FINM7406 International Financial Management

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Part A
Answer these questions on the multiple choice answer sheet provided.
Each question in this section is worth 1 mark.
Question 1.
A purely domestic firm that sources and sells only domestically:
A) faces exchange rate risk to the extent that it has international competitors in the domestic market.
B) faces no exchange rate risk.
C) should never hedge because this could actually increase its currency exposure.
D) faces no exchange rate risk, and should never hedge because this could actually increase its currency exposure.
Question 2.
Studies suggest that international capital markets are not segmented anymore:
A) and are therefore fully integrated.
B) but are not as yet fully integrated.
C) so cross-listing of shares will not lower a firm’s cost of capital.
D) none of the options.
Question 3.
In the graph below, X and Y represent:
A) US stocks and international stocks.
B) international stocks and US stocks.
C) systematic risk and unsystematic risk.
D) none of the options.
Semester One Final Examinations, 2019 FINM7406 International Financial Management
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Question 4.
A firm with a highly elastic demand for its products:
A) will be unable to pass increased costs following unfavourable changes in the exchange rate without significantly lowering the quantity sold.
B) will be able to raise prices following unfavourable changes in the exchange rate without significantly lowering the quantity sold.
C) can easily pass increased costs on to consumers.
D) will sell about the same amount of product regardless of price.
Question 5.
Studies show that international stock markets tend to move more closely together when the volatility is higher. This finding suggests that:
A) investors should liquidate their portfolio holdings during turbulent periods.
B) because investors need risk diversification most precisely when markets are turbulent, there may be less benefit to international diversification for investors who liquidate their portfolio holdings during turbulent periods.
C) this kind of correlation is why international portfolio diversification is smart for today’s investor.
D) none of the options.
Question 6.
One explanation for foreign equity ownership restrictions:
A) is to make it difficult or impossible for foreigners to gain control of a domestic company.
B) is to expropriate wealth from domestic shareholders.
C) is the argument in favour of free trade.
D) none of the options.
Question 7.
A liquid stock market:
A) is one in which prices reflect all relevant information quickly.
B) is one in which prices reflect all publicly available information quickly.
C) is one in which prices reflect price and volume information quickly.
D) is one in which investors can buy and sell stocks quickly at close to the current quoted prices.
Semester One Final Examinations, 2019 FINM7406 International Financial Management
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Question 8.
The central issue of corporate governance is:
A) how to protect creditors from managers and controlling shareholders.
B) how to protect outside investors from the controlling insiders.
C) how to alleviate the conflicts of interest between boards of director and
shareholders.
D) how to alleviate the conflicts of interest between shareholders and bondholders.
Question 9.
Economic exposure can be defined as:
A) the link between the future home currency values of the firm’s assets and liabilities and exchange rate fluctuations.
B) the extent to which the firm’s operating cash flows would be affected by random changes in exchange rates.
C) the sensitivity of realised domestic currency values of the firm’s contractual cash flows denominated in foreign currencies to unexpected exchange rate changes.
D) the potential that the firm’s consolidated financial statement can be affected by changes in exchange rates.
Question 10.
A firm may cross-list its share to:
A) establish a broader investor base for its stock.
B) establish name recognition in foreign capital markets, thus paving the way for the firm to source new equity and debt capital from investors in different markets.
C) expose the firm’s name to broader investor and consumer groups.
D) all of the options.
Semester One Final Examinations, 2019 FINM7406 International Financial Management
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Part B
Answer all questions for Part B in the examination answer booklet provided.
Start each question on a new page.
For calculation questions, show all your working.
Question 11. (11 marks)
Mozzie Ltd is an Australian company that is listed on the ASX. Mozzie manufactures a range of cosmetics and insect repellents. Because Mozzie Ltd makes a large number of its sales in Singapore, it is considering opening up a branch there. Mozzie Ltd has hired a consulting firm to help it forecast its cash flows from this new branch, and has paid SGD10,000 for the analysis. The consultants estimate the initial investment will be SGD150,000. Over the next four years, sales from the new branch are forecast to be SGD290,000 per year, and cost of goods sold SGD185,000. Depreciation is SGD10,000 per year. The company tax rate in Singapore is 17%.
