跨国公司财务管理基础第5版1-8章习题答案.pdfVIP

CHAPTER 1 SUGGESTED ANSWERS TO “GENERAL ELECTRIC GLOBALIZES” 1. What advantages does General Electric seek to attain from its international business activities? ANSWER. Aside from gaining access to markets worldwide, GE focuses on taking advantage of its global reach to find less expensive materials abroad and intellectual capital, thereby lowering its cost of designing and manufacturing products. 2. What actions is it taking to gain these advantages from its international activities? ANSWER. GE is acquiring companies abroad, and setting up joint ventures with other foreign companies, to gain their assets and ability to service local customers. It is setting up manufacturing facilities abroad to access lower cost labor and materials and also sourcing more purchases abroad for the same reasons. It also is identifying and hiring engineering and scientific talent from around the world to boost its intellectual capital and is setting up R its just that higher productivity means that companies dont have to hire as many new workers to produce the higher output. U.S. companies also have a comparative advantage in many service industries, such as financial services, consulting, and telecommunications. 5. Are the unions and their members right to be concerned about the effects of free -trade policies? What are these effects that they are concerned about? Who would be helped and who would be hurt if the unions got their way on trade? Explain. ANSWER. Yes. The industrial unions have set wages and benefits well above market levels. They were able to get away with such high levels of compensation as long as they were not facing competition from lower-paid foreign workers whose labor is embodied in imported products. Lower-priced foreign imports will put pressure on competing U.S. goods and, therefore, on the compensation enjoyed by industrial union members. Thus, protectionist policies will protect the wages and benefits of these union workers. At the same time, they will lead to higher prices to U.S. consumers of both foreign goods and services and the domestic goods and services that compete with them. A less obvious effect will be the harm caused to companies that export. Protectionism will lead to less demand for foreign exchange, thereby raising the value of the dollar and making U.S. exports less competitive overseas. CHAPTER 2 SUGGESTED ANSWERS TO “A YEN FOR YUAN” 1. Why is China trying to hold down the value of the yuan? What evidence suggests that China is indeed pursing a weak currently policy? ANSWER. China believes that it needs to export in order to keep people employed and provide jobs, as state enterprises become obsolete and close down. The government worries that a large body of unemployed people would lead to unrest. Evidence that a weak yuan policy is being pursued shows up in the peg to the dollar being maintained despite the weakening of the dollar. The existence of the peg is evident from the fixed exchange rate and the large quantity of dollars the government is buying up to support the dollar against the yuan (as seen in the jump in Chinas foreign exchange reserves in recent years). 2. What benefits does China expect to realize from a weak currency policy? ANSWER. China hopes that flourishing export businesses will be able to absorb newly unemployed people from state enterprises that are being shut down. In addition, a perceived potential deflation can be averted by maintaining a weak yuan (which raises the price of foreign goods) and expanding the yuan money supply in pursuit of this policy 3. What policy tools is China using to maintain the yuan at an artificially low level? Are there any potential problems with using this policy tool? What might China do to counter these problems? ANSWER. The policy tool used to maintain the yuan at an artificially low level is keeping the yuan pegged to the dollar by issuing more yuan to buy up dollars. The problem with maintaining the weak value is a rising money supply. A rapidly expanding money supply results in inflation. In Chinas case, this inflationary pressure is most noticeable in asset prices. To cope with this problem, the Chinese government could sterilize its foreign exchange intervention, but that is likely to result in continuing pressure on the yuan to appreciate. Alternatively, as suggested in the answer to part 6, China could free its currency and allow capital outflows, which would absorb much of the pressure to appreciate. 