Question;Week 8 Homework;nternational Finance, FIN: 535;Strayer University;2013;12. Global Strategy.Senser Co. established a subsidiary in Russia;two years ago. Under its original;plans, Senser;intended to operate the subsidiary for a total of four years. However, it would;like to;reassess the;situation, since exchange rate forecasts for the Russian ruble indicate that it;may depreciate;from its current;level of $.033 to $.028 next year and to $.025 in the following year. Senser;could sell the;subsidiary today for;5 million rubles to a potential acquirer. If Senser continues to operate the;subsidiary;it will generate;cash flows of 3 million rubles next year and 4 million rubles in the following;year. These;cash flows would be;remitted back to the parent in the U.S. The required rate of return of the;project is 16;percent. Should;Senser continue operating the Russian subsidiary?;17. Accounting;for Government Restrictions.Sunbelt;Inc. plans to purchase a firm in Indonesia. It;believes that it can;install its operating procedure in this firm, which would significantly reduce;the firm?s;operating expenses.;However, the Indonesian government may approve the acquisition only if Sunbelt;does not lay off any;workers. How can Sunbelt possibly increase;efficiency without laying off workers?;How can Sunbelt;account for the Indonesian government?s position as it assesses the NPV of this;possible;acquisition?;24. Valuation of a;Foreign Target.Gaston Co. (a U.S.;firm) is considering the purchase of a target;company based in Mexico. The net cash;flows to be generated by this target firm are expected to be 300;million pesos at the end of one year. The;existing spot rate of the peso is $.14, while the expected spot;rate in one year is $.12. All cash flows;will be remitted to the parent at the end of one year. In addition;Gaston hopes to sell the company for 800;million pesos (after taxes) at the end of one year. The target has;10 million shares outstanding. If Gaston;purchases this target, it would require a 25 percent return. The;maximum value that Gaston should pay for;this target company today is ____ pesos;per share. Show;your work.;16. How Country Risk Affects NPV. Hoosier, Inc., is planning a project in;the United Kingdom.;It;would lease space for one year in a shopping;mall to sell expensive clothes manufactured in the U.S. The;project would end in one year, when all;earnings would be remitted to Hoosier, Inc. Assume that no;additional corporate taxes are incurred beyond;those imposed by the British government.;Since Hoosier;Inc., would rent space, it would not have any;long-term assets in the United Kingdom, and expects the;salvage (terminal) value of the project to be;about zero.;Assume that the;project?s required rate of return is 18 percent. Also assume that the initial outlay;required by the;parent to fill the store with clothes is $200,000. The pretax earnings are expected to the;?300,000 at the end;of one year. The British pound is;expected to be worth $1.60 at the end of one year;when the after-tax;earnings are converted to dollars and remitted to the United States. The following;forms of country;risk must be considered;The;British economy may weaken (probability = 30%), which would cause the expected;pretax;earnings to be ?200,000.;The;British corporate tax rate on income earned by U.S. firms may increase from 40;percent to 50;percent (probability = 20 percent).;These two forms of country risk are;independent. Calculate the expected;value of the project?s net;present value (NPV) and determine the probability that;the project will have a negative NPV.;18. J.C.;Penney?s Country Risk Analysis.Recently, JC Penney decided to consider;expanding into;various foreign;countries, it applied a comprehensive country risk analysis before making its;expansion;decisions.;Initial screenings of 30 foreign countries were based on political and economic;factors that;contribute to;country risk. For the remaining 20 countries where country risk was considered;to be;tolerable;specific country risk characteristics of each country were considered. One of;JC Penney's;biggest targets;is Mexico, where it planned to build and operate seven large stores.;A.;Identify the political factors that you think may possibly affect the;performance of the JC;Penney;stores in Mexico.;B. Explain why the JC Penney;stores in Mexico and in other foreign markets are subject to;financial risk (a subset of country risk).;c. Assume that JC Penney anticipated that there;was a 10 percent chance that the Mexican;government would;temporarily prevent conversion of peso profits into dollars because of;political;conditions. This event would prevent JC Penney from;remitting earnings generated in Mexico;and;could adversely;affect the performance of these stores (from the U.S. perspective). Offer a way in;which this type of;political risk could be explicitly incorporated into a capital budgeting;analysis;when assessing the;feasibility of these projects.;d. Assume that JC Penney decides to use dollars;to finance the expansion of stores in Mexico.;Second, assume that;JC Penney decides to use one set of dollar cash flow estimates for any project;that it;assesses. Third, assume that the stores;in Mexico;are not subject to political risk. Do;you think;that the required;rate of return on these projects would differ from the required rate of return;on stores;built in the U.S. at;that same time? Explain.;e. Based;on your answer to the previous question, does this mean that proposals for any;new stores;in the U.S. have a higher probability of;being accepted than proposals for any new stores in Mexico?;25. Accounting for;Country Risk of Projects. Slidell Co. (a U.S. firm);considers a foreign project in;which it expects to receive 10 million;Euros at the end of this year. It plans to hedge receivables of 10;million Euros with a forward contract.;Today, the spot rate of the euro is $1.20, while the one-year;forward rate of the euro is presently;$1.24, and the expected spot rate of the euro in one year is $1.19.;The initial outlay is $7 million. Slidell has a required;return of 18%.;There is a 20% chance that political;problems will cause a reduction in foreign business, such that it;would only receive 4 million Euros at the;end of one year. Determine the expected;value of the net;present value of this project.
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