國際財務(wù)管理(英文版) 第11版 馬杜拉 答案 Chapter 16

1、 Chapter 16Long-Term FinancingLecture OutlineLong-Term Financing DecisionSources of EquitySources of DebtCost of Debt FinancingMeasuring the Cost of FinancingActual Effects of Exchange Rate Movements on Financing CostsAssessing the Exchange Rate Risk of Debt FinancingUse of Exchange Rate Probabiliti

2、esUse of SimulationReducing Exchange Rate RiskOffsetting Cash InflowsForwardCurrencyParallelContractsSwapsLoansDiversifying Among CurrenciesInterest Rate Risk from Debt FinancingThe Debt Maturity DecisionThe Fixed Versus Floating-rate DecisionHedging With Interest Rate SwapsPlain Vanilla Swap Chapte

3、r ThemeThis chapter introduces the long-term sources of funds available to MNCs. Should the MNC choosebonds as a medium to attract long-term funds, a currency for denomination must be chosen. This is acritical decision for the MNC. While there is no clear-cut solution, this chapter illustrates how s

4、uch aproblem can be analyzed. A suggested method of presenting this analysis is to run through anexample under assumed exchange rates. Then stress that future exchange rates are not known withcertainty. Therefore, the firm should consider the possible costs of financing under a variety ofexchange ra

5、te scenarios.Topics to Stimulate Class Discussion1. Why would U.S. firms consider issuing bonds denominated in a foreign currency?2. What are the desirable characteristics related to a currencys interest rate (high or low) and value(strong or weak) that would make the currency attractive from a borr

6、owers perspective?Critical debateAre swaps deceiving the market?Proposition. Yes. Interest rates are charged to firms because the market estimates that the riskis appropriate for the borrower. For MNCs to then swap the loans is to ignore this judgment and putslenders at risk and hence the interests

7、of the shareholders.Opposing View. No. The difference in rates is often small and hardly related to non payment.There are other reasons for swaps to do with currencies and changing the nature of the loan, so there isno second guessing the market.With whom do you agree? Provide a reasoned argument as

8、 to why you agree or with one ofthe above views.ANSWER: The swap rates will be in line with forward rates, so that MNCs will not benefit fromborrowing low interest rate currencies and simultaneously hedging. As the forward rates are marketrates there is little by the way of deceiving the market espe

9、cially as swaps are usually between highlycreditworthy companies.Answers to End of Chapter Questions1. Floating-Rate Bonds.a. What factors should be considered by a UK firm that plans to issue a floating rate bonddenominated in a foreign currency?b. Is the risk of issuing a floating rate bond higher

10、 or lower than the risk of issuing a fixed ratebond? Explain.c. How would an investing firm differ from a borrowing firm in the features (i.e., interest rate andcurrencys future exchange rates) it would prefer a floating rate foreign currency-denominatedbond to exhibit?ANSWER: a. A firm should consi

11、der the interest rate for each possible currency as well as forecasts of theexchange rate relative to the firms home currency. The firm should also determine whether ithas future cash inflows in any foreign currencies that could denominate the bond. Finally, thefirm should forecast the future path o

12、f the coupon rate.b. The risk from issuing a floating rate bond is that the interest rate may rise over time. The riskfrom issuing a fixed rate bond is that the firm is obligated to pay that coupon rate even ifinterest rates decline. Some firms may feel that a fixed rate bond is less risky since at

13、leastthey know with certainty the coupon rate they must pay in the future.somewhat open-ended.This question isc. An investing firm prefers a bond denominated in a currency that is expected to appreciate andwith an interest rate that is high and expected to increase. A borrowing firm prefers a bondde

14、nominated in a currency that is expected to depreciate and with an interest rate that is lowand expected to decrease.2. Risk From Issuing Foreign Currency-Denominated Bonds. What is the advantage of usingsimulation to assess the bond financing position?ANSWER: Unlike point forecasts, simulation prov

15、ides a distribution of possible outcomes. Thus,the firm can determine the probability that a particular foreign issued bond will be a less expensivesource of funds than a locally issued bond.3. Exchange Rate Effects.a. Explain the difference in the cost of financing with foreign currencies during a

16、strong-poundperiod versus a weak-pound period for a UK firm.b. Explain how a UK-based MNC issuing bonds denominated in euros may be able to offset aportion of its exchange rate risk.ANSWER:a. The cost of financing with foreign currencies is low when the pound strengthens, and highwhen the pound weak

17、ens.b. It may offset some exchange rate risk if it has cash inflows in euros. These euros could beused to make coupon payments.4. Bond Offering Decision. Columbia plc is a UK company with no foreign currency cash flows. Itplans to issue either a bond denominated in euros with a fixed interest rate o

