Week 1 -Homework
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Week 1 -Homework

Course Number: FIN 535 internatio, Fall 2013

College/University: Strayer

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Week 1 Homework International Finance: 535 Mohamed E Abdelrhaman Prof: Anthony Criniti Strayer University Fall 2013 17. International Joint Venture: A. Explain how the joint venture enabled Anheuser-Busch to achieve its objective of maximizing shareholder wealth. Answer: The joint venture creates a way for Anheuser-Busch to distribute Budweiser throughout Japan. It enables Anheuser-Busch to penetrate the...

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1 Week Homework International Finance: 535 Mohamed E Abdelrhaman Prof: Anthony Criniti Strayer University Fall 2013 17. International Joint Venture: A. Explain how the joint venture enabled Anheuser-Busch to achieve its objective of maximizing shareholder wealth. Answer: The joint venture creates a way for Anheuser-Busch to distribute Budweiser throughout Japan. It enables Anheuser-Busch to penetrate the Japanese market without requiring a substantial investment in Japan. B. Explain how the joint venture limited the risk of the international business. Answer: The joint venture has limited risk because Anheuser-Busch does not need to establish its own distribution network in Japan. Thus, Anheuser-Busch may be able to use a smaller investment for the international business, and there is a higher probability that the international business will be successful. C. Many international joint ventures are intended to circumvent barriers that normally prevent foreign competition. What barrier in Japan did Anheuser-Busch circumvent as a result of the joint venture? What barrier in the United States did Kirin circumvent as a result of the joint venture? Answer: Anheuser-Busch is able to benefit from Kirins distribution system in Japan, which would not normally be so accessible. Kirin is able to learn more about how Anheuser-Busch expanded its product across numerous countries, and therefore breaks through an information barrier. D. Explain how Anheuser-Busch could have lost some of its market share in countries outside Japan as a result of this particular joint venture. Answer: Anheuser-Busch could lose some of its market share to Kirin as a result of explaining its worldwide expansion strategies to Kirin. However, it appears that Anheuser-Busch expects the potential benefits of the joint venture to outweigh any potential adverse effects. 21. Valuation of Wal-Marts International Business: 1. Explain how to determine the present value (in dollars) of the non-U.S. part assuming that you had access to all the details of Wal-Mart businesses outside the United States. Answer: The non-U.S. part can be measured as the present value of future dollar cash flows resulting from the non-U.S. businesses. Based on recent earnings data for each store and applying an expected growth rate, you can estimate the remitted earnings that will come from each country in each year in the future. You can convert those cash flows to dollars using a forecasted exchange rate per year. Determine the present value of cash flows of all stores within one country. Then repeat the process for other countries. Then add up all the present values that you estimated to derive a consolidated present value of all non-U.S. subsidiaries. 22. Impact of International Business on Cash Flows and Risk: A. Explain why Nantucket may be able to effectively capitalize on international opportunities such as the Greek island tours. Answer: It already has established credibility with American tourists, but could penetrate a new market with some of the same customers that it has served on tours in the U.S. B. Nantucket is privately-owned owners by who reside in the U.S. and work in the main office. Explain possible agency problems associated with the creation of a subsidiary in Athens, Greece. How can Nantucket attempt to reduce these agency costs? Answer: The employees of the subsidiary in Athens are not owners, and may have no incentive to manage in a manner that maximizes the wealth of the owners. Thus, they may manage the tours inefficiently. Nantucket could attempt to allow the employees a portion of the ownership of the company so that they benefit more directly from good performance. Alternatively, Nantucket may consider having one of its owners transfer to Athens to oversee the subsidiarys operations. C. Greeces cost of labor and rent are relatively low. Explain why this information is relevant to Nantuckets decision to establish a tour business in Greece. Answer: The low cost of rent and labor will be beneficial to Nantucket, because it enables Nantucket to create the subsidiary at a low cost. D. Explain how the cash flow situation of the Greek tour business exposes Nantucket to exchange rate risk. Is Nantucket favorably or unfavorably affected when the euro (Greeces currency) appreciates against the dollar? Explain. Answer: Nantuckets tour business in Greece results in dollar cash inflows and euro cash outflows. It will be adversely affected by the appreciation of the euro because it will require more dollars to cover the costs in Athens if the euros value rises. E. Nantucket plans to finance its Greek tour business. Its subsidiary could obtain loans in Euros from a bank in Greece to cover its rent, and its main office could pay off the loans over time. Alternatively, its main office could borrow dollars and would periodically convert dollars to Euros to pay the expenses in Greece. Does either type of loan reduce the exposure of Nantucket to exchange rate risk? Explain. Answer: No. The Euro loans would be used to cover euro expenses, but Nantucket would need dollars to pay off the loans. Alternatively, the U.S. dollar loans would still require conversion of dollars to Euros. With either type of loan, Nantucket is still adversely affected by the appreciation of the euro against the dollar. F. Explain how the Greek island tour business could expose Nantucket to country risk. Answer: The subsidiary could be subject to government restrictions or taxes in Greece that would place it at a disadvantage relative to other Greek tour companies based in Athens. 27. Exposure of MNCs to Exchange Rate Movements: 1. Do you think that the exchange rate movements will have a favorable or unfavorable effect on the MNC? Answer: The movements in the euro are expected to have an unfavorable effect on Arlingtons value. The expected movements in the peso are expected to have a favorable effect on Arlingtons value. However, the expected peso effect should be smaller because the dollar amount of business in pesos is smaller. Thus, the overall effect should be unfavorable. References Madura, J. (2012). International financial management (11th Ed.). Mason, OH: South Western Cengage Learning.

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