Applied Financial Management
APPLIED FINANCIAL MANAGEMENT
TUTORIAL SOLUTIONS
Question 1
(a) Define expropriation
The taking of foreign property, with or without compensation, by a government.
(b ) When expropriation does occur – how can a company respond?
Broadly the company can offer to allow more local involvement in the project, offer to support the local government (legal issues?), work in political opposition to the local government, try to use local (due to sovereign immunity) legal solutions, lobby the firm’s home government or take action through the
International Centre for Settlements of Investment Disputes. The last resort is insurance. CHAPTER 13 QUESTIONS
2. Impact of a Weak Currency on Feasibility of DFI. Packer, Inc., a U.S. producer of computer disks, plans to establish a subsidiary in Mexico in order to penetrate the Mexican market. Packer’s executives believe that the Mexican peso’s value is relatively strong and will weaken against the dollar over time. If their expectations about the peso value are correct, how will this affect the feasibility of the project? Explain.
ANSWER: If the peso’s value is relatively strong now, Packer Inc. will incur high costs of establishing a Mexican subsidiary. In addition, if the peso weakens, future remitted earnings by the subsidiary to the parent will be converted to fewer dollars. Packer will be adversely affected by the exchange rate movements (although the project may still be feasible).
3. DFI to Achieve Economies of Scale. Bear Co. and Viking, Inc., are automobile manufacturers that desire to benefit from economies of scale. Bear Co. has decided to establish distributorship subsidiaries in various countries, while Viking, Inc., has decided to establish manufacturing subsidiaries in various countries. Which firm is more likely to benefit from economies of scale?
ANSWER: Bear Company is likely to benefit because it is maintaining all of its manufacturing in one area. If Viking Inc. spreads its production
TUTORIAL SOLUTIONS
Question 1
(a) Define expropriation
The taking of foreign property, with or without compensation, by a government.
(b ) When expropriation does occur – how can a company respond?
Broadly the company can offer to allow more local involvement in the project, offer to support the local government (legal issues?), work in political opposition to the local government, try to use local (due to sovereign immunity) legal solutions, lobby the firm’s home government or take action through the
International Centre for Settlements of Investment Disputes. The last resort is insurance. CHAPTER 13 QUESTIONS
2. Impact of a Weak Currency on Feasibility of DFI. Packer, Inc., a U.S. producer of computer disks, plans to establish a subsidiary in Mexico in order to penetrate the Mexican market. Packer’s executives believe that the Mexican peso’s value is relatively strong and will weaken against the dollar over time. If their expectations about the peso value are correct, how will this affect the feasibility of the project? Explain.
ANSWER: If the peso’s value is relatively strong now, Packer Inc. will incur high costs of establishing a Mexican subsidiary. In addition, if the peso weakens, future remitted earnings by the subsidiary to the parent will be converted to fewer dollars. Packer will be adversely affected by the exchange rate movements (although the project may still be feasible).
3. DFI to Achieve Economies of Scale. Bear Co. and Viking, Inc., are automobile manufacturers that desire to benefit from economies of scale. Bear Co. has decided to establish distributorship subsidiaries in various countries, while Viking, Inc., has decided to establish manufacturing subsidiaries in various countries. Which firm is more likely to benefit from economies of scale?
ANSWER: Bear Company is likely to benefit because it is maintaining all of its manufacturing in one area. If Viking Inc. spreads its production