18、r a bond denominatedin UK pounds with a floating interest rate. It estimates its periodic pound cash flows for eachbond. Which bond do you think would have greater uncertainty surrounding these future poundcash flows? Explain.ANSWER: Exchange rates are generally more volatile than interest rates ove

19、r time. Therefore thepound value of payments made on euro-denominated bonds would likely be more uncertain thanthe payments made on floating-rate bonds denominated in pounds. Also, the principal payment issubject to exchange rate risk but not to interest rate risk.5. Currency Diversification. Why wo

20、uld a UK firm consider issuing bonds denominated inmultiple currencies? ANSWER: The firm may issue bonds in multiple currencies to reduce exchange rate risk. This isespecially possible when the currencies used to denominate bonds are not highly correlated.6. Financing That Reduces Exchange Rate Risk

21、. Kerr, Plc a major UK exporter of products toJapan, denominates its exports in pounds and has no other international business. It can borrowpounds at 9 percent to finance its operations or borrow yen at 3 percent. If it borrows yen, it willbe exposed to exchange rate risk. How can Kerr borrow yen a

22、nd possibly reduce its economicexposure to exchange rate risk?ANSWER: Kerr could invoice its exports in yen and use the proceeds to pay back loans. Itseconomic exposure would be reduced because Japanese consumers would not be subjected toexchange rate swings.7. Exchange Rate Effects. Katina, Plc is

23、a UK firm that plans to finance with bonds denominated ineuros to obtain a lower interest rate than is available on pound-denominated bonds. What is themost critical point in time when the exchange rate will have the greatest impact?ANSWER: The most critical time is maturity, since the principal wil

24、l be paid back at that time.8.Financing Decision. Ivax plc (based in Germany) is a drug company that has attempted tocapitalize on new opportunities to expand in Eastern Europe. The production costs in most EasternEuropean countries are very low, often less than one-fourth of the cost in Germany or

25、Switzerland.Furthermore, there is a strong demand for drugs in Eastern Europe. Ivax penetrated Eastern Europe bypurchasing a 60 percent stake in Galena AS, a Czech firm that produces drugs.a. Should Ivax finance its investment in the Czech firm by borrowing euros that would then beconverted into kor

26、una (the Czech currency) or by borrowing koruna from a local Czech bank? Whatinformation do you need to know to answer this question?b. How can borrowing koruna locally from a Czech bank reduce the exposure of Ivax to exchange raterisk?c. How can borrowing koruna locally from a Czech bank reduce the

27、 exposure of Ivax to political riskcaused by government regulations?ANSWER:a. Ivax would need to consider the interest rate in the Europe versus the interest rate when borrowingkoruna (the Czech currency). It would also need to consider the potential change in the korunacurrency against the euro. If

28、 it finances the project in dollars, it is more exposed to exchange raterisk, because the funds would be remitted to Germany before paying the interest expenses on theloan. Conversely, if it finances the project in koruna, it could use some of its local funds to payoff its interest expenses before r

29、emitting any funds to the parent. Another reason for borrowingfrom a local Czech bank is that the bank may help Ivax avoid any excessive regulatory restrictionsthat could be imposed on foreign firms in the drug industry. These potential advantages ofborrowing locally must be weighed against the pote

30、ntially higher interest rate when borrowinglocally.b. By borrowing koruna, the Czech subsidiary of Ivax should make its interest payments beforeremitting any funds to the parent. Therefore, there are less funds that have to be remitted (lessexposure) than if the funds are remitted to Europe before i

31、nterest payments are paid to a Europeanbank. c. By borrowing from a local Czech bank, Ivax may be able to avoid excessive regulations thatcould be imposed on foreign firms by the local government. Also, there is less chance of anyextreme action to be taken on a foreign firm when that firms failure w

32、ould cause defaults onloans provided by local lenders.Advanced Questions9. Bond Financing Analysis. Sambuka plc can issue bonds in either UK pounds or in Swiss francs.Pound-denominated bonds would have a coupon rate of 15 percent; Swiss franc-denominatedbonds would have a coupon rate of 12 percent.

33、Assuming that Sambuka can issue bonds worth10,000,000 in either currency, that the current exchange rate of the Swiss franc is 0.47, and thatthe forecasted exchange rate of the franc in each of the next three years is 0.50, what is theannual cost of financing for the franc-denominated bonds? Which t

34、ype of bond should Sambukaissue?ANSWER:If Sambuka issues Swiss franc-denominated bonds, the bonds would have a face value of10,000,000/0.47 = Sf21,276,595.Year 1 YearSF2,553,191Exchange rate 0.50 0.50Payments in 1,276,5962 YearSF2,553,1910.503SF PaymentSF23,829,7861,276,59611,914,893A UK bond at 15%

35、 on 10m would cost more (annual payments being 1.5m etc) but can wereally assume that the exchange ratte will stay as it is? A change of 1.5/1.276 1 = 17 % wouldmake the SF more expensive, this is quite a big change but Sambuka would be wise to carry out arisk assessment.10. Bond Financing Analysis.

