Multinational Business Finance Assignment 5
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IIPM
THE INDIAN INSTITUTE OF PLANNING AND MANAGEMENT Multinational Business Finance - Re-Examination Assignment
Paper Code: IIPM/FIN04/MBF005 Max. Marks: 100 General Instructions: The Student should submit this assignment in his/her own handwritten (not in the typed format). The Student should submit this assignment within 2 days from the issue of the assignment. The student should attach this assignment paper with the answered papers. Write legibly and keep the length of the answer as per the weightage (in terms of marks) assigned to each question. DO NOT be unduly short or long in providing the relevant details. The student should only use the Rule sheet papers for answering the questions. Failure to comply with the above instructions would lead to rejection of assignment. Specific Instructions: There are Four Questions in this assignment. The student should answer all the questions along with their subparts. Marks are being assigned to each section of the question as well. Each Question carries equal marks (25 marks) unless specified explicitly.
Question-1(A)[15Marks] An MNC has accounts receivable of $1.8 billion and accounts payable of $940 million. It also has borrowed $700 million. The current spot rate is $1.8138/£. [i][5Marks]What is the MNC’s dollar transaction exposure in dollar terms ? [ii][5Marks]What is the MNC’s dollar transaction exposure in pound terms ? [iii][5 Marks] Suppose the pound appreciates to $2.1122/£, what is the MNC’s gain or loss,
Question-1[B][10Marks] Indus Ltd. is the wholly owned Indian subsidiary of US based company Gofts Ltd. Non consolidated balance sheets of both Gofts Ltd. and Indus Ltd. (only foreign operations), in thousands, are as follows: Assets Gofts Ltd.(Figures in Indus Ltd. (affiliate)(Figures dollars) in Rs.) Cash 2,200 8,000
2 Accounts receivable 2,400 4,600 Inventory 2,400 7,000 Net plant and equipment 4,600 9,000 Investment 2,000 Total 13,600 28,600 Plant &equipment and commons stock were acquired when exchange rate was Rs. 38.20/$. Liabilities and net worth Gofts Ltd. (parent) (Figures in Indus ltd. (affiliate) (Figures dollars) in Rs.) Accounts payable 1,000 12,000 Common stock 4,000 6,000 Retained earnings 8,600 10,000 Total 13,600 28,600 The current exchange rate is Rs. 43.20/$. Gofts Ltd. translates by current rate method. You have to answer carefully…………………………………………… the following questions
(i) Calculate the accounting exposure for Gofts Ltd, by the current rate method and monetary / non monetary method. (ii) Prepare a consolidated balance sheet for Gofts Ltd. and Indus Ltd.
Question-2[A][10 Marks] Globalisation has made a tremendous impact throughout the world in past few years. There are various reasons involved in this progression.” Elaborate and discuss the reasons along with its impacts on Indian economy as well . Question-2[B][15Marks] S Ltd in USA, ordered 5 drilling rigs from Daewoo in South Korea for $500 million. Daewoo has even given a proposal to finance the deal with a 5 year loan at 7% pa, repayable annually on reducing balance method. S Ltd will not get tax benefit on this interest, since it is an internal arrangement between the two parties. The interest rate prevailing in USA on a similar loan is 16%, and tax rate is 50%. [i] Is this proposal viable for S Ltd ? [Hint: Discounting factors for the 5 years at 8%pa are given below]
Year 1 Year 2 Year 3 Year 4
0.926 0.857 0.794 0.735
3 Year 5 0.681 All working should form of your any answer exposure ?
in pound terms, on its dollar transaction
Question-3 [25 Marks]…………………………. Read the following case carefully and answer the questions which are being given in the last of the case as well………………………………………………………………………………………………… ………. MANAGING OPERATING EXPOSURE: CAN WE REALLY MANAGE THE SAME?
It is necessary for business executives to digest and control the dynamic interaction of currency exposure and exposure management for their company's long-term welfare This case recounts how a company assessed its foreign exchange exposure and decided to hedge these exposures (Maloney, 1990). BCR is an indonesian based metal producer with business interests in eight countries. It is the world's fifth largest metal producer, owns 25 percent of the world's largest ironore producer and is a major producer of gold and fertilizer. BCR builds its business on large, low cost, and long life assets, which are globally competitive.
Most commodities produced by indonesian mining companies, including BCR, are exported and priced in US dollars. Thus, these companies would suffer significantly and their Indonesian currency revenue would drop if the Indonesain currency appreciated sharply against the US dollar. Given such an exposure, the conventional wisdom held that borrowing in US dollars would provide a "natural" hedge against their revenue stream. When forward markets began to develop, Indonesian mining companies often hedged up to 100 percent of forecasted revenues with a combination of debt servicing and forward contracts--often for periods up to ten years. In the early and mid-70’s, the Indonesian dollar declined sharply against the US dollar, and the "natural" hedge proved not to be a hedge at all, but rather an uncovered short position in the US dollar. As expected, the decline in the Indonesian currency increased the cost of serving US dollar debt. And those companies that had also sold forward their expected dollar revenue stream
4 also suffered further foreign exchange losses as these contracts matured. The positive effect of the stronger US dollar on dollar-denominated revenues was offset by a prolonged slump in mineral commodity prices.
