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

# 5 exposure of mncs to exchange rate movements

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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.
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).

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