Reference no: EM133122966

Questions -

Q1. Hilton International is considering investing in a new Swiss hotel. The required initial investment is $1.5 million (or SFr 2.38 million at the current Exchange rate of $0.63 = SFr1 Profits for the first 10 years will be reinvested, at which time Hilton will sell out to its partner. Based on projected earnings, Hilton's share of this hotel will be worth SFr 3.88 million in 10 years.

a. What factors are relevant in evaluating this investment?

b. How will fluctuations in the value of the Swiss franc affect this investment?

c. How would you forecast the $:SFr exchange rate 10 years ahead?

Q2. A proposed foreign investment involves a plant whose entire output of 1 million units per annum is to be exported. With a selling price of $10 per unit, the yearly revenue from this investment equals $10 million. At the present rate of exchange, dollar costs of local production equal $6 per unit. A 10% devaluation is expected to lower unit costs by $0.30, while a 15% devaluation will reduce these costs by an additional $0.15. Suppose a devaluation of either 10% or 15% is likely, with respective probabilities of 0.4 and 0.2 (the probability of no currency change is 0.4). Depreciation at the current Exchange rate equals $1 million annually, and the local tax rate is 40%.

a. What will annual dollar cash flows be if no devaluation occurs?

b. Given the currency scenario described here, what is the expected value of annual after-tax dollar cash flows assuming no repatriation of profits to the United States?

Q3. In 1990, General Electric acquired Tungsram Ltd., a Hungarian lightbulb manufacturer. Hungary's inflation rate was 28% in 1990 and 35% in 1991, while the forint (Hungary's currency) was devalued 5% and 15%, respectively, during those years. Corresponding inflation for the United States was 6.1% in 1990 and 3.1% in 1991.

1. What happened to the competitiveness of GE's Hungarian operations during 1990 and 1991? Explain.

2. In early 1992, GE announced that it would cut back its capital investment in Tungsram. What might have been the purpose of GE's publicly announced cutback?

Q4. Nissan produces a car that sells in Japan for ¥1.8 million. On September 1, the beginning of the model year, the exchange rate is ¥150:$1. Consequently, Nissan sets the U.S. sticker price at $12,000. By October 1, the Exchange rate has dropped to ¥125:$1. Nissan is concerned because it now receives only $12,000 × 125 = ¥1.5 million per U.S. sale.

a. What scenarios are consistent with the U.S. dollar'sdepreciation?

b. What alternatives are open to Nissan to improve its situation?

c. How should Nissan respond in this situation?

d. Suppose that on November 1, the U.S. Federal Reserve intervenes to rescue the dollar, and the exchange rate adjusts to ¥220:$1 by the following July. What problems and/or opportunities does this situation present for Nissan and for General Motors?

Q5. Chemex, a U.S. maker of specialty chemicals, exports 40% of its $600 million in annual sales: 5% to Canada and 7% each to Japan, Britain, Germany, France, and Italy. It incurs all its costs in U.S. dollars, while most of its export sales are priced in the local currency.

a. How is Chemex affected by exchange rate changes?

b. Distinguish between Chemex's transaction exposure and its operating exposure.

c. How can Chemex protect itself against transaction exposure?

d. What financial, marketing, and production techniques can Chemex use to protect itself against operating exposure?

e. Can Chemex eliminate its operating exposure by hedging its position every time it makes a foreign sale or by pricing all foreign sales in dollars? Why or why not?

Q6. Over the past year, China has experienced an inflation rate of about 22%, in contrast to U.S. inflation of about 3%. At the same time, the exchange rate has gone from Y8.7/U.S.$1 to Y8.3/U.S.$1.

a. What has happened to the real value of the yuan over the past year? Has it gone up or down? A little or a lot?

b. What are the likely effects of the change in the yuan's real value on the dollar profits of a multinational company such as Procter & Gamble that sells almost exclusively in the local market? What can it do to cope with these effects?

c. What are the likely effects of the change in the yuan's real value on the dollar profits of a textile manufacturer that exports most of its output to the United States? What can it do to cope with these effects?