Ebook Multinational Business Finance 10th Edition

Contents of the book Multinational Business Finance 10th Edition introduce to you the content: Financial Goals, Corporate Governance, The International Monetary System, Balance of Payments, Foreign Exchange Market, Foreign Currency Derivatives,...

Multinational Business Finance 10th Edition Solution Manual IM Science, KUST, Solution Manual of MBF 10tth Edition Prepared By Wasim Uddin Orakzai Multinational Business Finance 10th Edition Chapter-1 Solution Manual Financial Goals & Corporate Governance Problem # 1.1: Shareholder Returns……………………………………… Problem # 1.2: Shareholder Choices…………………………………… Problem # 1.3: Microsoft's Dividend…………………………………… Problem # 1.4: Dual Classes of Common Stock………………………… Problem # 1.5: Corporate Governance: Minority Shareholder Control… Problem # 1.6: Price/Earnings Ratios and Acquisitions………………… Problem # 1.7: Corporate Governance: Overstating Earnings………… Problem # 1.8: Carlton Corporation's Consolidated Results…………… Problem # 1.9: Carlton's EPS Sensitivity to Exchange Rates……… … Problem # 1.10: Carlton’s Earnings & Global Taxation…………… … Chapter-2 Problem # 2.1: Problem # 2.2: Problem # 2.3: Problem # 2.4: Problem # 2.5: Problem # 2.6: Problem # 2.7: Problem # 2.8: Problem # 2.9: Chapter-3 9 10 10 11 12 13 14 15 17 The International Monetary System (IMS) Frankfurt & New York Peso Exchange Rate Changes……………………… Good as Sold…………………………………………… Gold Standard…………………………………………… Spot Rate Customer…………………………………… Forward Rate…………………………………………… Forward Discount on the dollars……………………… Forward Premium on the euro………………………… Iraqi Imports…………………………………………… 19 20 20 22 22 22 23 23 24 26 Balance of Payments (BOP) Problems # 3.1 - 3.4: Problems # 3.5 - 3.9: Problems # 3.10 - 3.13: Problems # 3.14 - 3.20: Australia's Current Account…………………… Uruguay's Current Account…………………… Myanmar's Balance of Payments…………… Argentina's Balance of Payments………….… 28 29 30 31 32 IM Science, KUST, Solution Manual of MBF 10tth Edition Prepared By Wasim Uddin Orakzai Multinational Business Finance 10th Edition Solution Manual Foreign Exchange Market (FEM) Chapter-4 Problem # 4.1: Problem # 4.2: Problem # 4.3: Problem # 4.4: Problem # 4.5: Problem # 4.6: Problem # 4.7: Problem # 4.8: Problem # 4.9: Problem # 4.10: Problem # 4.11: Problem # 4.12: Problem # 4.13: Problem # 4.14: Problem # 4.15: Problem # 4.16: Ringgit up or down? Forward Premium & Discounts…………………… Trading in Switzerland……………………………… Yen Forward Premium……………………………… Euro Forward Premium…………………………… Traveling: Copenhagen to St Petersburg……… Riskless Profit on the Franc……………………… Trans Atlantic Arbitrage…………………………… Wall Street Journal quotes and premiums……… Finanial Times quotes……………………………… Venezuelan Bolivar (A)…………………………… Venezuelan Bolivar (B)…………………………… Indirect Quotation on the Dollar…………………… Direct Quotation on the Dollar…………………… Mexican Peso - European Euro Cross Rates…… Around the Horn…………………………………… Chapter-5 Foreign Currency Derivatives (FCD) Problem # 5.1: Problem # 5.2: Problem # 5.3: Problem # 5.4: Problem # 5.5: Problem # 5.6: Problem # 5.7: Problem # 5.8: Problem # 5.9: Problem # 5.10: Problem # 5.11: Problem # 5.12: Problem # 5.13: Problem # 5.14: Problem # 5.15: Peso Futures………………………………………… Pounds Futures……………………………………… Hans Schmidt, euro Speculator…………………… Hans Schmidt, Swiss franc Speculator…………… Katya & the yen……………………………………… Samuel’s bet………………………………………… How much profit – calls?