SCHOOL OF BUSINESS AND ECONOMICS

DEPARTMENT OF COMMERCE
FIN 614M : INTERNATIONAL FINANCIAL MANAGEMENT
TIME ALLOWED – 3 HOURS

Instructions

Answer all the questions

QUESTION ONE

a. Give an account of the factors responsible for the growth of multinational

corporations? ( 8 marks)
b. Briefly explain why the cost of capital for MNC’s may differ from that for
domestic firms? ( 7 marks)
c. Explain the meaning of transaction exposure? ( 2 marks)
d. Explain how characteristics of MNC’s can affect the cost of capital?

(8 marks)

QUESTION TWO

Wolverine GMBH (Germany) currently has existing business in New Zealand but is
considering establishing a subsidiary there. The following information has been
gathered to assess this project:

i. The initial investment required is 50million Euros in new Zealand dollars

( NZ $). Given the spot rate of 0.50 Euros per New Zealand dollar, the
initial investment is 25 million initial investments for plant and
equipment, NZ$ 20 million is needed for working capital and will be
borrowed by the subsidiary from a New Zealand bank. The New
Zealand will pay interest only on the loan each year, at an interest rate
of 14 % .the loan principle is to be paid in 10 years.
ii. The project will be terminated at the end of year three, when the
subsidiary will be sold.
iii. The price ,demand ,a variable costof the product in new Zealand are as
follows
Year price demand variable cost
1 NZ $ 500 40,000 unit NZ$ 30
2 NZ$ 511 50,000 unit NZ $ 35
3 NZ$ 530 60,000 unit NZ $ 40

iv. The fixedcosts, such as overhead expenses, are estimated to be NZ$ 6

million per year.
v. The exchange rate of the New Zealand dollar is expected to be 0.52
euro’s at the end of the year 1, 0.54 Euros at the end of year two and
0.56 euro’s at the end of year 3.
vi. The New Zealand government will impose an income tax of 30% on
income. In addition, it will impose a withholding tax of 10% on earnings
remitted by the subsidiary. The US government will allow a tax credit on
the remitted earnings and will not impose any additional taxes.
vii. All cashflows received by the subsidiary are to be sent to the parent at
the end of each year. The subsidiary will use its working capital to
support ongoing operations.
viii. The plant and the equipment are depreciated over ten years using the
straight –line depreciation method. Since the plant and the equipment
are initially valued at NZ$ 50million, the annual depreciation expense is
NZ $ 5million.
ix. In the three years, the subsidiary is to be sold. Wolverine plans to let the
acquiring firm assume the existing New Zealand loan. The working
capital will not be liquidated but will be used by the acquiring firm that
buys the subsidiary. Wolverine expects to receive NZ$ 52 million after
subtracting capital gains taxes. Assume that this amount is not subject
to a withholding tax
x. Wolverine requires a 20% rate of return on the project.
Required
 Required

Determine the net present value of this project. Should wolverine

accept this project? (25 marks)

QUESTION THREE

a. Describe the major methods of financing international trade?(10marks)

b. Discuss the techniques used by MNC to optimize cash flows? ( 10 marks)
c. Cite the complication encountered in optimizing cash flows by the MNC?

(5 marks)

QUESTION FOUR

a. Briefly describe the process of remitting subsidiary earnings to the parent?

( 10 marks)
b. Account for the factors to consider in multinational capital budgeting?( 10
marks)
c. An MNC has total assets of sh 100 million and debt of sh 20 million. The
firm’s before –tax cost of debt is 12%, and its cost of financing with equity is
15%. The MNC has a corporate tax rate of 40%. What is this firms weighted
average cost of capital? ( 5 marks)
 MARKING SCHEME

INTERNATIONAL FINANCIAL MANAGEMENT - FIN 614 M

QUESTION ONE

Factors responsible for rise of MNC

a. Search for raw materials

b. Market seeking
c. Cost minimization
d. Knowledge seeking
e. Keeping domestic customers
f. Exploiting financial market imperfections

Why the cost of capital may differ MNC

g. Size of firm
h. International diversification
i. Exposure to exchange rate change
j. Access to international capital markets
k. Exposure to county risk

Transaction exposure

QUESTION THREE

1. Methods of financing international trade

 Accounts receivable financing
 Factoring
 Letters of credit
 Bankers acceptance
 Working capital management
 Medium-term capital goods financing ( forfeiting)
 Counter trade
2. Techniques of optimizing cash flows
 Accelerating cash flows
  Minimizing blocked funds
 Minimizing currency conversion costs
 Managing intersubsidiary cash transfers

Complication of optimizing cash flows

 Company-related characteristics
 Government restrictions
 Characteristics of banking systems

QUESTION FOUR

Process of remitting subsidiary earnings to the parent

 Cash-flow generated by subsidiary

 Payment of corporate tax to the host government
 After –tax cash flow to subsidiary
 Retained earnings by subsidiary
 Cash flow remitted by subsidiary
 Withholding tax paid to host government
 After –tax cash flows remitted by subsidiary
 Conversion of funds to parent’s currency
 Cash flow to parent

Factors to consider in multinational capital budgeting

 Exchange rate fluctuations

 Inflation
 Financing arrangement
 Blocked funds
 Uncertain salvage value
 Impact of project on prevailing cash flows
 Host government incentives
 Real options.

QUESTION FIVE
Characteristics of MNC

 Corporate characteristics
 Stability of MNC’s cash flow
 MNC’s credit risk
 MNC’s access to retained earnings
 MNC’s guarantee on debt
 MNC’s agency problems
 County characteristics
 Stock restrictions in host countries
 Interest rates in host countries
 Strength of host country currencies
 Country risk in host countries
 Tax laws in host countries