International Financial Management

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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?

 

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.

 

 

 

1. JOSEPH’S COLLEGE OF COMMERCE (AUTONOMOUS)

End Semester Examinations – OCTOBER 2014

m.com -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. Write a note on the various International business methods.
2. Explain the components of International Financial system.
3. Briefly explain the agencies that facilitate international flow.
4. Explain the factors affecting international trade.
5. Write a note on the exchange rate system in India.
6. Mention the subjective factors to be considered while assessing a particular country for investment in Country Risk analysis.
7. What are the issues involved in foreign investment analysis?
8. What are the considerations an MNC has to keep in mind while investing in other country with special reference to tax?
9. What are the various international project evaluation techniques considered for international investment.
10. Calculate the Weighted average cost of capital when the capital structure shows:

(a)  existing debt of $5.0 million at 10% for 6 years (tax rate is 30%)

(b)  new debt of $ 3.0 million at 8 % for 10 years with a floating cost of $ 2,00,000

(c ) existing equity shares of $ 7.0 million ($ 15 per share), EPS $ 4, growth rate of 5% and dividend pay-out ratio of 50% and

(d) proposed equity share(1,00,000 shares) to be sold at $15 with $ 2,00,000 floatation cost.

 

Section – B

 

1. Answer any THREE   Each carries 15 marks.                   (3 x 15   = 45)

11) What are the components of Balance of Payments? What is meant by equilibrium and disequilibrium in balance of payment? What are the measures taken to overcome disequilibrium in the Balance of payment?

 

12) An Indian importer imports goods worth $62,500. He expects an appreciation of pound. So he goes for hedging the risk. The currency market has the following data:

(a) spot rate on the date of the contract Rs. 68,00/£

(b) three month forward rate Rs. 68.50/£

(c) Strike rate in a three-month call option Rs. 68.60/£ with 5% premium

(d) Strike rate in a three-month put option Rs. 68.80/£ with 5% premium

( e) spot rate on the date of payment/maturity Rs. 68.90/£

 

Will he go for a hedge? If so, which of the options he will select?

 

13)  Briefly explain the international working capital management policy from the point of view of a firm as well as units and also elucidate on the objectives aimed to be achieved through Working capital management for an international firm.

 

14) Explain the ways in which the inventory, receivables and cash in managed internationally by the parent as well as the subsidiary

15) Elucidate on the risks involved in international project and the ways to mitigate the same.

Section – C

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

 

16. Sparton a US company is considering pre-development of a subsidiary  company in Singapore, that will manufacture and sell tennis rackets locally. Spartan management has obtained the following relevant information.

(i) Initial Investment :-

An estimated 20 million Singapore $ which includes funds to support working capital would be needed for the project. This is given at the existing spot rate of 0.50 USD/Singapore $

(ii)  Life cycle:-

The projects life cycle is expected to end in 4 years. The host government has promised to purchase the plant from the parent after 4 years

(iii) Price and Demand:-

Year	Price/unit	Demand (units)
1	Singapore $350	60000
2	Singapore $350	60000
3	Singapore $360	100000
4	Singapore $380	100000

 

 

 

 

 

 

 

The estimated price and demand schedule during each of the next 4 years is as follows:

 

(iv) Cost: – the variable cost for material,  labour etc.,  per unit are as follows;

Year	Variable Cost per unit
1	Singapore $ 200
2	Singapore $200
3	Singapore $ 250
4	Singapore $ 260

The expenses of leasing the extra office space is 1 million Singapore $ per year. Other annual overhead expenses are expected to be Singapore $ 1 million per year

(v)  The exchange rate:

The rate of exchange is USD 0.5 per Singapore $. Spartan uses the spot rate as its best forecast of exchange rate that will exist in future period.

(vi)  The host country taxes on income earned by the subsidiary:-

The Singapore government will allow Spartan to establish the subsidiary and 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.

(vii) The US government taxes on income earned by Spartan subsidiary; the US government will allow a tax credit on taxes paid in Singapore.

(viii) Spartan subsidiary plans to send all the net cash flows received back to the parent at the end of the year

(ix) Depreciation on plant and equipment is at a maximum of 2 million Singapore $ per year.

(x) Salvage value of 12 million Singapore $will be paid by the Singapore government at the end of 4 years.

(xi) Discounting rate is 15%.

Calculate NPV.