…………………………… How much profit – puts? Falling Canadian dollar……………………………… Braveheart's Put on Pounds………………………… Call Options on British pounds……………………… Put Options on euros………………………………… Solar Turbines and Venezuelan bolivares………… Vitro de Mexico……………………………………… Put Options on Chinese Renminbi……………… Chapter-6 International Parity Conditions (IPC) Problem # 6.1: Big Mac Hamburger Standard……………………… 35 36 37 41 42 43 44 45 47 48 49 50 51 54 55 57 58 60 61 62 63 65 68 70 71 72 73 75 78 79 80 81 82 83 84 IM Science, KUST, Solution Manual of MBF 10tth Edition Prepared By Wasim Uddin Orakzai Multinational Business Finance 10th Edition Problem # 6.2: Problem # 6.3: Problem # 6.4: Problem # 6.5: Problem # 6.6: Problem # 6.7: Problem # 6.8: Problem # 6.9: Problem # 6.10: Problem # 6.11: Problem # 6.12: Problem # 6.13: Problem # 6.14: Problem # 6.15: Problem # 6.16: Problem # 6.17: Problem # 6.18: Problem # 6.19: Problem # 6.20: Chapter-7 Solution Manual Exchange Rate Pass-Through…………………… Argentine pesos…………………………………… International Fisher Effect………………………… Covered Interest Arbitrage (CIA) - Denmark I…… CIA Denmark B – Part (a) & Part (b)……………… CIA– Japan………………………………………… Uncovered Interest Arbitrage – Japan…………… International Parity Conditions in Equilibrium…… Mary Smyth – CIA…………………………………… Mary Smyth – UIA…………………………………… Mary Smyth one month later…………………… Langkawi Island Resort…………………………… Covered Interest against the Norwegian krone… Frankfurt and New York…………………………… Chamonix chateau rentals………………………… East Asiatic Company – Thailand………………… Maltese Falcon: 2003-2004………………………… London Money Fund………………………………… The African Beer standard of PPP………………… Foreign Exchange Rate Determination Problem # 7.1: Problem # 7.2: Problem # 7.3: Problem # 7.4: Problem # 7.5: Problem # 7.6: Problem # 7.7: Problem # 7.8: Problem # 7.9: Problem # 7.10: Chapter-8 Problem # 8.1: Problem # 8.2: Problem # 8.3: Problem # 8.4: Problem # 8.5: Problem # 8.6: Current spot rates………………………………….… Purchasing power parity forecasts…………….…… International Fisher forecasts……………………… Implied real interest rates…………………………… Forecasting with real interest rates………….…… Forward rates………………………………….……… Real economic activity and misery………….……… Balance of payments approach……………….…… Current accounts and spot rates…………………… Exchange Rate Trends and Bounds……………… 85 87 89 92 94 97 98 99 102 103 105 106 107 109 110 111 114 115 118 120 122 123 125 127 129 131 133 135 135 135 Transaction Exposure 136 Lipitor in Indonesia…………………………………… Embraer of Brazil…………………………………… Mattel Toys…………………………………………… Hindustan Lever……………………………………… Tek - Italian Account Receivable…………………… Tek - Japanese Account Payable………………… 137 138 139 140 141 143 IM Science, KUST, Solution Manual of MBF 10tth Edition Prepared By Wasim Uddin Orakzai Multinational Business Finance 10th Edition Problem # 8.7: Problem # 8.8: Problem # 8.9: Problem # 8.10: Problem # 8.11: Problem # 8.12: Problem # 8.13: Problem # 8.14: Problem # 8.15: Problem # 8.16: Problem # 8.17: Problem # 8.18: Problem # 8.19: Problem # 8.20: Problem # 8.21: Problem # 8.22: Problem # 8.23: Problem # 8.24: Problem # 8.25: Solution Manual Tek - British Telecom Bid…………………………… Tek Swedish Price List…………………………… Tek Swiss Dividend Payable…………………… Northern Rainwear………………………………… Vamo Road Industries……………………………… Worldwide Travel…………………………………… Seattle Scientific, Inc……………………………… Wilmington Chemical Company…………………… Dawg-Grip, Inc…………………………………… Aqua-Pure…………………………………………… Botox Watch Company……………………………… Redwall Pump Company…………………………… Pixel's Financial Metrics…………………………… Scout Finch and Dayton Manufacturing (A)……… Scout Finch and Dayton Manufacturing (B)……… Siam Cement………………………………………… Aswan Project: Mitsubishi's Exp (Part a & b)…… Aswan Project: Fluor's Exposure………………… Aswan Project: DaSilva's Contingency Lever…… 145 146 148 150 151 152 153 154 155 157 159 160 162 163 165 167 168 171 173 Operating Exposure Chapter-9 Problem # 9.1: Carlton Germany - Case 4…………………………… Problem # 9.2: Carlton Germany - Case 5…………………………… Problem # 9.3: Denver Plumbing Company (A)……………………… Problem # 9.4: Denver Plumbing Company (B)…………………… Problem # 9.5: Hawaiian Macadamia Nuts………………………… Problem # 9.6: Cellini Fashionwear…………………………………… Problem # 9.7: Autocars, Ltd………………………………………… Problem # 9.8: High-Profile Printers, Inc (A)………………………… Problem # 9.9: High-Profile Printers, Inc (B)………………………… Problem # 9.10: Hedging Hogs: Risk-Sharing at Harley Davidson… Chapter-10 Translation Exposure (Accounting Exposure) Problem # 10.1: Problem # 10.2: Problem # 10.3: Problem # 10.4: Problem # 10.5: Problem # 10.6: Carlton Germany (A)……………………………… Carlton Germany (B)……………………………… Carlton Germany (C)……………………………… Carlton Germany (D)……………………………… Montevideo Products, S.A (A)…………………… Montevideo Products, S.A (B)…………………… IM Science, KUST, Solution Manual of MBF 10tth Edition Prepared By Wasim Uddin Orakzai 174 175 176 178 178 179 180 181 182 183 185 187 188 189 191 192 193 194 Multinational Business Finance 10th Edition Solution Manual Problem # 10.7: Montevideo Products, S.A (C)…………………… Problem # 10.8: Siam Toys, Ltd (A)………………………………… Problem # 10.9: Siam Toys, Ltd (B)………………………………… Problem # 10.10: Egyptian Ingot, Ltd………………………………… Chapter-11 Sourcing Equity Globally Problem # 11.1: Problem # 11.2: Problem # 11.3: Problem # 11.4: Problem # 11.5: Problem # 11.6: Problem # 11.7: Problem # 11.8: Problem # 11.9: Problem # 11.10: 196 198 200 202 205 Novo’s cost of equity prior to April 1980………… Novo’s WACC prior to April 1980……………… Novo’s cost of equity after July 1981…………… Novo’s WACC after July 1981…………………… Novo’s cost of equity in 2004……………………… Novo’s WACC in 2004……………………………… HangSung before equity issue abroad…………… HangSung’s WACC before equity issue abroad… HangSung after equity issue abroad……………… HangSung’s WACC after equity issue abroad…… 206 206 207 207 208 208 209 209 210 210 Annexure of Currencies Used in Solution Manual……………………… 211 IM Science, KUST, Solution Manual of MBF 10tth Edition Prepared By Wasim Uddin Orakzai Multinational Business Finance 10th Edition Solution Manual “Read and Lord is the most bounteous, who teaches by the pen, teaches man that which he knew not (Al-Quran) IM Science, KUST, Solution Manual of MBF 10tth Edition Prepared By Wasim Uddin Orakzai Multinational Business Finance 10th Edition Solution Manual Chapter-1 Financial Goals & Corporate Governance IM Science, KUST, Solution Manual of MBF 10tth Edition Prepared By Wasim Uddin Orakzai Multinational Business Finance 10th Edition Chapter # Solution Manual “Financial Goals & Corporate Governance” Problem # 1.1: Shareholder returns Solution: What are the shareholder's returns? Assumptions Share price, P1 Share price, P2 Dividend paid, D2 Value Part (a) $ 16.00 $ 18.00 $ Value Part (b) $ 16.00 $ 18.00 $ 1.00 a If the company paid no dividend (plugging zero in for the dividend): Return = (P2 - P1 + D2) / (P1) Return = $18.00 - $ 16.00 / $16.00 = $2.00 / $16.00 Return = 12.50% b Total shareholder return, including dividends, is: Return = (P2 - P1 + D2) / (P1) Return = (P2 - P1 + D2) / (P1) Return = $18.00 - $ 16.00 + $1.00 / $16.00 = $2.00 / $16.00 Return = 18.75% Problem # 1.2: Solution: Shareholder choices Assumptions Share price, P1 Share price, P2 Dividend paid, D2 Value $ 62.00 $ 74.00 $ 2.25 Return = (P2 - P1 + D2) / (P1) Return = $74.00 - $ 62.00 + 2.25 / $62.00 = $14.25.00 / $62.00 Return = 22.98% IM Science, KUST, Solution Manual of MBF 10tth Edition Prepared By Wasim Uddin Orakzai Multinational Business Finance 10th Edition Solution Manual The share's expected return of 22.98% far exceeds the required return by Mr Fong of 12% He should therefore make the investment Problem # 1.3: Microsoft's dividend Solution: What would the return have been on Microsoft shares if it had paid a constant dividend in the recent past? Shareholder Shareholder Closing If Return Return Share Dividend (without (with Assumptions Price Paid Dividend ) Dividend) 1998 (January 2) $131.13 1999 (January 4) $141.00 $0.16 7.53% 7.65% 2000 (January 3) $116.56 $0.16 -17.33% -17.22% 