Question;Week 9 Homework;International Finance, FIN: 535;Strayer University;2013;17. Interaction;between Financing and Investment.Charleston Corp. is considering;establishing a subsid?iary in either Germany or the United;Kingdom. The subsidiary will be;mostly financed with loans from the local banks in the host country;chosen. Charleston has;determined that the revenue generated from the British subsidiary;will be slightly more favorable;than the revenue generated by the German subsidiary, even after;considering tax and exchange;rate effects. The initial outlay will be the same, and both;countries appear to be politically;stable. Charleston decides to estab?lish the subsidiary in;the United Kingdom because of the;revenue advantage. Do you agree with its decision?;Explain.;18. Financing Decision. In;recent years, several U.S. firms have penetrated Mexico's market.;One of the;biggest challenges is the cost of capital to finance businesses in Mexico.;Mexican;interest rates;tend to be much higher than U.S. interest rates. In some periods, the Mexican;government does;not attempt to lower the interest rates because higher rates may attract;foreign;investment in;Mexican securities.;a. How might U.S.-based MNCs expand in Mexico;without incurring the high Mexican;interest;expenses when financing the expansion?;Are any disadvantages associated with this;strategy?;b. Are;there any additional alternatives for the Mexican subsidiary to finance its;business;itself after it has been well;established? How might this strategy;affect the subsidiary?s;capital structure?;28. MNC?s Cost of;Capital.Sandusky Co. is;based in the U.S.;About 30% of its sales are from exports to;Portugal. Sandusky Co. has no other international;business. It finances its operations with 40% equity and;the remainder of funds with dollar-denominated;debt. It borrows its funds from a U.S. bank at an interest;rate of 9 percent per year. The long-term;risk-free rate in the U.S.;is 6 percent. The long-term risk-free;rate in Portugal is 11 percent. The stock;market return in the U.S.;is expected to be 13 percent annually.;Sandusky?s stock price typically moves in the;same direction and by the same degree as the U.S. stock;market. Its earnings are subject to a 20%;corporate tax rate.;Estimate the cost of;capital to Sandusky Co.;9. Bond;Financing Analysis.Sambuka, Inc. can;issue bonds in either U.S. dollars or in Swiss francs.;Dollar-denominated;bonds would have a coupon rate of 15 percent, Swiss franc-denominated bonds;would have a coupon;rate of 12 percent. Assuming that Sambuka can issue bonds worth $10,000,000 in;either currency;that the current exchange rate of the Swiss franc is $.70, and that the;forecasted exchange;rate of the franc in;each of the next three years is $.75, what is the annual cost of financing for;the franc-;denominated bonds?;Which type of bond should Sambuka issue?;10. Bond Financing;Analysis.Hawaii Co. just;agreed to a long-term deal in which it will export products;to Japan. It needs;funds to finance the production of the products that it will export. The;products will be;denominated in;dollars. The prevailing U.S.;long-term interest rate is 9 percent versus 3 percent in Japan.;Assume that interest;rate parity exists, and that Hawaii Co. believes that the international Fisher;effect;holds.;a. Should Hawaii Co. finance its production with;yen and leave itself open to the exchange rate;risk? Explain.;b. Should Hawaii Co. finance its production with;yen and simultaneously engage in forward;contracts to hedge;its exposure to exchange rate risk?;c. How could Hawaii Co. achieve low-cost;financing while eliminating its exposure to exchange;rate risk?;11. Cost of Financing.Assume that Seminole, Inc., considers;issuing a Singapore;dollar?denominated;bond at its present;coupon rate of 7 percent, even though it has no incoming cash flows to cover;the bond;payments. It;is attracted to the low financing rate, since U. S. dollar-denominated bonds;issued in the;United States would;have a coupon rate of 12 percent. Assume that either type of bond would;have a;four??year maturity;and could be issued at par value. Seminole needs to borrow $10;million. Therefore, it;will either issue U.;S. dollar denominated bonds with a par value of $10 million or bonds;denominated in;Singapore dollars;with a par value of S$20 million. The spot rate of the Singapore dollar is $.50.;Seminole has;forecasted the Singapore dollar?s value at the end of each of the next four;years, when;coupon payments are;to be paid;End of Year Exchange Rate of Singapore;Dollar;1 $.52;2.56;3.58;4.53;Determine the expected annual cost of;financing with Singapore;dollars. Should Seminole, Inc., issue;bonds denominated in;U.S. dollars or Singapore dollars? Explain.
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