Multinational corporation and international

MULTINATIONAL CORPORATION AND INTERNATIONAL

FINANCIAL MANAGEMENT

1. What types of enterprises do you know?

2. What is corporate enterprise?

3. What types of business partnerships do you know?

4. What are the main working spheres for financial manager?

5. What is the goal of financial management?

6. How can corporations deal with agency problems?

7. What major dimensions set international finance apart from domestic finance?

8. What can we consider as multinational corporation?

9. What are the various categories of multinational firms?

10. What is the motivation for international expan­sion of firms within each category?

11. In seeking to predict tomorrow’s exchange rate, are you better off knowing today's exchange rate or the exchange rates for the past 100 days?

12. Are multinational firms riskier than purely domestic firms?

13. Is there any reason to believe that MNCs may be less risky than purely domestic firms? Explain.

14. In what ways do financial markets grade government economic policies?

15. How might total risk affect a firm's production costs and its ability to sell? Give some examples of firms in financial distress that saw their sales drop.

WORKING WITH FINANCIAL STATEMENTS

16. What are the principal features of the present Ukrainian accounting system?

17. What financial statements under National Accounting Standards do you know?

18. What are the most important Ukrainian accounting principles?

19. What is Balance Sheet? Describe its structure.

20. How are assets classified?

21. Name two types of fixed assets.

22. What kinds of liabilities do you know?

23. What does liquidity measure?

24. What information can the income statement give?

25. What information can the Cash Flow Statement give?

26. What information can the Capital Statement give?

27. What equation can illustrate the Owner's Capital balance?

INTRODUCTION TO VALUATION

28. What do we mean by the future value of an investment?

29. What does it mean to compound interest?

30. What do we mean by the present value of an investment?

31. The process of discounting a future amount back to the present is the opposite of doing what?

32. What do we mean by discounted cash flow valuation?

33. Describe how to calculate the future value of a series of cash flows.

34. Describe how to calculate the present value of a series of cash flows.

35. If an interest rate is given as 12 percent compounded daily, what do we call this rate?

36. What is an APR? What is an EAR? Are they the same thing?

37. In general, what is the relationship between a stated interest rate and an effective interest rate? Which is more relevant for financial decisions?

38. What does continuous compounding mean?

39. What is a pure discount loan? An interest-only loan?

40. What does it mean to amortize a loan?

41. What are the cash flows associated with a bond?

42. What is the general expression for the value of a bond?

43. Is it true that the only risk associated with owning a bond is that the issuer will not make all the payments? Explain.

44. What are the distinguishing features of debt as compared to equity?

45. What is the indenture? What are protective covenants? Give some examples.

46. What is sinking fund?

47. Why do we say bond markets may have little or no transparency?

48. In general, what are bid and ask price?

49. What is the difference between a nominal and a real return? Which is more important to a typical investor?

50. What is the Fisher effect?

51. What is the term structure of interest rates?

52. What are the six components that make up the bond’s yield?

53. What are the relevant cash flows for valuing a share of common stock?

54. Does the value of a share of stock depend on how long you expect to keep it?

55. What is the value of a share of stock when the dividend grows at a constant rate?

56. What rights do stockholders have?

57. Why is preferred stock called preferred?

58. Why does the value of a share of stock depend on dividends?

59. Under what circumstances might a company choose not to pay dividends?

60. Suppose a company has a preferred stock issue and a common stock issue. Both have just paid a $2 dividend. Which do you think will have a higher price, a share of the preferred or a share of the common?

61. Based on the dividend growth model, what are the two components of the total return on a share of stock? Which do you think is typically larger?

62. In the context of the dividend growth model, is it true that the growth rate in dividends and the growth rate in the price of the stock are identical?

CAPITAL BUDGETING FOR THE INTERNATIONAL CORPORATION

63. What is the net present value rule?

64. If we say an investment has an NPV of $1,000, what exactly do we mean?

65. In words, what is the payback period? The payback period rule?

66. Why do we say that the payback period is, in a sense, an accounting break-even measure?

67. In words, what is the discounted payback period? Why do we say it is, in a sense, a financial or economic break-even measure?