4. Does an undervalued yuan impose any cost on the Chinese economy? If so, what are they? ANSWER. An undervalued yuan raises the cost of foreign goods and services to Chinese consumers and companies, reducing their purchasing power overseas. 5. Suppose the Chinese government were to cease its foreign exchange market intervention and the yuan climbed to five to the dollar. What would be the percentage gain to the dollar investor? ANSWER. In this scenario, the value of the yuan would rise from $0.1208 (1/8.28) to $0.20 (1/5). The resulting gain in dollar value is (0.20 0.1208)/0.1208 or 65.6% 6. Currently the yuan is not a convertible currency, meaning that Chinese individuals are not permitted to exchange their yuan for dollars to invest abroad. Moreover, companies operating in China must convert all their foreign exchange earnings into yuan. Suppose China were to relax these currency controls and restraints on capital outflows. What would happen to the pressure on the yuan to revalue? Explain. ANSWER. Relaxing currency controls and constraints on capital outflows would result in increased capital outflows and an increase in the demand for foreign currency. Other things being equal, this increased demand for foreign exchange would reduce the pressure on the yuan to revalue and could even result in a depreciation of the yuan if the demand for foreign assets (for diversification and investment purpose, say) were sufficiently great. SUGGESTED SOLUTIONS TO CHAPTER 2 PROBLEMS 1. On August 8, 2000, Zimbabwe changed the value of the Zim dollar from Z$38/U.S.$ to Z$50/U.S.$. a. What was the original U.S. dollar value of the Zim dollar? What is the new U.S. dollar value of the Zim dollar? ANSWER. The U.S. dollar value of the Zim dollar prior to devaluation was $0.0263 (1/38). Subsequent to devaluation, the Zim dollar was worth $0.02 (1/50). b. By what percent has the Zim dollar devalued (revalued) relative to the U.S. dollar? ANSWER. The U.S. dollar value of the Zim dollar has changed by (0.02 - 0.0263)/0.0263 = -24%. Thus, the Zim dollar has devalued by 24% against the U.S. dollar. c. By what percent has the U.S. dollar appreciated (depreciated) relative to the Zim dollar? ANSWER. The U.S. dollar has appreciated against the Zim dollar by an amount equal to (50 - 38)/38 = 31.58%. 2. In 1995, one dollar bought 80. In 2000, it bought about 110. a. What was the dollar value of the yen in 1995? What was the yens dollar value in 2000? ANSWER. The dollar value of the yen in 1995 was $0.0125 (1/80). By 2000, the yen had fallen to $0.00909. b. By what percent has the yen fallen in value between 1995 and 2000? ANSWER. Between 1995 and 2000, the yen fell by 27.27%, calculated as (0.00909 - 0.0125)/0.0125. c. By what percent has the dollar risen in value between 1995 and 2000? ANSWER. During this same period, the dollar appreciated by 37.5%, calculated as (110 - 80)/80. 3. On February 1, the euro is worth $0.8984. By May 1, it has moved to $0.9457. a. By how much has the euro appreciated or depreciated against the dollar over this 3-month period? ANSWER. Since the euro is now worth more in dollar terms, it has appreciated against the dollar. The amount of euro appreciation is (0.9457 - 0.8984)/0.1984 = 5.27%. b. By how much has the dollar appreciated or depreciated against the euro over this period? ANSWER. The flip side of franc appreciation is dollar depreciation. The dollar has depreciated by an amount equal to 4. In early August 2002 (the exact date is a state secret), North Korea reduced the official value of the won from $0.465 to $0.0067. The black market value of the won at the time was $0.005. a. By what percent did the won devalue? ANSWER. Using Equation 2.1, the won devalued ($0.067-$0.465)/$0.465)=98.56% b. Following the initial devaluation what further percentage devaluation would be necessary for the won to equal its black market value? ANSWER. 