Fina 430:International Finance Question Paper

Fina 430:International Finance

Institution: Kenya Methodist University question papers

Exam Year:2012

KENYA METHODIST UNIVERSITY

END OF 2ND TRIMESTER 2012(EVENING) EXAMINATIONS
SCHOOL : BUSINESS AND ECONOMICS
DEPARTMENT : ACCOUNTING AND FINANCE
UNIT CODE : FINA 430
UNIT TITLE : INTERNATIONAL FINANCE

TIME: 2 HOURS

Instructions:

Answer question one and any other two questions.

Question One

Discuss the various types of exchange rate systems and their impact on economies. (10mks)
Assume the following information
Spot rate of £=

$1.60 180 day forward rate of £ = 81.56 180 day UK interest rate = 4% 180 day US interest rate = 3% Based on the information above, explain whether covered interest arbitrage by US investors is feasible assuming that the investors use their own funds. (5mks) Using the information above, does interest rate partly exist? Explain. (5mks) (i) Briefly discuss the criteria considered by MNCs in making international financing decisions. (5mks) ii) Amex Kenya LTD plans to finance its US operations by repeatedly borrowing two currencies with low interest rates whose exchange rate movements are highly correlated. Explain the implication on the variance of the two currency portfolio effecting financing rate and on the variance of the individual currency effective financing rate. (5mks) Question Two Osaka Japan Ltd is an MNC that intends to expand internationally to Kenya. Clearly explain with examples the risks this firm may face in entering and establishing a subsidiary in Kenya. (8mks) M-link consists of two businesses. Its local business is expected to generate cash flows of$ 1 million at the end of each of the next 3 years. It also owns a foreign subsidiary based in Mexico. This business is expected to generate

$2 million in cash flows at the end of each of the next 3 years. The main competitor of the Mexican subsidiary is Santiago Ltd, a privately held firm that is based in Mexico. M-link Ltd just contacted Santiago ltd and wants to acquire it. If it acquires Santiago, M-link would merge the operations of Santiago Ltd with its Mexican subsidiary’s business. It expects that these merged operations would generate a total of$ 3 million in cash flows at the end of each of the next 3 years. Santiago Ltd is willing to be acquired for a price of 40million pesos. The spot rate of the Mexican peso is $ 0.10. The required rate of return on this project is 24%.

Determine the NPV of this acquisition by M-link ltd.

(8mks)

Should M-link ltd pursue this acquisition. Give reasons.

(4mks)

Question Three

Discuss the major motivation behind national government in encouraging MNCs to invest in their countries.

(6mks)

Evaluate the circumstances that may justify violation of the packing order of financing preferences by management of MNCs. (8mks)

Why would Japanese and German companies traditionally have greater debt levels that Anglo-American companies.

(6mks)

Question Four

Global financial markets integration has been credited with a number of hopefully desirable outcomes. Using relevant examples evaluate the possible desirable and undesirable outcomes of global financial markets integration.

(11mks)

Clearly explain how each of the following may influence country risks.
Government involvement in business
Political and social Tension in a country

Wasteful government expenditure on non productive prestigious projects.

(9mks)

Fina 430:International Finance Question Paper

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