19. Valuation of an MNC. Birm Co.

, based in Alabama, considers several international opportunities in Europe that could affect the value of its firm. The valuation of its firm is dependent on four factors: (1) expected cash flows in dollars, (2) expected cash flows in euros that are ultimately converted into dollars, (3) the rate at which it can convert euros to dollars, and (4) Birms weighted average cost of capital. For each opportunity, identify the factors that would be affected. a. Birm plans a licensing deal in which it will sell technology to a firm in Germany for $3 million; the payment is invoiced in dollars, and this project has the same risk level as its existing businesses. b. Birm plans to acquire a large firm in Portugal that is riskier than its existing businesses. c. Birm plans to discontinue its relationship with a U.S. supplier so that it can import a small amount of supplies (denominated in euros) at a lower cost from a Belgian supplier. d. Birm plans to export a small amount of materials to Ireland that are denominated in euros solution: a.(1) b.(2) (4) c.(2) d.(2)

12. International Investments. U.S.-based MNCs commonly invest in foreign securities. a. Assume that the dollar is presently weak and is expected to strengthen over time. How will these expectations affect the tendency of U.S. investors to invest in foreign securities? solution: a)It can be suggested that if the dollar is strong, we get more shares for the same amount of dollars than before. so the good choice of us is when dollar is weak and is expected to strengthen then investments will increase when dollars strengthens b. Explain how low U.S. interest rates can affect the tendency of U.S.-based MNCs to invest abroad. solution: b) the level of economic activity will be higher when the interest rate is low, which is same as funds are available at lower interest rates. so depends on this situation, the investors may prefer to invest in Us firms which have more chances of growth.

c. In general terms, what is the attraction of foreign investments to U.S. investors? solution: c) The major attraction is strong dollar which compared to major world currencies.

22. International Financial Markets. Recently, Wal-Mart established two retail outlets in the city of Shanzen, China, which has a population of 3.7 million. These outlets are massive and contain products purchased locally as well as imports. As Wal-Mart generates earnings beyond what it needs in Shanzen, it may remit those earnings back to the United States. Wal-Mart is likely to build additional outlets in Shanzen or in other Chinese cities in the future. a. Explain how the Wal-Mart outlets in China would use the spot market in foreign exchange. solution: a) If The Wal-Mart stores in China need to buy products from other countries, they must change the Chinese currency (yuan) into the other currencies in the spot market to purchase these products. Moreover, if they have the excess earning in yuan, they can use the spot market to change them into dollars. b. Explain how Wal-Mart might utilize the international money markets when it is establishing other Wal-Mart stores in Asia. solution: b) Because the Wal-Mart stores in the other foreign markets is growing and developing, so that Wal-Mart may need to hold some deposits of dollars(other currencies) that can be used to support the developing . When some Wal-Mart stores in foreign markets need funds, they can borrow money from banks in the foreign market. Thus, on the short-term basis, the foreign can afford market serves such as a deposit for Wal-Mart stores. c. Explain how Wal-Mart could use the international bond market to finance the establishment of new outlets in foreign markets. solution: c) To establish new outlets, Wal-Mart could issue bonds in the foreign market. However, The bonds may be denominated in the currency that is needed; then, if the stores are established, some of the cash flows which are generated by those stores could be used to pay interest .