1. JOSEPH’S COLLEGE OF COMMERCE (AUTONOMOUS)

End Semester Examinations – OCTOBER 2014

MIB –III semester

INTERNATIONAL FINANCIAL MANAGEMENT

Duration: 3 Hrs                                                                                          Max. Marks: 100

 

Section – A

1. Answer any SEVEN  Each carries 5 marks.                  (7 x 5  = 35)

 

1. What are the typical reasons why MNCs expand internationally?

 

2. What method has McDonald’s used to conduct international business? How has it used this method to its advantage and mention the other methods to conduct international business.

 

3. How would a relatively high home inflation rate and a weakening home currency affect the home country’s current account, other things being equal?

 

4. What are the reasons for Balance of Payments disequilibrium?

 

5. Why is country risk analysis important?

 

6. Cliff top Co. plans to expand its successful business by establishing a subsidiary in Canada. However, it is concerned that after 2 years the Canadian government will either impose a special tax on any income sent back to the US parent or order the subsidiary to be sold at that time. The executives have estimated that either of these scenarios have a 15% chance of occurring. They have decided to add 4 percentage points to the project’s required rate of return to incorporate the country risk that they are concerned about in the capital budgeting analysis. Is there a better way to more precisely incorporate the country risk of concern here?

 

7. Explain how the present value of the salvage value of an Indonesian subsidiary be affected (from US parent’s perspective) by (i) an increase in the risk of the foreign subsidiary and (ii) an expectation that Indonesia’s currency (rupiah) will depreciate against the dollar over time.

 

8. In 2001, an outbreak of foot–and-mouth disease occurred in United Kingdom and eventually spread to several other European countries. This disease can spread by direct or indirect contact with infected animals. The US government imposed trade restrictions on some products produced in the United Kingdom for health reasons. Give your view on how this restriction affected the trade flows between the two countries?

 

9. What are the techniques to optimize cash flow in multinational Cash Management?

 

10. Differentiate between Direct Foreign Investment and Portfolio Investment.

 

Section – B

1. Answer any THREE   Each carries 15 marks              (3 x 15   = 45)
2. a) Among the agencies that facilitate international trade flows, what is the difference in the functions of IMF, World Bank, WTO and IFC?

 

1. b) Explain how each of the following transactions will be classified and recorded in the debit and credit of the US Balance of Payments:

 

• A Japanese insurance company purchases US Treasury Bonds and pays out of its bank account kept in New York City.
• A US citizen consumes a meal at a restaurant in Paris and pays with her American Express Card.
• An Indian immigrant living in Los Angeles sends a cheque drawn on his Los Angeles bank account as a gift to his parents living in Mumbai.
• A US computer programmer is hired by a British company for consulting and gets paid from the US bank
• Individuals in the US purchase CDs over the internet from a firm based in China                                                                                          (10+5)

 

12. a) What strategies does an MNC use to reduce exposure to a host government takeover?

 

1. b) Calculate the Balance on Capital a/c with the following information:

 

• Government loans from abroad 20 M
• Government loans to abroad 40 M
• Direct investment abroad 68 M
• FDI into the country 208 M
• Foreign short-term loans investment in the country 60 M
• Short-term loans and investment abroad 470 M
• Private remittance abroad 85 M
• Private remittance from abroad 211M (8+7)

 

13. a) An American multinational corporation has subsidiaries whose cash positions for the month of September 2013 are given below:

Swiss subsidiary: Cash surplus of CHF 15 M

Canadian subsidiary: Cash deficit of CAD 25 M

UK subsidiary: Cash deficit of GBP 3 M

What are the cash requirements if:

• Decentralized cash management is adopted?
• Centralized cash management is adopted?

Exchange rates: CHF 1.48/USD, CAD: 1.58/USD, USD: 1.57/GBP

 

1. b) Should capital budgeting for a MNC project be conducted from the viewpoint of the subsidiary that will administer the project or the parent that will most likely finance much of the project? Depict the process of remitting subsidiary earnings to the parent diagrammatically. (8+7)

 

14. a) What are the factors influencing working capital requirements?

 

1. b) Write a note on ADRs and GDRs.                                                               (8+7)

 

15) a) What is a lease contract? What are the various kinds of leases?

 

1. b) What are the reasons for the cost of capital for MNCs differing from that for domestic firms?                                                                                                       (8+7)

 

Section – C

 

• Compulsory Case study.                                                                           (1 x 20 = 20)

 

16. Rolls and Skates, Inc is considering the development of a subsidiary in Singapore that would manufacture and sell roller skates locally. The management has asked various departments to supply relevant information for a capital budgeting analysis. The project would end in 4 years. An estimated 40 M Singapore dollars (SGD), which includes funds to support working capital, would be needed for the project. Given the existing spot rate of USD 0.40 per SGD, the USD amount of the parent’s initial investment is USD 16 M.

 

The estimated price & demand schedules during each of the next 4 years are shown below:

	Year 1	Year 2	Year 3	Year 4
Price / skate	SGD 700	SGD 700	SGD 720	SGD 760
Demand  in Singapore	60,000 units	60,000 units	100,000 units	100,000 units

 

The variable costs (for materials, labour etc) per unit have been estimated and consolidated as shown below:

	Year 1	Year 2	Year 3	Year 4
Variable cost per skate	SGD 400	SGD 400	SGD 500	SGD 520

The expense of leasing extra office space is SGD 2M per year. Other annual overhead expenses are expected to be SGD 2 M per year. The Singapore government will allow the company’s subsidiary to depreciate the cost of the plant and equipment at a maximum rate of SGD 4M per year, which is the rate the subsidiary will use.

 

The Singapore government will impose a 20% tax rate on income. In addition, it will impose a 10% withholding tax on any funds remitted by the subsidiary to the parent. The US government will allow tax credit on taxes paid in Singapore; therefore, earnings remitted to the US parent will not be taxed by the US government.

 

The subsidiary plans to send all net cash flows received, back to the parent firm at the end of each year. The Singapore government promises no restrictions on the cash flows to be sent back to the parent firm but imposes a 10% withholding tax on any funds sent to the parent, as mentioned earlier.

 

The Singapore government will pay the parent SGD 12 M to assume ownership of the subsidiary at the end of 4 years. Assume that there is no capital gains tax on the sale of the subsidiary. The spot exchange rate of SGD is USD 0.40. The company uses the spot rate as its best forecast of the exchange rate that will exist in future periods. Rolls and Skates, Inc requires a return of 15% on this project.

 

• Determine the NPV of this project. Should the company accept this project?
• In the above case, Rolls & Skates, Inc uses the SGD spot rate of USD 0.40 as a forecast for all future periods of concern. The company realizes that the exchange rate will typically change over time, but it does not know whether the SGD will strengthen or weaken in the future. Assume an optimistic scenario where the exchange rates become USD 0.44, USD 0.47, USD 0.51 and USD 0.55 per SGD.

Also assume a pessimistic scenario where the exchange rates become USD 0.37, USD 0.35, USD 0.30 and USD 0.27 per SGD.

Which of the two will be favourable to the parent company and why? Explain with the help of numerical.

 

 

 

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