ 0.56 at the end of year 3.
• The South African government will impose an income tax of 30% on
income. In addition, it will impose a withholding tax of 10% on
earnings remitted by the subsidiary. The US government will allow a
tax credit on the remitted earnings and will not impose any additional
taxes.
• All cash flows received by the subsidiary are to be sent to the parent at
the end of each year. The subsidiary will use its working capital to
support ongoing operations.
• The price, demand and variable cost of the product in South Africa are
as follows:
Year Price Demand Variable Cost
1 ZAR 1000 40,000 units ZAR 60
2 ZAR 1022 50,000 units ZAR 70
3 ZAR 1060 60,000 units ZAR 80
• The plant & equipment are depreciated over 10 years using straight
line method. Since the plant & equipment are initially valued at ZAR
100M, the annual depreciation expense is ZAR 10 M.
• In three years, the subsidiary is to be sold. When it sells the subsidiary,
Threads Woven Corp. expects to receive ZAR 104 M after subtracting
capital gains taxes. Assume that this amount is not subject to a
withholding tax.
• Threads Woven Corp requires a 20% rate of return on the project.
Determine the NPV of this project. Should Threads Woven Corp.
accept this project?
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