Although BCR too experienced some currency losses, it fared better than many of its competitors for two reasons. First, it had relied more on the equity markets to finance capital expenditures. Second, it had not participated in new major projects in the early 1970s. In 1984, however, the company contemplated investment in new copper, uranium, and gold mine, with capital costs expected to be about $750 million. Under arrangements with a joint venture partner, the company planned to finance its share of the mine solely with debt, thereby increasing its total debt by a magnitude of two or three times.
When confronted with the need to decide the currency denomination of the debt, BCR concluded that taking a short position in US dollars, whether by borrowing or selling forwards, would not stabilize the volatility of its home country operating profits. Consequently, BCR decided to borrow in a basket of currencies that included Indonesian currency, US dollars, Japanese yen, British pounds, and Deutsche marks. The company also decided to discontinue its practice of selling forward US dollar revenues, except when actual sales had been made. …………………………………………….Case Questions……………………….. (i)What are two possible ways to hedge economic exposure? (ii)What are the different types of foreign exchange risk BCR will encounter? (iii)Evaluate pros and cons of various exchange-hedging instruments and techniques. (iv)Explain why borrowings in US dollars and forward sales of US dollar revenues by Indonesian mining companies had backfired. (v)Explain why BCR decided to borrow in a basket of currencies rather than exclusively in US dollars or Indonesain Currency. (vi)Explain why BCR decided not to hedge its economic exposure
Question-4(A)[13Marks] The Vodafone Corporation arranged a one-year, $1.5 million loan to fund a foreign project. The loan was denominated in Euros and carried a 10% nominal rate. The exchange rate at the time of
5 the loan was €0.6799/$ but dropped to €0.6455/$ by the time the repayment became due. What effective interest rate did Vodafone end up paying on the foreign loan ? Question-4(B)[12 Marks] On the same date that the DM Spot was quoted $0.40 in New York, the price of the pound sterling was quoted $1.80. (i)What would you expect the price of the pound to be in Germany ? (ii)If the pound were quoted in Frankfurt at DM 4.40/£, what would you do to profit from the situation ?
/////…………………………ALL THE BEST…………………………………////
IIPM
THE INDIAN INSTITUTE OF PLANNING AND MANAGEMENT Multinational Business Finance - Re-Examination Assignment
Paper Code: IIPM/FIN04/MBF005 Max. Marks: 100 General Instructions: The Student should submit this assignment in his/her own handwritten (not in the typed format). The Student should submit this assignment within 2 days from the issue of the assignment. The student should attach this assignment paper with the answered papers. Write legibly and keep the length of the answer as per the weightage (in terms of marks) assigned to each question. DO NOT be unduly short or long in providing the relevant details. The student should only use the Rule sheet papers for answering the questions. Failure to comply with the above instructions would lead to rejection of assignment. Specific Instructions: There are Four Questions in this assignment. The student should answer all the questions along with their subparts. Marks are being assigned to each section of the question as well. Each Question carries equal marks (25 marks) unless specified explicitly.
Question-1(A)[15Marks] An MNC has accounts receivable of $1.8 billion and accounts payable of $940 million. It also has borrowed $700 million. The current spot rate is $1.8138/£. [i][5Marks]What is the MNC’s dollar transaction exposure in dollar terms ? [ii][5Marks]What is the MNC’s dollar transaction exposure in pound terms ? [iii][5 Marks] Suppose the pound appreciates to $2.1122/£, what is the MNC’s gain or loss,
Question-1[B][10Marks] Indus Ltd. is the wholly owned Indian subsidiary of US based company Gofts Ltd. Non consolidated balance sheets of both Gofts Ltd. and Indus Ltd. (only foreign operations), in thousands, are as follows: Assets Gofts Ltd.(Figures in Indus Ltd. (affiliate)(Figures dollars) in Rs.) Cash 2,200 8,000
2 Accounts receivable 2,400 4,600 Inventory 2,400 7,000 Net plant and equipment 4,600 9,000 Investment 2,000 Total 13,600 28,600 Plant &equipment and commons stock were acquired when exchange rate was Rs. 38.20/$. Liabilities and net worth Gofts Ltd. (parent) (Figures in Indus ltd. (affiliate) (Figures dollars) in Rs.) Accounts payable 1,000 12,000 Common stock 4,000 6,000 Retained earnings 8,600 10,000 Total 13,600 28,600 The current exchange rate is Rs. 43.20/$. Gofts Ltd. translates by current rate method. You have to answer carefully…………………………………………… the following questions
(i) Calculate the accounting exposure for Gofts Ltd, by the current rate method and monetary / non monetary method. (ii) Prepare a consolidated balance sheet for Gofts Ltd. and Indus Ltd.