2001 (January 2) $ 43.38 $0.16 -62.78% -62.65% 2002 (January 2) $ 67.04 $0.16 54.54% 54.91% 2003 (January 2) $ 53.72 $0.16 -19.87% -19.63% a Average shareholder return for the period : Return = (P2 - P1 + D2) / (P1) Return = $74.00 - $ 62.00 + / $62.00 = $14.25.00 / $62.00 Return = -7.58% b Total shareholder return if Microsoft had paid a constant dividend: Return = (P2 - P1 + D2) / (P1) Return = $74.00 - $ 62.00 + / $62.00 = $14.25.00 / $62.00 Return = -7.39% Problem # 1.4: Dual Classes of Common Stock Solution: What are the implications for the distribution of voting rights and dividend distributions for Powlitz? Local Votes Currency per Total Powlitz Manufacturing (millions) share Votes Long-term debt 200 0 Retained earnings 300 0 Paid-in common stock: million A-shares 100 10 *1,000 Paid-in common stock: million B-shares 400 ** 400 IM Science, KUST, Solution Manual of MBF 10tth Edition Prepared By Wasim Uddin Orakzai 10 Multinational Business Finance 10th Edition Translation gain or (loss) = After Devaluation net exposure – Translation gain or (loss) = $35,000 - $21,000 Translation gain or (loss) = $ 14,000 Solution Manual Before Devaluation net exposure Notes: Before Devaluation: *Total Exposed Assets = Cash + A/R + Inventory + Net plant & equipment Total Exposed Assets = $ 3,000 + $6,000 + $6,000 + $ 12,000 Total Exposed Assets = $27,000 **Total Exposed Liabilities = Current Liabilities + Long term debt Total Exposed Liabilities= $1,500 + 4500 Total Exposed Liabilities = 6000 After Devaluation: *Total Exposed Assets = Cash + A/R + Inventory + Net plant & equipment Total Exposed Assets = $5,000 + $10,000 + $10,000 + 20,000 Total Exposed Assets = $45,000 **Total Exposed Liabilities = Current Liabilities + Long term debt Total Exposed Liabilities= $2500 + $7500 Total Exposed Liabilities = $10,000 Problem#10.8: Siam Toys, Ltd (A) Siam Toys, Ltd., is the Thai affiliate of a U.S toy manufacturer Siam Toys manufacture plastic injection molding equipment for making toy cars Sales are primarily in the United States and Europe Siam Toys’ balance sheet in thousands of Thai bahts (฿) as of March 31st is as follows Using the data presented on Siam Toys, assume that the Thai baht dropped in value from  ฿ 30/$ to ฿40/$ between March 31 and April Assuming no change in balance sheet accounts between these two days, calculate the gain or loss from translation by both the current rate method and the temporal method Explain the translation gain or loss in terms of changes in the value of exposed accounts TRANSLATION BY THE CURRENT RATE METHOD Balance Sheet After Devaluation IM Science, KUST, Solution Manual of MBF 10tth Edition Prepared By Wasim Uddin Orakzai 201 Multinational Business Finance 10th Edition Solution Manual Before Devaluation (thousands) Thai baht Assets Cash Accounts receivable Inventory Net plant & equipment Total Liabilities & Net Worth Accounts payable Bank loans Common stock Retained earnings CTA account (loss) Total Exchange Translated Exchange Rate Accounts Rate Statement ฿24,000 36,000 48,000 60,000 ฿168,000 (/฿/$) 30 30 30 30 ฿18,000 60,000 18,000 72,000 ฿168,000 30 30 20 34 US dollars $800 1,200 1,600 2,000 $5,600 Translated Accounts (/฿/$) 40 40 40 40 $600 2,000 900 2,100 $5,600 40 40 20 34 US dollars $600 900 1,200 1,500 $4,200 $450 1,500 900 2,100 ($750) $4,200 Note: Dollar retained earnings before devaluation are the cumulative sum of additions to retained earnings of all prior years, translated at exchange rates in effect in each of those years This cumulative translation account (CTA) loss of$750,000 would be entered into the company's consolidated balance sheet under equity TRANSLATION BY THE TEMPORAL METHOD Before Devaluation After Devaluation Balance Sheet (thousands) Exchange Thai baht Rate Assets Cash Statement ฿24,000 (/฿$) 30 Translated Accounts