12. Cost of Capital An MNC has total assets of $100 million and debt of $20 million. The firm’s beforetax cost of debt is 12 percent, and its cost of financing with equity is 15 percent. The MNC has a corporate tax rate of 40 percent. What is this firm’s cost of capital?
24. Assessing Foreign Project Funded with Debt and Equity Nebraska Co. plans to pursue a project in Argentina that will generate revenue of 10 million Argentine pesos (AP) at the end of each of the next 4 years. It will have to pay operating expenses of AP3 million per year. The Argentine government will charge a 30 percent tax rate on profits. All after-tax profits each year will be remitted to the U.S. parent and no additional taxes are owed. The spot rate of the AP is presently $.20. The AP is expected to depreciate by 10 percent each year for the next 4 years. The salvage value of the assets will be worth AP40 million in 4 years after capital gains taxes are paid. The initial investment will require $12 million, half of which will be in the form of equity from the U.S. parent and half of which will come from borrowed funds. Nebraska will borrow the funds in Argentine pesos. The annual interest rate on the funds borrowed is 14 percent. Annual interest (and zero principal) is paid on the debt at the end of each year, and the interest payments can be deducted before determining the tax owed to the Argentine government. The entire principal of the loan will be paid at the end of year 4. Nebraska requires a rate of return of at least 20 percent on its invested equity for this project to be worthwhile. Determine the NPV of this project. Should Nebraska pursue the project?
3. Exchange Rate Effects
a. Explain the difference in the cost of financing with foreign currencies during a strong-dollar period versus a weak-dollar period for a U.S. firm.
b. Explain how a U.S.-based MNC issuing bonds denominated in euros may be able to offset a portion of its exchange rate risk.
6. Financing That Reduces Exchange Rate Risk Kerr, Inc., a major U.S. exporter of products to Japan, denominates its exports in dollars and has no other international business. It can borrow dollars at 9 percent to finance its operations or borrow yen at 3 percent. If it borrows yen, it will be exposed to exchange rate risk. How can Kerr borrow yen and possibly reduce its economic exposure to exchange rate risk?
4. Export-Import Bank
a. What is the role today of the Export-Import Bank of the United States?
b. Describe the Direct Loan Program administered by the Export-Import Bank.
8. Government Programs This chapter described many forms of government insurance and guarantee programs. What motivates a government to establish such programs?
5. Short-Term Financing Analysis Assume that Davenport, Inc., needs $3 million for a 1-year period. Within 1 year, it will generate enough U.S. dollars to pay off the loan. It is considering three options: (1) borrowing U.S. dollars at an interest rate of 6 percent, (2) borrowing Japanese yen at an interest rate of 3 percent, or (3) borrowing Canadian dollars at an interest rate of 4 percent. Davenport expects that the Japanese yen will appreciate by 1 percent over the next year and that the Canadian dollar will appreciate by 3 percent. What is the expected “effective” financing rate for each of the three options? Which option appears to be most feasible? Why might Davenport, Inc., not necessarily choose the option reflecting the lowest effective financing rate?
12. Break-Even Financing Lakeland, Inc., is a U.S.-based MNC with a subsidiary in Mexico. Its Mexican subsidiary needs a 1-year loan of 10 million pesos for operating expenses. Since the Mexican interest rate is 70 percent, Lakeland is considering borrowing dollars, which it would convert to pesos to cover the operating expenses. By how much would the dollar have to appreciate against the peso to cause such a strategy to backfire? (The 1-year U.S. interest rate is 9 percent.)
10. Effective Yield Repeat question 9, but this time assume that Rollins, Inc., expects the 180-day forward rate of the pound to substantially overestimate the spot rate to be realized in 180 days.
17. Impact of September 11 Palos Co. commonly invests some of its excess dollars in foreign government short-term securities in order to earn a higher short-term interest rate on its cash. Describe how the potential return and risk of this strategy may have changed after the September 11, 2001, terrorist attack on the United States.
18.From the case study and your knowledge of both the cost of capital and capital structure for MNCs, predict the likely outcome of a Blades expansion into Thailand. Determine whether Blades’ cost of capital will be higher or lower than it would be for a manufacturer operating solely in the U.S. Provide a rationale for your response.
18a.From the case study and the readings, predict the major effects of an expansion of Blades into Thailand on the required rate of return for the company. Suggest whether or not Blades should use the new required rate of return, which entails using the capital asset pricing model (CAPM) when discounting the cash flows from the Thai subsidiary to determine the net present value (NPV) of a project there. Provide a rationale for your response
19.Compare two (2) methods that a company can use in order to finance international trade. Examine the advantages and disadvantages of financing with a portfolio of currencies. Provide two (2) examples of how companies or MNCs finance international transactions by using their own “bank” or by keeping currencies on hand (marketable securities).
19a.Analyze Interest Rate Parity (IRP) and two (2) methods for forecasting exchange rates. Determine the primary manner in which they all affect a company’s short-term financing decision. Support your response with one (1) example of the manner in which IRP and forecasting exchange rates methods affect a company’s short-term financing decision