FIN 4213 INTERNATIONAL EXAM
QUESTIONS AND ANSWERS WITH
COMPLETE SOLUTION
11.Estimating an MNC's Cash Flow. Biloxi Co. is a U.S. firm that has a subsidiary in China. The subsidiary
reinvests half of its net cash flows into operations and remits another half to the parent. Biloxi Co. has
expected cash flows from domestic business equal to $12,000,000 and the Chinese subsidiary is
expected to generate 60 million Chinese yuan at the end of the year. The expected value of yuan at the
end of the year is $.15. What are the expected dollar cash flows of the parent of Biloxi Co. in one year?
(1 point) - ANSWER -Answer: $12,000,000 + 0.5×¥60,000,000×$0.15/¥ = $16,500,000
2.Uncertainty Surrounding an MNC's Cash Flowsa.Assume that Bangor Co. (a U.S. firm) knows that it will
have cash inflows of $800,000 from domestic operations, cash inflows of 600,000 Swiss francs due to
exports to Swiss operations, and cash outflows of 700,000 Swiss francs at the end of the year. While the
future value of Swiss franc is uncertain because it fluctuates, your best guess is that the Swiss franc's
value will be $1.15 at the end this year. What are the expected dollar cash flows of Bangor Co.? (1 point)
- ANSWER -Answer: $800,000 + (SFr600,000 - SFr700,000) × $1.15/SFr = $685,000
Assume that Concord Co. (a U.S. firm) is in the same industry as Bangor Co. There is no political risk that
could have any impact on the cash flows of either firm. Concord Co. knows that it will have cash inflows
of $800,000 from domestic operations, cash inflows of 300,000 Swiss francs due to exports to Swiss
operations, and cash outflows of 600,000 Swiss francs at the end of the year. Is the valuation of the total
cash flows of Concord Co. more uncertain or less uncertain than the total cash flows of Bangor Co.?
Explain briefly. (1 point) - ANSWER -Answer: The two firms have the same cash flow from domestic
operations. The uncertainty of the total cash flows comes from the net cash flow in Swiss franc.
2 For Concord Co., its net cash flow in Swiss franc is: SFr300,000 - SFr600,000 = SFr-300,000, i.e., 300,000
Swiss francs net cash outflow. For Bangor Co., its net cash flow in Swiss franc is: SFr600,000 - SFr700,000
= SFr-100,000, i.e., 100,000 Swiss francs net cash outflow. Concord Co. has a large r cash outflow in Swiss
franc than Bangor Co. So, the valuation of the total cash flows of Concord Co. is mor e uncertain than
the total cash flows of Bangor Co.
3.What are the three theories of international business? What are the primary reasons for international
business according to each theory? (1 point) - ANSWER -Answer: (1). Theory of comparative advantage;
QUESTIONS AND ANSWERS WITH
COMPLETE SOLUTION
11.Estimating an MNC's Cash Flow. Biloxi Co. is a U.S. firm that has a subsidiary in China. The subsidiary
reinvests half of its net cash flows into operations and remits another half to the parent. Biloxi Co. has
expected cash flows from domestic business equal to $12,000,000 and the Chinese subsidiary is
expected to generate 60 million Chinese yuan at the end of the year. The expected value of yuan at the
end of the year is $.15. What are the expected dollar cash flows of the parent of Biloxi Co. in one year?
(1 point) - ANSWER -Answer: $12,000,000 + 0.5×¥60,000,000×$0.15/¥ = $16,500,000
2.Uncertainty Surrounding an MNC's Cash Flowsa.Assume that Bangor Co. (a U.S. firm) knows that it will
have cash inflows of $800,000 from domestic operations, cash inflows of 600,000 Swiss francs due to
exports to Swiss operations, and cash outflows of 700,000 Swiss francs at the end of the year. While the
future value of Swiss franc is uncertain because it fluctuates, your best guess is that the Swiss franc's
value will be $1.15 at the end this year. What are the expected dollar cash flows of Bangor Co.? (1 point)
- ANSWER -Answer: $800,000 + (SFr600,000 - SFr700,000) × $1.15/SFr = $685,000
Assume that Concord Co. (a U.S. firm) is in the same industry as Bangor Co. There is no political risk that
could have any impact on the cash flows of either firm. Concord Co. knows that it will have cash inflows
of $800,000 from domestic operations, cash inflows of 300,000 Swiss francs due to exports to Swiss
operations, and cash outflows of 600,000 Swiss francs at the end of the year. Is the valuation of the total
cash flows of Concord Co. more uncertain or less uncertain than the total cash flows of Bangor Co.?
Explain briefly. (1 point) - ANSWER -Answer: The two firms have the same cash flow from domestic
operations. The uncertainty of the total cash flows comes from the net cash flow in Swiss franc.
2 For Concord Co., its net cash flow in Swiss franc is: SFr300,000 - SFr600,000 = SFr-300,000, i.e., 300,000
Swiss francs net cash outflow. For Bangor Co., its net cash flow in Swiss franc is: SFr600,000 - SFr700,000
= SFr-100,000, i.e., 100,000 Swiss francs net cash outflow. Concord Co. has a large r cash outflow in Swiss
franc than Bangor Co. So, the valuation of the total cash flows of Concord Co. is mor e uncertain than
the total cash flows of Bangor Co.
3.What are the three theories of international business? What are the primary reasons for international
business according to each theory? (1 point) - ANSWER -Answer: (1). Theory of comparative advantage;
