MAY-1997 (3 HOURS) N.B.: 1. There are nine questions; answer any five only. 2.

All questions carry equal marks.

TOTAL MARKS-100

1. The World Bank/IMF/WTO/UNCTAD are important financial orgainisations. Discuss with reference to any two of the above 2. The SAARC/NAFTA/EEC/ASEAN/APEC are important Regional Cooperation Agreements. Discuss with reference to any two of the above. 3. International trade theories profoundly affect International Business. Discuss with examples. 4. Discuss marketing strategies employed by MNCs to penetrate new markets. 5. What are the key elements in International Business? 6. What are the Risks faced by a MNC when it invents in a new country? Discuss in detail. 7. What is the Organisational structure of a MNC? Discuss in detail. 8. Write short notes on any two of the following:a) Multi Location Manufacturing b) Forex c) Foreign Portfolio Investment d) Difference between a MNC and a IC e) Future and Options 9. Imperial Power Corporation In 1971, Imperial Power Corporation (IPC) a U.S. based multinational firm, completed a new plant in Spain to manufacture fractional horsepower electric motors. These motors were sold to IPC subsidiaries in France and Germany, who assembled them into various end products that were then sold throughout Europe. Penetration of the Spanish market was however negligible. The plant site near Madrid had been chosen because of inducements from the Spanish government, the availability of a stable, suitably skilled labor force, and the expectation that presence in Spain would aid the marketing effort. To provide the required capital for the new subsidiary. Imperial Power of Spain, or IPS, IPC provided US$800,000 as long termloan in addition to equity capita. Chase Manhattan Bank in New York provided US$300,000 as an equipment mortgage guaranteed by IPC. In early 1982, the Madrid plant was operating at 70% of design capacity. The French and German subsidiaries were operating near full design capacity. In late 1981, top management at IPC was concerned about the possibility of a devaluation of the Spanish peseta. Strong political unrest and an economy weakend by strikes led management to

conclude that exchange rate was technically floating, it was that the Spanish monetary authorities often intervened to keep the exchange rate within a narrow band. Therefore, the devaluation, if it happened, would be sudden rate than gradual. The current exchange rates (local currency per US$1) were: DM 2,4127 Spta 106.67 FF 6.27 0.5602 In additional to the debt incurred at the time of start-up, IPS had borrowed Pts. 7.5 million each from Banco Espanol de Credito and Chase Manhattan Bank (Madrid). The equipment mortgage, however, had been 50% repaid. Monthly reports received by IPC indicated that IPS had an average gross margin of 50%. Direct and indirect imported material accounted for 25% of the variable manufacturing cost. Spanish domestic material 15% and the remainder was labour and overhead. In an effort to reduce cash balances in anticipation of the devaluation, Imperial Power-Spain had purchase a $250,000 CD from Credit Lyonnais and bought. EXHIBIT: Imperial Power of Spain, Balance Sheet as of March31, 1982 (in thousands of pesetas). ASSETS Cash Receivables and securities Inventories New plant and equipment Total LIABILITIES Accounts payable Accrued wages and taxes Long term debt Equity Total Pts. 6,300 53,763 41,000 75,100 176,163 32,620 2,300 116,336 151,256 24,907 176,163

Pts. Pts. Pts. Pts

Foreign currency assets and liabilities translated at current exchanges rates. Spanish treasury notes for Pts. 14 million. Payments due from the French and German subsidiaries totaled FF 250,000 and DM 200,000 respectively. IPS owned $32,000 to Essex Wire (UK) Ltd and DM 125,000 to Ruhr Steel. The remainder of accounts payable was own to local suppliers. Exhibit 1 is the balance sheet for IPS as of March 31, 1982 Budgeted sales for the year ending March 31, 1983, were Pts. 280 million. Answer all questions. a) Why was the Plant chosen to be located in Spain? Explain the Outcome of this choice. b) What are the reasons for the impending devaluation of the Spanish Peseta?

c) How should IPC manage its account payable in this situation? Its account receivables? d) What did IPC do to reduce its cash balances and why? e) Calculate the Debt/Equity ratio and explain the effect of devaluation on it.