25.4% 5. On Friday, September 13, 1992, the lira was worth DM 0.0013065. Over the weekend, the lira devalued against the DM to DM 0.0012613. a. By how much has the lira devalued against the DM? ANSWER. Using Equation 2.1, the lira devalued by (0.0012613 - 0.0013065)/0.0013065, or -3.46%. b. By how much has the DM appreciated against the lira? ANSWER. Using Equation 2.2, the DM appreciated against the lira by (1/0.0012613) - (1/0.0013065)/(1/0.0013065), or 3.58%. c. Suppose Italy borrowed DM 4 billion, which it sold to prop up the lira. What were the Bank of Italys lira losses on this currency intervention? ANSWER. Prior to devaluation, DM billion was worth Lit (4 billion/0.0013065). Following devaluation, the DM 4 billion borrowing would cost Lit (4 billion/0.0012613) to repay. Hence, the Italian government would lose Lit 4 billion x (1/0.0012613) - (1/0.0013065) = Lit 109,716,164344, or DM 138,384,998 at the new exchange rate. d. Suppose Germany spent DM 24 billion in an attempt to defend the lira. What were the Bundesbanks DM losses on this currency intervention? ANSWER. The Bundesbank would have bought Lit 24 billion/0.0013065. Following lira devaluation, these lira would be worth DM (24 billion/0.0013065) x 0.0012613, or DM 23,169,690,012. The result is a foreign exchange loss for the Bundesbank of DM 830,309,988 on this currency intervention. 6. At the time Argentina launched its new exchange rate scheme, the euro was trading at $0.85. Exporters and importers would be able to convert between dollars and pesos at an exchange rate that was an average of the dollar and the euro exchange rates, that is, P1 = $0.50 0.50. a. How many pesos would an exporter receive for one dollar under the new system? ANSWER. Under the new system, P1 = $0.50 + _0.50 = $0.50 + $0.85/2 = $0.925. The peso value of a dollar is thus 1/0.925, or $1 = P1.081. This exchange rate is equivalent to dollar appreciation of 8.1% against the peso. b. How many dollars would an importer receive for one peso under the new system? ANSWER. As shown in the answer to Part a, P1 = $0.925. This exchange rate is equivalent to peso devaluation against the dollar of 7.5%. SUGGESTED ANSWERS TO ”THE EURO REACTS TO NEW INFORMATION” 1. Explain the differing initial and subsequent reactions of the euro to news about the European Central Banks monetary policy. Give full details, drawing on any theories you are familiar with. ANSWER. The initial reaction is based on the expectation of no tightening in the money supply. The result will be higher inflation than previously expected andaccording to purchasing power paritya depreciating euro. The euros subsequent reaction was based on the view that monetary policy would in fact be tightened (thats the objective of an interest rate increase) and inflation would be reduced. At the same time, a higher real interest rate would be expected to attract more capital and boost the euros value as well. 2. How does a strong pound reduce the threat of imported inflation and work against higher interest rates? ANSWER. A weak pound will bring higher prices of foreign goods and services, enabling domestic producers to raise their prices and leading to higher inflation. Conversely, a stronger pound will bring lower-priced foreign goods and services, putting downward pressure on domestic prices and reducing the threat of inflation. Lower inflation will leadvia the Fisher effectto lower interest rates. At the same time, the expectation of lower inflation means the Bank of England will be under less pressure to raise interest rates to fight nonexistent inflation. 3. Which U.K. manufacturers are likely to be pressured by a strong pound? ANSWER. Those British manufacturers who compete with imports or who export will be hurt by a stronger pound because foreign competitors will see their pound-equivalent prices fall. In addition, British manufacturers who use domestically-sourced inputs in competition with those who use imported inputs will suffer. 4. Why might higher pound interest rates send sterling even higher? Give two possible reasons. ANSWER. Higher British interest rates occasioned by a tightening of monetary policy will lead to lower expected inflation. According to purchasing power parity, countries with lower rates of inflation will tend to see their currencies appreciate relative to those of countries with higher rates of inflation. At the same time, if the higher nominal interest rate is also a higher real interest rate, this will attract capital to the U.K. seeking to earn the higher real return. The greater demand for sterling for investment purposes will boost its value. 