Exchange Translated Rate Accounts US dollars $800 US dollars $600 ( ฿/$) 40 IM Science, KUST, Solution Manual of MBF 10tth Edition Prepared By Wasim Uddin Orakzai 202 Multinational Business Finance 10th Edition Accounts receivable Inventory Net plant & equipment Total Liabilities & Net Worth Accounts payable Bank loans Common stock Retained earnings CTA account (loss) Total Solution Manual 36,000 48,000 60,000 ฿168,000 30 30 20 1,200 1,600 3,000 $6,600 40 30 20 900 1,600 3,000 $6,100 ฿18,000 60,000 18,000 72,000 ฿168,000 30 30 20 23 $600 2,000 900 3,100 $6,600 40 40 20 23 $450 1,500 900 3,100 $150 $6,100 Note a: Dollar retained earnings before devaluation are the cumulative sum of additions to retained earnings of all prior years, translated at exchange rates in effect in each of those years Note b: Retained earnings after devaluation are translated at the same effective rate (see Note a) as before devaluation The translation gain of $150,000 would be passed-through to the consolidated income statement EXPLANATION OF DIFFERENT OUTCOME BY TRANSLATION METHODOLOGY: The Temporal Method results in a translation gain, as opposed to the CTA loss found under the Current Rate Method, because of the different exchange rates used against Net plant & equipment and the inventory line items This gain would be impossible under the Current Rate Method because ALL assets are exposed under that method, whereas the Temporal Method carries Net plant & equipment and inventory at relevant historical exchange rates Problem#10.9: Siam Toys, Ltd (B) Using the original data provided for Siam Toys, assume that the Thai baht appreciated in value from B30/$ to B25/$ between March 31 and April Assuming no change in balance sheet accounts between those two days, calculate the gain or loss from translation by both the current rate method and the temporal method Explain the translation gain or loss in terms of changes in the value of exposed accounts TRANSLATION BY THE CURRENT RATE METHOD IM Science, KUST, Solution Manual of MBF 10tth Edition Prepared By Wasim Uddin Orakzai 203 Multinational Business Finance 10th Edition Balance Sheet (thousands) Thai baht Assets Cash A/R Inventory Net plant & equipment Total Liabilities & Net Worth Accounts payable Bank loans Common stock Retained earnings CTA account (loss) Total Statement ฿24,000 36,000 48,000 Solution Manual Before Devaluation After Devaluation Exchange Translated Exchange Translated Rate Accounts Rate Accounts (Baht/US$ ) US dollars (Baht/US$) US dollars 30 $800 25 $960 30 1,200 25 1,440 30 1,600 25 1,920 60,000 ฿168,000 30 2,000 $5,600 25 2,400 $6,720 ฿18,000 60,000 18,000 72,000 ฿168,000 30 30 20 34 $600 2,000 900 2,100 $5,600 25 25 20 34 $720 2,400 900 2,100 $600 $6,720 Note: Dollar retained earnings before devaluation are the cumulative sum of additions to retained earnings of all prior years, translated at exchange rates in effect in each of those years This cumulative translation account (CTA) gain of $600,000 would be entered into the company's consolidated balance sheet under equity TRANSLATION BY THE TEMPORAL METHOD Balance Sheet (thousands) Assets Cash Accounts receivable After Before Devaluation Devaluation Exchange Translated Exchange Thai baht Rate Accounts Rate (Baht/US$ Statement ) US dollars (Baht/US$) ฿24,000 30 $800 25 36,000 30 1,200 Translated Accounts US dollars $960 25 IM Science, KUST, Solution Manual of MBF 10tth Edition Prepared By Wasim Uddin Orakzai 1,440 204 Multinational Business Finance 10th Edition Inventory Net plant & equipment Total Liabilities & Net Worth Accounts payable Bank loans Common stock Retained earnings CTA account (loss) Total Solution Manual 48,000 30 1,600 30 1,600 60,000 ฿168,000 20 3,000 $6,600 20 3,000 $7,000 ฿18,000 60,000 18,000 72,000 30 30 20 23 $600 2,000 900 3,100 25 25 20 23 $720 2,400 900 3,100 ฿168,000 $6,600 ($120) $7,000 Note a: Dollar retained earnings before devaluation are the cumulative sum of additions to retained earnings of all prior years, translated at exchange rates in effect in each of those years Note b: Retained earnings after devaluation are translated at the same effective rate (see Note a) as before devaluation.The translation loss of $120,000 would be passed-through to the consolidated income statement EXPLANATION OF DIFFERENT OUTCOME BY TRANSLATION METHODOLOGY: The Temporal Method results in a translation gain, as opposed to the CTA loss found under the Current Rate Method, because of the different exchange rates used against Net plant & equipment and the inventory line items This gain would be impossible under the Current Rate Method because ALL assets are exposed under that method, whereas the Temporal Method carries Net plant & equipment and inventor at relevant historical exchange rates Problem#10.10: Egyptian Ingot, Ltd Egyptian Ingot, Ltd., is the Egyptian subsidiary of Tran Mediterranean Aluminum, a British multinational that fashions automobile engine blocks from aluminum TransMediterranean’s home reporting currency is the British pound Egyptian Ingot’s IM Science, KUST, Solution Manual of MBF 10tth Edition Prepared By Wasim Uddin Orakzai 205 Multinational Business Finance 10th Edition Solution Manual December 31st balance sheet is shown below At the date of this balance sheet the exchange rate between Egyptian pounds and British pounds sterling was ŁE5.50/UKŁ a) What is Egyptian Ingot’s contribution to the translation exposure of TransMediterranean on December 31st, using the current rate method? b) Calculate the translation exposure loss to Trans-Mediterranean if the exchange rate at the end of the following quarter is ŁE6.00/Ł Assume all balance sheet accounts are the same at the end of the quarter as they were at the beginning Balance Sheet of Egyptian Ingot, Ltd Egyptian pounds Assets Cash A/R Statement 16,500,000 33,000,000 Before Exchange Rate After Exchange Rate Change Change Exchange Translated Exchange Translated Rate Accounts Rate Accounts (Egyptian (Egyptian L/UKL) US dollars L/UKL) US dollars 5.5 $3,000,000 $2,750,000 5.5 6,000,000 5,500,000 IM Science, KUST, Solution Manual of MBF 10tth Edition Prepared By Wasim Uddin Orakzai 206 Multinational Business Finance 10th Edition Inventory Net plant & equipment Solution Manual 49,500,000 5.5 9,000,000 8,250,000 66,000,000 5.5 12,000,000 $30,000,00 11,000,000 Total Liabilities & Net Worth A/P Long-term debt Invested capital CTA account (loss) 165,000,000 Total 165,000,000 $27,500,000 24,750,000 5.5 $4,500,000 $4,125,000 49,500,000 5.5 9,000,000 8,250,000 90,750,000 5.5 16,500,000 5.5 16,500,000 - $30,000,00 ($1,375,000) $27,500,000 a Calculation of Actg Exposures: Egyptian pounds 165,000,000 Dec 31st 5.5 $30,000,000 End of Quarter $27,500,000 -74,250,000 90,750,000 -13,500,000 $16,500,000 -12,375,000 $15,125,000 Serial Number Exposed assets (all assets) Less: Exposed Liabilities & Current Liabilities + debt) Net exposure b) Change in translation exposure: Translation Gain (Loss) = ($1,375,000) – = ($1,375,000) Alternatively, the translation loss arising from the fall in the value of the peso Uruaguayo can be found as follows: Net exposed assets (US$) Percentage change in the value of the dollar Translation gain (loss) $16,500,000 -8.30% ($1,375,000) IM Science, KUST, Solution Manual of MBF 10tth Edition Prepared By Wasim Uddin Orakzai 207 Multinational Business Finance 10th Edition Solution Manual IM Science, KUST, Solution Manual of MBF 10tth Edition Prepared By Wasim Uddin Orakzai 208 Multinational Business Finance 10th Edition Solution Manual Chapter-11 Sourcing Global Equity Chapter # 11 Sourcing Equity Globally Problem# 11.1: Novo’s cost of equity prior to April 1980 Solution: Assumptions Danish risk free rate of interest, krf Danish stock market return, km Novo’s beta before internationalization Values 10.00% 18.00% 1.00 IM Science, KUST, Solution Manual of MBF 10tth Edition Prepared By Wasim Uddin Orakzai 209 Multinational Business Finance 10th Edition Solution Manual Calculation: What was Novo’s cost of equity? ke = krf + (km – krf) β = 18.00% Problem# 11.2: Novo’s WACC prior to April 1980 Solution: Assumptions Novo’s cost of debt, kd Novo’s cost of equity, ke Novo’s debt to capital ratio, D/V Novo’s equity to capital ratio, E/V Novo’s effective tax rate, t Values 12.0% 18.0% 70.0% 30.0% 40.0% Calculation: What was Novo’s weighted average cost of capital? WACC = (D/V × kd (1 – t)) + (E/V × ke) = 10.44% b) How did this affect its capital budget? The relatively high debt ratio and the tax shelter of interest led to a modest WACC despite the relatively high cost of equity Thus the WACC was probably a reasonable hurdle rate for capital investments However, the bigger problem was that the marginal cost of capital would increase significantly if Novo did not gain access to the liquidity provided by international portfolio investors Problem# 11.3: Novo’s cost of equity after July 1981 Assuming the following data now apply, calculate Novo’s cost of equity International portfolio investors dominated the trading activity in Novo’s stock Most of the volume was executed on the New York Stock Exchange Therefore we use international norms rather than Danish norms Assumptions Values International risk free rate of interest, krf 8.00% International stock market return, km 12.00% Novo’s beta after internationalization 0.80 IM Science, KUST, Solution Manual of MBF 10tth Edition Prepared By Wasim Uddin Orakzai 210 Multinational Business Finance 10th Edition Solution Manual What was Novo’s cost of equity now? ke = krf + (km – krf)β = 11.20% This was a very significant drop from the 18% cost of equity observed before April 1980 Problem# 11.4: Novo’s WACC after July 1981 Assumptions Novo’s new cost of debt, kd Novo’s cost of equity, ke Novo’s debt to capital ratio, D/V Novo’s equity to capital ratio, E/V Novo’s effective tax rate, t Values 10.0% 11.2% 50.0% 50.0% 40.0% a) What was Novo’s weighted average cost of capital? WACC = (D/V × kd (1 – t)) + (E/V × ke) = 8.60% b) How did this affect its capital budget? The lower cost of equity more than offset the lower debt ratio The WACC was reduced to 8.60% from 10.44% This created a better hurdle rate for capital investments Furthermore, access to international portfolio investors improved Novo’s marginal cost of capital Both results increased the number of capital projects that could be undertaken by Novo Problem# 11.5: Novo’s cost of equity in 2004 Assumptions International risk free rate of interest, krf International stock market return, km Novo’s beta after internationalization Values 4.00% 8.00% 0.80 IM Science, KUST, Solution Manual of MBF 10tth Edition Prepared By Wasim Uddin Orakzai 211 Multinational Business Finance 10th Edition Solution Manual What was Novo’s cost of equity now? ke = krf + (km – krf)β = 7.20% This is a further drop in the cost of equity due to reduction in market expectations & much of the world and lower the interest rates Problem# 11.6: Novo’s WACC in 2004 Assumptions Novo’s new cost of debt, kd Novo’s cost of equity, ke Novo’s debt to capital ratio, D/V Novo’s equity to capital ratio, E/V Novo’s effective tax rate, t Values 6.0% 7.2% 50.0% 50.0% 40.0% a) What was Novo’s weighted average cost of capital? WACC = (D/V × kd (1 – t)) + (E/V × ke) = 5.40% b) How did this affect its capital budget? Novo’s lower WACC in early 2004, compared to post-July 1981, was mainly due to lower overall interest rates and required rates of return Theoretically, Novo’s lower WACC should lead to even more