5 Exposure of MNCs to Exchange Rate Movements Arlington Co expects to receive

5 exposure of mncs to exchange rate movements

This preview shows page 3 - 5 out of 5 pages.

5. Exposure of MNCs to Exchange Rate Movements. Arlington Co. expects to receive 10 million euros in each of the next 10 years. It will need to obtain 2 million Mexican pesos in each of the next 10 years. The euro exchange rate is presently valued at $1.38 and is expected to depreciate by 2 percent each year over time. The peso is valued at $0.13 and is expected to depreciate by 2 percent each year over time. Review the valuation equation for an MNC. Do you think that the exchange rate movements will have a favorable or unfavorable effect on the MNC? 1 st Year (10,000,000*$1.38) + (2,000,000*$0.13) =13,826,000 2 nd Year (10,000,000*$1.35) + (2,000,000*$0.13) =13,526,000 3 rd year (10,000,000*$1.32) + (2,000,000*$0.13) =13,226,000 I think the exchange rate movement will have an unfavorable effect on the MNC as the exchange rates will lower the value of the company and the cash flow of the company. 5 Marks 6. Valuation of an MNC. Birm Co., based in Toronto, is considering several international opportunities in Europe that could affect the value of its firm. The valuation of its firm is dependent on four factors: (1) expected cash flows in dollars, (2) expected cash flows in euros that are ultimately converted into Ca dollars, (3) the rate at which it can convert euros to Ca dollars, and (4) Birm’s weighted average cost of capital. For each opportunity, identify the factor or factors that would be affected.
Image of page 3
a. Birm plans a licensing deal in which it will sell technology to a firm in Germany for $3,000,000; the payment is invoiced in CA dollars, and this project has the same risk level as its existing businesses. b. Birm plans to acquire a large firm in Portugal that is riskier than its existing businesses. c. Birm plans to discontinue its relationship with a Canadian supplier so that it can import a small amount of supplies (denominated in euros) at a lower cost from a Belgian supplier. d. Birm plans to export a small amount of materials to Ireland that are denominated in CA dollars. 8 Marks Opportunity Canadian Dollar CF Euro CF Exchange rate at which Birm Co. converts euros to Ca dollars Birm’s weighted average cost of capital a. joint venture X X b. acquisition X X X c. imported supplies X X d. exports to Ireland X Put an “X” in the box(es) for the factor affected. Provide an explanation. 7. Valuation of Wal-Mart’s International Business. In addition to all of its stores in the U.S., Let’s assume Wal-Mart has 13 stores in Argentina, 302 stores in Brazil, 289 stores in Canada, 73 stores in China, 889 stores in Mexico, and 335 stores in the U.K. Overall, it has 2,750 stores in foreign countries. Consider the value of Wal-Mart as being composed of two parts, a U.S. part (due to business in the U.S.) and a non-U.S. part (due to business in other countries).
Image of page 4
Image of page 5

You've reached the end of your free preview.

Want to read all 5 pages?

What students are saying

  • Left Quote Icon

    As a current student on this bumpy collegiate pathway, I stumbled upon Course Hero, where I can find study resources for nearly all my courses, get online help from tutors 24/7, and even share my old projects, papers, and lecture notes with other students.

    Student Picture

    Kiran Temple University Fox School of Business ‘17, Course Hero Intern

  • Left Quote Icon

    I cannot even describe how much Course Hero helped me this summer. It’s truly become something I can always rely on and help me. In the end, I was not only able to survive summer classes, but I was able to thrive thanks to Course Hero.

    Student Picture

    Dana University of Pennsylvania ‘17, Course Hero Intern

  • Left Quote Icon

    The ability to access any university’s resources through Course Hero proved invaluable in my case. I was behind on Tulane coursework and actually used UCLA’s materials to help me move forward and get everything together on time.

    Student Picture

    Jill Tulane University ‘16, Course Hero Intern

Stuck? We have tutors online 24/7 who can help you get unstuck.
A+ icon
Ask Expert Tutors You can ask You can ask You can ask (will expire )
Answers in as fast as 15 minutes