Mozzie’s cost of capital in AUD is 12%. The inflation rate is forecasted to be 2% per annum in Australia, and 2.5% in Singapore. The current spot foreign exchange rate is SGD/AUD = 1.0025.
a) Calculate the Free Cash Flows in each of years zero to four in SGD and in AUD, using the Purchasing Power Parity forecasted exchange rates. Show all your working. (9 marks)
b) Calculate the NPV of this project in AUD. Determine whether Mozzie should go ahead. Show all your working. (2 marks)
Question 12. (10 marks)
Daniel Smith is an analyst for BHP Australia. BHP has received an order from a German manufacturing company for iron ore worth two million euros. The client will pay in six months’ time. The current spot rate is 0.8 EUR/AUD. Daniel forecasts that the euro will depreciate by 8% against the Australian dollar over the next six months. He is considering whether BHP needs to hedge for future currency fluctuations.
a) Give one reason to support BHP hedging, and one reason against BPH hedging. (2 marks)
b) If Daniel is correct in his forecasts and BHP does not hedge, what will be BHP’s proceeds from the sale of the iron ore in six months in AUD? Show all your workings. (2 marks)
Semester One Final Examinations, 2019 FINM7406 International Financial Management
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If BHP decides to hedge, its risk management committee requires that the hedged position should be at least 5% better than the unhedged position.
c) Based on Daniel’s expectations, determine whether he should hedge this exchange rate risk using a forward contract. The six-month euro forward rate is 1.1875 AUD/EUR. Show all your working. (1 mark)
d) Based on Daniel’s expectations, determine whether he should hedge this exchange rate risk using an option contract. The interest rate in Australia is 4% p.a., and in Europe it is 5% p.a. Details of two available options are as follows:
Options
Cost
180-day put option on dollar at 0.8 EUR/AUD
1.5% premium
180-day call option on dollar at 0.8 EUR/AUD
1% premium
Show all your working. (3 marks)
e) List one advantage and one disadvantage of hedging using an option relative to using a forward contract. (2 marks)
Question 13. (7 marks)
Emma Liu, an Australian investor, decided that she wanted to expand her share portfolio by purchasing some shares on the Bangkok Stock Exchange. She bought 250 shares of the Bangkok Bank Public Company Ltd at a price of THB 196 (THB = Thai Baht). At that time, the exchange rate was 23.7919 THB/AUD. One year later, she sold the shares for THB 201 and the exchange rate was 24.1965 THB/AUD. Emma also calculated that the variance of the investment in terms of THB is 10%, and the variance of the rate of change in the exchange rate is 1.5%. The correlation between the THB return and the rate of change in the exchange rates was 0.02.
a) What was the return and variance of Emma’s investment (from an Australian point of view)? (4 marks)
b) Emma found that it was a lot of work to invest directly in the Thai stock. The following year, she decided that she would prefer to invest via an international mutual fund. Give three advantages of investing through an international mutual fund. (3 marks)
Semester One Final Examinations, 2019 FINM7406 International Financial Management
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Question 14. (8 marks)
a) What is an American Depository Receipt? In your answer, explain fully how they are created. (4 marks)
b) What is the Australian equivalent of an American Depository Receipt? (1 mark)
c) What is political risk? List two types of political risk, other than expropriation.
(3 marks)
Question 15. (4 marks)
You work for a large multinational company. At a recent annual general meeting, a shareholder asked what the company is doing in terms of ESG. Afterwards, one of the company’s managers remarks to you, “Did you hear that question about ESG? What a joke! Real companies don’t need to be wasting their time with those kinds of issues!”
a) What does ESG stand for? (1 mark)
b) Give three reasons why your company should consider ESG. (3 marks)

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