acceptable capital projects However, the dismal economic outlook worldwide in early 2004 discouraged firms from investing in capital projects even though they pass the new lower hurdle rate Problem# 11.7: HangSung before equity issue abroad Assumptions Values Korean risk free rate of interest, krf 10.00% Korean stock market return, km 14.00% HangSung’s beta 1.00 What was Novo’s cost of equity now? ke = krf + (km – krf)β = 14.00% Problem# 11.8: HangSung’s WACC before equity issue abroad Assumptions Values HangSung’s cost of debt, kd 12.0% HangSung’s cost of equity, ke 14.0% HangSung’s debt to capital ratio, D/V 80.0% IM Science, KUST, Solution Manual of MBF 10tth Edition Prepared By Wasim Uddin Orakzai 212 Multinational Business Finance 10th Edition Solution Manual HangSung’s equity to capital ratio, E/V HangSung’s effective tax rate, t 20.0% 30.0% What was HangSung’s WACC? WACC = (D/V × kd (1 – t)) + (E/V × ke) = 9.52% Problem# 11.9: HangSung after equity issue abroad Assumptions International risk free rate of interest, krf International stock market return, km HangSung’s beta What was Novo’s cost of equity now? ke = krf + (km – krf)β= 6.80% Values 4.00% 8.00% 0.70 The cost of equity dropped significantly from 14% to 6.8% after the equity issue abroad This demonstrates one of the advantages for a firm to internationalize its cost and availability of capital Problem# 11.10: HangSung’s WACC after equity issue abroad Assumptions HangSung’s cost of debt, kd HangSung’s cost of equity, ke HangSung’s debt to capital ratio, D/V HangSung’s equity to capital ratio, E/V HangSung’s effective tax rate, t Values 6.0% 6.8% 60.0% 40.0% 30.0% IM Science, KUST, Solution Manual of MBF 10tth Edition Prepared By Wasim Uddin Orakzai 213 Multinational Business Finance 10th Edition Solution Manual a) What was HangSung’s WACC? WACC = (D/V × kd (1 – t)) + (E/V × ke) = 5.24% b) How did this affect its capital budget? HangSung’s WACC was lowered from 9.52% before its equity issue abroad to 5.24% aftewards This should lead to more acceptable capital projects The equity issue abroad should also increase HangSung’s liquidity, thereby leading to a less-steeply increasing marginal cost of capital and still more acceptable capital projects Annexure of Currencies Used in Solution Manual S No Country USA Australia Hong Kong Canada Brazil Uruguay Afghanistan Pakistan India Currency Dollar Australian Dollar Hong Kong Dollar Canadian Dollar Reais Peso Uruguayo Rupees / Dollar Rupees Rupees Symbol $ A$ HK$ C$ R$ $U $ Rs Or PKR Rs IM Science, KUST, Solution Manual of MBF 10tth Edition Prepared By Wasim Uddin Orakzai 214 Multinational Business Finance 10th Edition 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 30 Indonesia Malyshia Switzerland Europeon Union Iran Thailand China Russia Germany Jurden Iraq Kuwit Dubai Saudi Arabia Mexican Japan UK Egypt Italy Turkey Rupaya Malaysian Ringget Swiss franc Euro Riyal / Toman Bhat Yoan / Renminbi Ruble Deutsche Mark Jordanian Diner Iraqi Diner Kuwaiti Diner Dirham Riyal Mexican peso Yen Pound Sterling Egyptian Pound Lira Lira Solution Manual Rs RM SF € R ฿ Y R DM JD ID KD D SRI Ps ¥ £ £E Lit TL IM Science, KUST, Solution Manual of MBF 10tth Edition Prepared By Wasim Uddin Orakzai 215 ... 10tth Edition Prepared By Wasim Uddin Orakzai 27 Multinational Business Finance 10th Edition Solution Manual Chapter-3 Balance of Payments IM Science, KUST, Solution Manual of MBF 10tth Edition. .. 81 82 83 84 IM Science, KUST, Solution Manual of MBF 10tth Edition Prepared By Wasim Uddin Orakzai Multinational Business Finance 10th Edition Problem # 6.2: Problem # 6.3: Problem # 6.4: Problem... 140 141 143 IM Science, KUST, Solution Manual of MBF 10tth Edition Prepared By Wasim Uddin Orakzai Multinational Business Finance 10th Edition Problem # 8.7: Problem # 8.8: Problem # 8.9: Problem