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Fnmg 548:International Finance Management Question Paper
Fnmg 548:International Finance Management
Course:Master Of Business Administration
Institution: Kenya Methodist University question papers
Exam Year:2012
INTERNATIONAL FINANCE MANAGEMENT (FNMG 548) (MSFI 516) 2ND TRIMESTER 2012
KENYA METHODIST UNIVERSITY
SCHOOL OF BUSINESS AND MANAGEMENT
END OF SEMESTER EXAMINATION FOR MASTER IN BUSINESS ADMINISTRATION, AUGUST 2012 (EVENING)
UNIT CODE : FNMG 548
UNIT TITLE : INTERNATIONAL FINANCIAL MANAGMENT
TIME: 3 HOURS
INSTRUCTIONS:
Answer Question ONE and any Other THREE Questions
QUESTION ONE
International business operations require an analysis of a complex set of
factors whose impacts may vary from country to country. The case below highlights one such factor- country risk.
Case: Country Risk Assessments- Blades Inc.
Blades Inc. is a USA- based company with operations in Thailand. The Company produces and sells roller blades branded "speedos". Recently, Ben Holtm the Chief Financial officer (CFO), has assessed whether it would be more beneficial for blades to establish a subsidiary in Thailand to manufacture rollerblades or to acquire an existing manufactures. Previously, the company manufactured the roller blades in the USA before exporting them to Thailand. Skate and stuff, an existing Thai Company, has offered to sell its business to blades for 1 billion Thai Bhat. (The Thai Currency). In Holt`s view, establishing a subsidiary in Thailand yields a higher Net Present Value (NPV) then acquiring an existing business. Further more the Thai manufacturer has rejected an offer by Blader of 900 million Bhat for Skate & Stuff. A purchase of 900 million bhat for the company would make the acquisition as attractive as the establishment of skate & stuff. A purchase of 900 million bhat for the company would make the acquisition as attractive as the establishment of a subsidiary in terms of NPV.
Skate and stuff has indicated that it is not willing to accept less than 950 million bhat. Although Holt is confident the NPV analysis was conducted correctly, same discount rate, 25%, was used in each analysis. In his view, establishing a subsidiary in Thailand may be associated with a higher country risk than acquiring Skate and Stuff. Although either approach would result in approximately the same level of financial rush, the political risk associated with establishing a subsidiary in Thailand may be higher than the political risk of operating Skate and Stuff. Consequently, a higher discount rate should have been used to assess the establishment of a subsidiary. Based on these considerations Holt wants to measure the country risk associated with Thailand on both a macro and a micro level and then re-examine the feasibility of both approaches.
First, Holt has gathered some more detailed political information on Thailand. For example, he believes that consumers in Asian countries prefer to purchase goods produced by Asians, which might prevent a subsidiary in Thailand, from being successful this cultural characteristic might not prevent an acquisition of Skate and Stuff from succeeding, however, especially if Blader retains the company`s management and employees. Furthermore, the subsidiary would have to apply for various licenses and permits to be allowed to operate in Thailand, while Skate & Stuff obtained these licenses and permits long ago. However, the number of licenses required to roller blades business is low compared to other industries. Moreover, there`s a high possibility that the Thai Government will implement capital controls in the near future, which would prevent funds from leaving Thailand since Blades has planned to remit all earnings to the US, capital controls may force it to reinvest the funds in Thailand.
As for Financial risk the economy has been weak lately and recovery is forecast to be slow. This may affect demand, particularly since it sells a leisure product. In an economic downturn, consumers eliminate these purchases first. He is also worried about high interest rates which may further slow the economy. Inflation is also expected to remain high and this may affect consumer purchasing power, leading to adjustment to spending habits towards purchasing essential products. However, the high inflation is also indicative that the Thai`s are still spending a relatively high proportion of their earnings.
Another financial factor is the bhat-dollar exchange rate. Current forecasts indicate the bhat may depreciate in future. However the company would be selling locally produced roller blades to Thai consumers. The exchange rate will only affect remittances.
Based on the foregoing, Holt feels the political risk would be higher if a subsidiary is established rather than acquiring Skate & Stuff. The Financial risk will, however, be roughly the seme.
He would like, however, to have some numbers needy to backing his argument when he meets the Board of Blades. He wants a quantitative analysis of he country risk associated with operating in Thailand. He has provided you with the following information and asked for a country risk analysis. Further, you are to adjust the discount rate for the riskier venture (establishing a subsidiary)
1. Since Blades produces leisure products, its more susceptible to financial risk factors rather than political risk factors use weights financial risk factors 60%, political risk factors 40%
2. Use the attitude of Thai consumers, capital controls and bureaucracy as political considers capital controls as the most important political risk factor. Altitudes and bureaucracy as considered to have equal importance.
3. Use Interest rates, inflation levels and exchange rates as financial risk factors Exchange rates and Interest rates are equal importance but inflation is slightly less important.