68. What advantage(s) does the discounted payback have over the ordinary payback?

69. What is an average accounting rate of return (AAR)?

70. What are the weaknesses of the AAR rule?

71. Under what circumstances will the IRR and NPV rules lead to the same accept/reject decisions? When might they conflict?

72. What are the most commonly used capital budgeting procedures?

73. If NPV is conceptually the best procedure for capital budgeting, why do you think multiple measures are used in practice?

74. Suppose a project has conventional cash flows and a positive NPV. What do you know about its payback? Its discounted payback? Its profitability index? Its IRR? Explain.

75. Describe how the average accounting return is usually calculated and describe the information this measure provides about a sequence of cash flows.

76. What is the AAR criterion decision rule?

77. Describe how the IRR is calculated and describe the information this measure provides about a sequence of cash flows. What is the IRR criterion decision rule?

78. What is the relationship between IRR and NPV? Are there any situations in which you might prefer one method over the other? Explain.

79. Describe how the profitability index is calculated and describe the information this measure provides about a sequence of cash flows. What is the profitability index decision rule?

80. What is the relationship between the profitability index and NPV? Are there any situations in which you might prefer one method over the other? Explain.

COST OF CAPITAL AND LONG-TERM FINANCIAL POLICY

81. What is the primary determinant of the cost of capital for an investment?

82. What do we mean when we say that a corporation’s cost of equity capital is 16 percent?

83. What are two approaches to estimating the cost of equity capital?

84. How can the cost of debt be calculated?

85. How can the cost of preferred stock be calculated?

86. How is the WACC calculated?

87. Why do we multiply the cost of debt by (1 - TC) when we compute the WACC?

88. What are flotation costs?

89. On the most basic level, if a firm’s WACC is 12 percent, what does this mean?

90. In calculating the WACC, if you had to use book values for either debt or equity, which would you choose? Why?

91. If you can borrow all the money you need for a project at 6 percent, doesn’t it follow that 6 percent is your cost of capital for the project?

92. What are the advantages of using the DCF model for determining the cost of equity capital? What are the disadvantages? What specific piece of information do you need to find the cost of equity using this model? What are some of the ways in which you could get this estimate?

93. What are the advantages of using the SML approach to finding the cost of equity capital? What are the disadvantages? What are the specific pieces of information needed to use this method? Are all of these variables observables, or do they need to be estimated? What are some of the ways in which you could get these estimates?

94. How do you determine the appropriate cost of debt for a company? Does it make a difference if the company’s debt is privately placed as opposed to being publicly traded? How would you estimate the cost of debt for a firm whose only debt issues are privately held by institutional investors?

SHORT-TERM FINANCIAL PLANNING AND MANAGEMENT

95. What is the difference between net working capital and cash?

96. Will net working capital always increase when cash increases?

97. List five potential uses of cash.

98. List five potential sources of cash.

99. What does it mean to say that a firm has an inventory turnover ratio of 4?

100. Describe the operating cycle and the cash cycle. What are the differences?

101. Explain the connection between a firm’s accounting-based profitability and its cash cycle.

102. What considerations determine the optimal size of the firm’s investment in current assets?

103. How would you do a sensitivity analysis? What could you learn from such an analysis?

104. What are the two basic forms of short-term financing?

105. Loftis Manufacturing, Inc., has recently installed a just-in-time (JIT) inventory system. Describe the effect this is likely to have on the company’s carrying costs, shortage costs, and operating cycle.

106. Is it possible for a firm’s cash cycle to be longer than its operating cycle? Explain why or why not.

THE FOREIGN EXCHANGE MARKET

107. Give a full definition of the market for foreign exchange.

108. Who are the market participants in the foreign exchange market?

109. How are foreign exchange transactions between international banks settled?

110. What is meant by a currency trading at a discount or at a premium in the forward market?

111. Why does most interbank currency trading worldwide involve the U.S. dollar?

112. What is triangular arbitrage? What is condition that will give rise to a triangular arbitrage opportunity?

113. Over the past six years the exchange rate between the Swiss franc and the US dollar, CFr/$, has exchanged from about 1.30 to about 1.60. would you agree that over this six year period, Swiss goods have become cheaper for buyers in the United States?

