Week 7 Homework
Mohamed E. Abdelrahman
Prof: James Glenn
International Finance FIN: 535
15. DFI Strategy:
A. What comparative advantage does JCPenney have when establishing a store in a foreign country, relative to an independent variety store?
B. Why might the overall risk of JCPenney decrease or increase as a result of its recent global expansion?
C. JCPenney has been more cautious about entering China. Explain the potential obstacles associated with entering China.
A. J.C. Penney has name recognition, which could result in customer trust, and therefore a
stronger demand for its products. It also has marketing expertise that it applies to each store. It
also has economies of scale, because it could buy its products in bulk and distribute the products
to the stores that need those products.
B. Its risk may decrease because it has a strategy that allows it to utilize its expertise, while
relying on foreign expertise for part of the business that requires knowledge about foreign
cultures. Also, it has created more international diversification by spreading its store throughout
more foreign markets, so that its overall performance is not as heavily influenced by U.S.
Its risk could have increased if it selected local partners in the foreign countries that do not
properly apply their knowledge of the local culture when making decisions about the types of
products that the store should carry.
C. Obstacles include high inflation in China, difficulties in converting foreign currency,
difficulties in efficiently distributing products across stores, and the lack of disposable income
for many China residents.
16. FDI Location Decision.
A. Assume that the Japanese yen strengthens against the US dollar over time. How would this be expected to affect the profits earned by the Chinese subsidiary?
B. If Decko Co. ltd had established its subsidiary in Tokyo, Japan instead of China, would its subsidiary’s profits be more exposed or less exposed to exchange rate risk?
C. Why do you think that Decko Co. ltd established the subsidiary in China instead of Japan? Assume no major country risk barriers. D. If the Chinese subsidiary needs to borrow money to finance its expansion and wants to reduce its exchange rate risk, should it borrow US dollars, Chinese yuan, or Japanese yen?
A. If the yen appreciates against the dollar, it appreciates against the yuan, which results in
higher yuan cash flows to the Chinese subsidiary.
B. If the subsidiary was established in Tokyo, Japan, it would be less exposed to exchange rate
C. If Decko Co. may have established the subsidiary in order to take advantage of the low-cost
labor in China.
d. If the subsidiary needs to borrow money, it should borrow Japanese yen, because its revenue
are also denominated in yen.
17. Foreign Investment Decision:
If the yen is expected to appreciate against the dollar, while the rupee is expected to depreciate against the dollar, how would this affect Trak’s direct foreign investment?
Trak Co. would benefit if the rupee depreciates over time because it will need fewer dollars to
cover its operating expenses. It benefits from a stronger yen over time because the yen will
convert into larger dollar cash flows.
28. Capital Budgeting with Hedging:
What is the dollar amount of cash flows that Baxter will receive in 5 years if it accepts this
ANSWER: The forward rate premium is:
p = (1 + .04)5 – 1 = (1.216 / 2.192) – 1 = –44%
(1 + .17)5
Forward rate = Spot rate × (1 + premium)
= $.03 × (.56)
So the amount to be received is 10,000,000 units × $.0168 = $168,000.
29. Capital Budgeting and Financing:
Determine the NPV under these conditions.
Rather than use...
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