4. Assign each factor a rating between 1 and 5, where 5 denotes most unfavorable rating.
Required:
a) From the above, is the political risk higher or lower for a leisure products manufacture than for a, say, Ford producer? Conduct a micro assessment of the political risk for Blades. (4marks)
b) Conduct a micro-assement of the financial risk for Blades. (4marks)
c) Is Blades likely to be affected by political or financial risk in Thailand?
(4marks)
d) Is the political risk likely to be higher for establishing a subsidiary compared to buying Skate & Stuff? Substantiate (numerical analysis not required. (4marks)
e) Conduct a quantitative country risk analysis for Blades inc. Using the information provided for each of the two operating models establishment of subsidiary or acquiring Skate & Stuff. Use your judgment to assign weights. (6marks)
f) What discount rate should be used in the riskier investment to make both alternatives equally risky? (3marks)
QUESTION TWO
a) Discuss the factors that determine the exchange rate between two
currencies. (10marks)
b) Discuss the following foreign exchange theories:
i) Interest Rate parity theorem. (3marks)
ii) Purchasing power parity theorem (3marks)
c) Bundi manufacturers in a Kenyan based company that imputs raw materials and components from Uganda and the UK. It wishes to forecast the direction of exchange rates in these countries for the coming one year. Its financial analysis have developed the following one-year projections.
Factor Kenya Uganda UK
Change in Interest rates -1% -2% -4%
Change in Inflation 2% -3% -6%
Kenya conducts a large volume of trade with Uganda but there`s little capital investments flows. One of the other hand, there are very large capital flow movements between Kenya and UK, but limited trade flows.
Required:
What should Bundi expect regarding the future value of the exchange rates between the Kenya shilling and Uganda shilling, and between the Kenya shilling and the pound sterling? (9marks)
QUESTION THREE
a) Discuss the types of foreign exchange risks that a company operating
Internationally may be exposed to. (7marks)
b) Explain each of the following currency risk it can be used to mitigate
foreign exchange risks.
Currency forward contracts.
(3marks)
Currency futures contract.
(3marks)
Currency options
(3marks)
Currency swaps
(3marks)
c) How may global taxation affect the behavior of a transnational
company? (6marks)
QUESTION FOUR
Bantu group has established a subsidiary in Uganda to manufacture and sell its products in that country. Bantu Holdings, the parent company, is based in Nairobi, Kenya.
a) Briefly discuss the subsidiary cash flows that the group should consider in developing its group cash management strategies. (9marks)
b) Discuss FOUR issues that should be taken into account in optimizing cash flows at the subsidiary. (8marks)
c) The current one-year Ugandan treasury bill interest is 25% while the company is considering investing earnings in Uganda in the Uganda T-bills before remittance to Kenya. Possible rate of change of the Ugandan skilling over the year and as given:
Possible Rate of Change Probability of
in Uganda Sh. Over 1 year Occurrence
-15% 20%
-4 50
0 30
What is the expected yield on a Ugandan investment?
(4marks)
What is the probability that a Ugandan investment will yield less than a Kenyan Investment of the same amount?
(4marks)
QUESTION FIVE
5. Exchange rate- Its expected to remain unchanged over the life of the project/
6. Rwanda taxes – 20% on income and 10% withholding tax on all remittances. Due to a tax treaty, it will pay no Kenyan tax on any remittances.
7. Depreciation – it will be allowed at a maximum of RWF 2 million p.a. This will be the depreciation rate adopted by the company.
8. Cash flows – the company will remit all net cash flows back to Kenya. The
9. Rwandan Government has promised there will be no restraining.
Salvage - The Rwanda Government will pay RWF 12 million for the plant after 4 years. Further it will not impose any capital gains.
10. Required rate of return – Bantu requires 15% return on its projects
Required:
Determine the net present value of the project and advice the company
appropriately. (15marks)
a) Discuss the factors that a company should consider before investing in a
foreign country. (10marks)
b) County King, Kenyan registered company, is considering investing in
Rwanda. It has gathered the following data:
1. Initial investment RWF 20million
(Ksh. 1 = 14 Rwanda Francs (RWF)
2. Project life 4 years. The Government of Rwanda has promised to buy the plant after 4 years.
3. Price and demand and variable costs
Product - shoes
Year Price per pair Variable cost per pair Demand (pairs)
1 RWF 350 RWF 200 60,000 paid
2 350 200 60,000
3 360 250 100,000
4 360 260 100,000
4. Fixed expenses per year:
Office space lease RWF 1 Million
Other costs 1 Million
QUESTION SIX
a) Discuss THREE theories that attempt to explain International business i.e. why companies go International. (6marks)
b) In which ways can a company operate internationally? (10marks)
c) Discuss opportunities that exist in the East African region for Kenyan companies that may wish to expand regionally. 9marks)
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