Msf 509 Multi National Finance Weekend Question Paper
Msf 509 Multi National Finance Weekend
Course:Masters Of Science In Finance
Institution: Kca University question papers
Exam Year:2014
UNIVERSITY EXAMINATIONS: 2013/2014
EXAMINATION FOR THE MASTERS OF SCIENCE (MSC) FINANCE AND
INVESTMENT/ACCOUNTING/ECONOMICS
MSF 509 MULTI NATIONAL FINANCE WEEKEND
DATE: AUGUST, 2014
TIME: 3 HOURS
INSTRUCTIONS: Answer Question One and Any Other Three Questions
QUESTION ONE (31 MARKS)
IMPACT OF THE 11 SEPTEMBER EVENTS ON FDI FLOWS
The effects of the terrorist’s attacks of 11 September 2001 on FDI flows are difficult to gauge.
Company Surveys suggest that they were limited. In October/ November 2001, a survey by UNCTAD,
the agence Francaise Pour les Investissements Internatiomax and Andersen Consulting revisited a
number of the firms they had surveyed before 11 September. The finding was that few expected to
change their investment plans in the light of the attacks. Similarly, a survey by the Japan External
Trade Organization (JETRO) found in October 2001 that nearly half the Japanese firms surveyed did
not expect to change their FDI plans. These findings are consistent with a survey by A.T Kearney in
September / October 2001: two-thirds of corporate executives of the World’s 1,000 largest firms said
that they intended to invest abroad at more or less the levels already planed, 16 per cent said that their
FDI in 2001 would increase, and 20 per cent that it would decline. A survey of 643 firms by
Multilateral Investment Guarantee Agency (MIGA) in October 2001 found that there was no effect on
the expansion plans of 64 per cent of the respondents. Virtually none of the respondents intended to
cancel their FDi projects.
On the other hand the higher level of uncertainty created by the 11 September events, including higher
perceived political risk (associated with war and terrorism), may have induced some companies to
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adopt a “wait-and-see” attitude. Firms may have placed planned investments on hold until they had a
clearer picture of economic developments and the longer –term impact of the events on the United
States. This was reflected in the JETRO Survey, according to which more than half the respondents
were unable to make an assessment. Some companies are reported to have cancelled planned
investments after the 11 September events.
(Source: UNCTAD, World Investments Report)
Required:
a)
Explain what you think could have made the impact of 11 September events on FDI to be
minimal
b)
(16 Marks)
From the case, do you find any difference between the Perception of the US firms and the
Japanese firms towards September 11 events? Illustrate.
(15marks)
QUESTION TWO (23 MARKS)
a)
If the rate of exchange is:
US$ 2.000-2.0100/£ in New York
US$ 1.9800-1.9810/£ in London
Explain how the arbitrage process will work between the two markets to allow arbitrageurs to
gain.
b)
(12 Marks)
Explain why currencies with lower interest rates than say shilling normally stand at a premium
while currencies with higher interest than shilling normally stands a discount.
(11 Marks)
QUESTION THREE (23 MARKS)
a)
A Kenyan importer expects appreciation of the dollar while importing goods for US$ 1,000. So
he goes for buying $1,000 one month forward coinciding the time of payment for the import.
The spot rate and the forward rate are KShs. 81.00 and KShs. 81.50 per US Dollar.
Surprisingly, the future spot rate (on maturing) is only KShs.81.30/$. Will the forward deal be
beneficial? Explain the process.
b)
(13 Marks)
Explain the process through which the International debts are settled by Multinational
Corporations
(10 Marks)
QUESTION FOUR (23 MARKS)
a)
Find out the translation loss or gain on the basis of the following data supplied by the Kenyan
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subsidiary to the parent unit in the USA
AMOUNT IN SHILLINGS (MILLIONS)
LIABILITIES
ASSETS
Current Liabilities 400 Cash 100
Share Capital 1000 Marketable securities 100
Bonds 600 Debtors 200
Retained Earnings 400 Inventory 300
Land and Building 600
Plant and Machinery 800
Furniture and Fixtures 300
Historical Rate = KShs. 80/US$
Current Rate
= KShs. 86/US$
(12 Marks)
b)
Explain how to treat the use of blocked funds for calculating the initial cash flow
(11 Marks)
QUESTION FIVE (23 MARKS)
a)
A Kenyan Company is making appraisal of its project to be set up with its subsidiary in the
USA. The initial project cost amounts to US$ 125,000 which as expected will add KShs.
3,000,000 to the Kenya Company’s borrowing capacity over a period of three years. A sum of
KShs. 4,000,000 of the initial investment as met by the Kenyan Parent and the remaining
$25,000 is borrowed at 10% interest rate in the USA. The project has a life of three years. The
net operating cash flow is $50,000, $60,000 and $72,000 respectively in the first, second and
third year respectively. The salvage value is expected to be $10,000. The Spot Exchange rate is
KShs. 40/$. It is assumed that the PPP holds with no lag and the real price remains constant in
both absolute and relative terms. Hence the sequence of the exchange rate reflects the
anticipated annual rates of inflation equating 8% in Kshs and 5% in Dollar.
Depreciation amounts to KShs. 15,000,000 a year for three years. Tax rate is 30% in Kenya and
25% in the USA. Expected tax savings from intra-firm transfer pricing is Kshs. 50,000 a year in
all the three years. Discount rate for cash flow assuming all equity financing is 20%. Discount
rate for depreciation/tax saving on interest deductions from contribution to borrowing capacity
at 12%.Discount rate relating to loan repayment is 20% and on tax saving on account of
transfer pricing is 25%.
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Required:
Find the adjusted present value.
b)
(13 Marks)
Discuss any five forms of political risks and how they are managed (10 Marks)
QUESTION SIX (23 MARKS)
a)
Using the information provided in the table bellow, Calculate the actual forward rates when the
US Dollar and the Mexican Peso are quoted as follows:
US DOLLAR
SPOT 1.7405-15
1 Month 0.25-0.20c PM
3 Months 0.90-0.80c PM
PESO
SPOT 258.51-269.65
1 Month 42-62 C disc
3 Months 78-98c disc
(10 Marks)
b) Distinguish between translation exposure and transaction exposure
(06 Marks)
c) Parent Company’s interest dominates while making capital budgetary analysis. Explain
(07 Marks)
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