FUTURES AND OPTIONS ON FOREIGN EXCHANGE

114. Explain the basic differences between the operation of a currency forward market and a futures market.

115. In order for a derivatives market to function most efficiently, two types of economic agents are needed: hedgers and speculators. Explain.

116. Why are most futures positions closed out through a reversing trade rather than held to delivery?

117. How can the FX futures market be used for price discovery?

118. What is the major difference in the obligation of one with a long position in a futures (or forward) contract in comparison to an options contract?

119. What is meant by the terminology that an option is in-, at-, or out-of-the-money?

120. List the arguments (variables) of which an FX call or put option model price is a function. How does the call and put premium change with respect to a change in the arguments?

INTERNATIONAL FINANCIAL MARKETS

121. Describe the differences between foreign bonds and Eurobonds. Also discuss why Eurobonds make up the lion's share of the international bond market.

122. Discuss the process of bringing a new international bond issue to market.

123. You are an investment banker advising a Eurobank about a new international bond offering it is considering. The proceeds are to be used to fund Eurodollar loans to bank clients. What type of bond instrument would you recommend that the bank consider issuing? Why?

124. As an investor, what factors would you consider before investing in the emerging stock market of a developing country?

125. Compare and contrast the various types of secondary market trading structures.

RISK IN INTERNATIONAL FINANCIAL MANAGEMENT

RISK MANAGEMENT VEHICLES

126. What is hedging?

127. Why do firms place greater emphasis on hedging now than they did in the past?

128. What can a firm accomplish by hedging financial risk?

129. What is a forward contract? Describe the payoff profiles for the buyer and the seller of a forward contract.

130. What is a futures contract? How does it differ from a forward contract?

131. What is cross-hedging? Why is it important?

132. What is a swap contract? Describe three types.

133. What is a futures option?

134. If a firm is selling futures contracts on lumber as a hedging strategy, what must be true about the firm’s exposure to lumber prices?

135. If a firm is buying call options on pork belly futures as a hedging strategy, what must be true about the firm’s exposure to pork belly prices?

136. What is the difference between a forward contract and a futures contract? Why do you think that futures contracts are much more common? Are there any circumstances under which you might prefer to use forwards instead of futures? Explain.

137. If a textile manufacturer wanted to hedge against adverse movements in cotton prices, it could buy cotton futures contracts or buy call options on cotton futures contracts. What would be the pros and cons of the two approaches?

138. What is the difference between transactions and economic exposure? Which can be hedged more easily? Why?

INTERNATIONAL PORTFOLIO INVESTMENT

139. Explain how exchange rate fluctuations affect the return from a foreign market, measured in dollar terms. Discuss the empirical evidence for the effect of exchange rate uncertainty on the risk of foreign investment.

140. Would exchange rate changes always increase the risk of foreign investment?

141. Discuss the condition under which exchange rate changes may actually reduce the risk of foreign investment.

142. Evaluate a home country's multinational corporations as a tool for international diversification.

143. Why do investors invest the lion's share of their funds in domestic securities?

144. What are the advantages of investing via international mutual funds?

145. Discuss how the advent of the euro would affect international diversification strategies.

FINANCING FOREIGN TRADE

146. Discuss some of the reasons why international trade is more difficult and risky from the exporter's perspective than is domestic trade.

147. What three basic documents are necessary to conduct a typical foreign commerce trade? Briefly discuss the purpose of each.

148. Discuss the various ways the exporter can receive payment in a foreign trade transaction after the importer's bank accepts the exporter's time draft and it becomes a banker's acceptance.

149. What is a forfaiting transaction?

150. Do you think that a country's government should assist private business in the conduct of international trade through direct loans, loan guarantees, and/or credit insurance?

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