5. What tools are available to the European Central Bank and the Bank of England to manage their monetary policies? ANSWER. Both central banks can use open market operationswhich involves buying and selling bonds denominated in their currencies to regulate the money supply. It may be more difficult for the ECB, however, as it doesnt have Treasury bonds denominated in euros but there will be other bonds issued in the euro that it can buy or sell. The central banks can also raise or lower the interest rate at which they lend money to banks and regulate the reserve requirements of banks. Another tool of monetary policy is foreign exchange market intervention, which involves buying or selling their currencies in the foreign exchange market. SUGGESTED SOLUTIONS TO CHAPTER 3 PROBLEMS 1. During the currency crisis of September 1992, the Bank of England borrowed DM 33 billion from the Bundesbank when a pound was worth DM 2.78 or $1.912. It sold these DM in the foreign exchange market for pounds in a futile attempt to prevent a devaluation of the pound. It repaid these DM at the post-crisis rate of DM 2.50:1. By then, the dollar:pound exchange rate was $1.782:1. a. By what percentage had the pound sterling devalued in the interim against the Deutsche mark? Against the dollar? ANSWER. During this period, the pound depreciated by 10.1% against the pound and by 6.8% against the dollar b. What was the cost of intervention to the Bank of England in pounds? In dollars? ANSWER. The Bank of England borrowed DM 33 billion and must repay DM 33 billion. When it borrowed these DM, the DM was worth 0.3597, valuing the loan at 11.87 billion (DM 33 billion x 0.3597). After devaluation, the DM was worth 0.4000. Hence, the Bank of Englands cost of repaying the DM loan was 13.20 billion (DM 33 billion x 0.4), a rise of 1.33 billion. Thus, the cost to the Bank of England of this DM borrowing and intervention was 1.33 billion. In dollar terms, intervention cost the Bank of England $825 million. This estimate is based on the difference of $0.025 between the DMs initial value of $0.6878 (1.912/2.78) and its ending value of $0.7128 (1/2.50) times the DM 33 billion borrowed and spent defending the pound. Specifically, the cost calculation is $0.025 x 33,000,000,000 = $825 million. 10.1%- = 2.78 2.78 2.50 6.8%- = 1.912 1.912 1.782 2. Suppose the central rates within the ERM for the French franc and DM are FF 6.90403:ECU 1 and DM 2.05853:ECU 1, respectively. a. What is the cross-exchange rate between the franc and the mark? ANSWER. Since things equal to the same thing are equal to each other, we have FF 6.90403 = DM 2.05853. Hence, FF1 = DM 2.05853/6.90403 = DM 0.298164. Equivalently, DM 1 = FF 6.90403/2.05853 = FF 3.35386. b. Under the original 2.25% margin on either side of the central rate, what were the approximate upper and lower intervention limits for France and Germany? ANSWER. Given the answer to part a, the French franc could rise to approximately DM 0.298164 x 1.0225 = DM 0.304872 or fall as far as DM 0.298164 x 0.9775 = DM 0.291455. Similarly, the upper limit for the DM is FF 3.42933 and the lower limit is FF 3.27840. c. Under the revised 15% margin on either side of the central rate, what are the current approximate upper and lower intervention limits for France and Germany? ANSWER. Given the answer to part a, the French franc could rise to approximately DM 0.298164 x 1.15 = DM 0.342888 or fall as far as DM 2.98164 x 0.85 = DM 0.253439. Similarly, the upper limit for the DM is FF 3.85694 and the lower limit is FF 2.85078. 3. A Dutch company exporting to France has FF 3 million due in 90 days. Suppose that the current exchange rate is FF 1 = Dfl 0.3291. a. Under the exchange rate mechanism, and assuming central rates of FF 6.45863/ECU and Dfl 2.16979/ECU, what is the central cross-exchange rate between the two currencies? ANSWER. Given central rates of DFl 2.16979:ECU and FF 6.45863:ECU for the Dutch guilder and French franc, respectively, the central cross rate between the two currencies is DFl 1 = FF 2.97662 (6.45863/2.16979). Equivalently, FF 1 = DFl 0.335952 (2.16979/6.45863). b. Based on the answer to part a, what is the most the Dutch company could lose on its French franc receivable, assuming that France and the Netherlands stick to the ERM with a 15% band on either side of their central cross rate? ANSWER. At worst, the French franc can fall by 15% relative to its central guilder cross rate, to a cross-exchange rate of FF 1 = DFl 0.285559 (0.335952 x 0.85). Since the current exchange rate is FF 1 = DFl 0.3291, the most the Dutch company can lose on its FF 3 million receivable is 3,000,000 x (0.3291 - 0.285559) = DFl 130,622. c. Redo part b, assuming the band was narrowed to 2.25%. ANSWER. If the band were narrowed to 2.25%, then the minimum value for the French franc would be DFl 0.328393 and the maximum loss that the Dutch company could sustain would be 3,