Question-2[A][10 Marks] Globalisation has made a tremendous impact throughout the world in past few years. There are various reasons involved in this progression.” Elaborate and discuss the reasons along with its impacts on Indian economy as well . Question-2[B][15Marks] S Ltd in USA, ordered 5 drilling rigs from Daewoo in South Korea for $500 million. Daewoo has even given a proposal to finance the deal with a 5 year loan at 7% pa, repayable annually on reducing balance method. S Ltd will not get tax benefit on this interest, since it is an internal arrangement between the two parties. The interest rate prevailing in USA on a similar loan is 16%, and tax rate is 50%. [i] Is this proposal viable for S Ltd ? [Hint: Discounting factors for the 5 years at 8%pa are given below]
Year 1 Year 2 Year 3 Year 4
0.926 0.857 0.794 0.735
3 Year 5 0.681 All working should form of your any answer exposure ?
in pound terms, on its dollar transaction
Question-3 [25 Marks]…………………………. Read the following case carefully and answer the questions which are being given in the last of the case as well………………………………………………………………………………………………… ………. MANAGING OPERATING EXPOSURE: CAN WE REALLY MANAGE THE SAME?
It is necessary for business executives to digest and control the dynamic interaction of currency exposure and exposure management for their company's long-term welfare This case recounts how a company assessed its foreign exchange exposure and decided to hedge these exposures (Maloney, 1990). BCR is an indonesian based metal producer with business interests in eight countries. It is the world's fifth largest metal producer, owns 25 percent of the world's largest ironore producer and is a major producer of gold and fertilizer. BCR builds its business on large, low cost, and long life assets, which are globally competitive.
Most commodities produced by indonesian mining companies, including BCR, are exported and priced in US dollars. Thus, these companies would suffer significantly and their Indonesian currency revenue would drop if the Indonesain currency appreciated sharply against the US dollar. Given such an exposure, the conventional wisdom held that borrowing in US dollars would provide a "natural" hedge against their revenue stream. When forward markets began to develop, Indonesian mining companies often hedged up to 100 percent of forecasted revenues with a combination of debt servicing and forward contracts--often for periods up to ten years. In the early and mid-70’s, the Indonesian dollar declined sharply against the US dollar, and the "natural" hedge proved not to be a hedge at all, but rather an uncovered short position in the US dollar. As expected, the decline in the Indonesian currency increased the cost of serving US dollar debt. And those companies that had also sold forward their expected dollar revenue stream
4 also suffered further foreign exchange losses as these contracts matured. The positive effect of the stronger US dollar on dollar-denominated revenues was offset by a prolonged slump in mineral commodity prices.
Although BCR too experienced some currency losses, it fared better than many of its competitors for two reasons. First, it had relied more on the equity markets to finance capital expenditures. Second, it had not participated in new major projects in the early 1970s. In 1984, however, the company contemplated investment in new copper, uranium, and gold mine, with capital costs expected to be about $750 million. Under arrangements with a joint venture partner, the company planned to finance its share of the mine solely with debt, thereby increasing its total debt by a magnitude of two or three times.
When confronted with the need to decide the currency denomination of the debt, BCR concluded that taking a short position in US dollars, whether by borrowing or selling forwards, would not stabilize the volatility of its home country operating profits. Consequently, BCR decided to borrow in a basket of currencies that included Indonesian currency, US dollars, Japanese yen, British pounds, and Deutsche marks. The company also decided to discontinue its practice of selling forward US dollar revenues, except when actual sales had been made. …………………………………………….Case Questions……………………….. (i)What are two possible ways to hedge economic exposure? (ii)What are the different types of foreign exchange risk BCR will encounter? (iii)Evaluate pros and cons of various exchange-hedging instruments and techniques. (iv)Explain why borrowings in US dollars and forward sales of US dollar revenues by Indonesian mining companies had backfired. (v)Explain why BCR decided to borrow in a basket of currencies rather than exclusively in US dollars or Indonesain Currency. (vi)Explain why BCR decided not to hedge its economic exposure
Question-4(A)[13Marks] The Vodafone Corporation arranged a one-year, $1.5 million loan to fund a foreign project. The loan was denominated in Euros and carried a 10% nominal rate. The exchange rate at the time of
5 the loan was €0.6799/$ but dropped to €0.6455/$ by the time the repayment became due. What effective interest rate did Vodafone end up paying on the foreign loan ? Question-4(B)[12 Marks] On the same date that the DM Spot was quoted $0.40 in New York, the price of the pound sterling was quoted $1.80. (i)What would you expect the price of the pound to be in Germany ? (ii)If the pound were quoted in Frankfurt at DM 4.40/£, what would you do to profit from the situation ?
/////…………………………ALL THE BEST…………………………………////