36、 Hatton ltd has just agreed to a long-term deal in which it willexport products to Japan. It needs funds to finance the production of the products that it willexport. The products will be denominated in pounds. The prevailing UK long-term interestrate is 9 percent versus 3 percent in Japan. Assume t

37、hat interest rate parity exists, and thatHatton believes that the international Fisher effect holds.a. Should Hatton finance its production with yen and leave itself open to exchange rate risk?Explain.b. Should Hatton finance its production with yen and simultaneously engage in forward contractsto h

38、edge its exposure to exchange rate risk?c. How could Hatton plc achieve low-cost financing while eliminating its exposure to exchangerate risk?ANSWER:a. No. The exchange rate of the yen is expected to rise according to the IFE, whichwould offset the interest rate differential.b. No. The forward rate

39、 premium should reflect the interest rate differential, so the financing ratewould be 9% if Hawaii used this strategy. c. Hawaii could request that the Japanese importers pay for their imports in yen. It could financein yen at 3% and use a portion of the proceeds from its export revenue to cover its

40、 financepayments.11. Cost of Financing. Assume that Seminole, plc considers issuing a Singapore pound-denominatedbond at its present coupon rate of 7 percent, even though it has no incoming cash flows to coverthe bond payments. It is attracted to the low financing rate, since UK pound-denominated bo

41、ndsissued in the United Kingdom would have a coupon rate of 12 percent. Assume that either type ofbond would have a four-year maturity and could be issued at par value. Seminole needs to borrow10 million. Therefore, it will issue either UK pound-denominated bonds with a par value of 10million or bon

42、ds denominated in Singapore dollars with a par value of S$20 million. The spot rateof the Singapore dollar is 0.33. Seminole has forecasted the Singapore dollars value at the end ofeach of the next four years, when coupon payments are to be paid:Pound Exchange Rate12340.340.350.380.33Determine the e

43、xpected annual cost of financing with Singapore pounds. Should Seminole, Plcissue bonds denominated in UK pounds or Singapore pounds? Explain.ANSWER:End of Year:1234S$ paymentExchange rate paymentS$1,400,0000.34S$1,400,0000.35S$1,400,0000.38S$21,400,0000.33476,000490,000532,0007,062,000S$20m is at t

44、he spot rate only worth 20 x 0.33 = 6,600,000 so some borrowing will also beneeded. The question is whether the foreign borrowing in S$ is cheaper than the UK equivalent.?12% of 6,600,000 is 792,000 so it would seenm that borrowing in Singapore dollars would bemuch cheaper. But clearly the validity

45、of the exchange rate predictions must be examined.12. Interaction Between Financing and Invoicing Policies. Assume that Hurricane, plc is a UKcompany that exports products to the United States, invoiced in pounds. It also exports products toDenmark, invoiced in pounds. It currently has no cash outfl

46、ows in foreign currencies, and it plansto issue bonds in the near future. Hurricane could issue bonds at par value in (1) pounds with acoupon rate of 12 percent, (2) Danish kroner with a coupon rate of 9 percent, or (3) dollars with acoupon rate of 15 percent. It expects the kroner and dollar to str

47、engthen over time. How couldHurricane revise its invoicing policy and make its bond denomination decision to achieve lowfinancing costs without excessive exposure to exchange rate fluctuations?ANSWER: Hurricane could invoice goods exported to Denmark in kroner instead of pounds.Thus, it would now ha

48、ve inflows in kroner that could be used to make coupon payments on bondsdenominated in kroner that it could issue. This strategy achieves a cost of financing of 9 percent, which is lower than the cost of other financing alternatives.To the extent that the inflows inkroner can cover bond payments, th

49、is strategy is not exposed to exchange rate risk.13. Swap Agreement. Grant, plc is a well-known UK firm that needs to borrow 10 million dollars tosupport a new business in the United States. However, it cannot obtain financing from US banksbecause it is not yet established within the United States.

50、It decides to issue pound-denominateddebt (at par value) in the United Kingdom, for which it will pay an annual coupon rate of 10percent. It then will convert the pound proceeds from the debt issue into dollars at the prevailingspot rate (the prevailing spot rate is one pound = $1.70). Over each of

51、the next three years, it plansto use the revenue in dollars from the new business in the United States to make its annual debtpayment. Grant, plc engages in a currency swap in which it will convert dollars to pounds at anexchange rate of $1.70 per pound at the end of each of the next three years. How many poundsmust be borrowed initially to support the new business in the United States? How many dollarsshould Grant plc specify in the swap a