Read Chapters 13 & 14

Chapter 13

Assume that you wanted to expand your Learning English business to other non-U.S. countries where some individuals may want to speak English.

a. Explain why you might be able to stabilize the profits of your total business in this manner. Review the motives for direct foreign investment that are identified in this chapter. Which of these motives are most important?

b. Why would a city such as Montreal be a less desirable site for your business than a city such as Mexico City?

c. Describe the conditions in which your total business would experience weak effects even if the business was spread across 3 or 4 countries.

d. What factors affect the probability of these conditions occurring? (In other words, explain why the conditions could occur in one set of countries, but not another set of countries).

e. What data would you review to assess the probability of these conditions occurring?

f. Consider that the prevailing service you offer is teaching individuals in Mexico to speak English, and your business has already created some supplemental pamphlets and CDs that translate common Spanish terms into English. How could you expand your business in a manner that may allow you to benefit from economies of scale (and perhaps even benefit from your existing business reputation)? When you attempt to benefit from economies of scale, do you forgo diversification benefits? Explain.

g. How would you come to a decision on whether to pursue business expansion that capitalizes on economies of scale even if it would forgo diversification benefits? Do you think economies of scale would be more important or less important than diversification for your business?

h. Is there any way to achieve economies of scale and yet still achieve diversification benefits?

Chapter 14

a. Review the different items that are used in the multinational capital budgeting example (Spartan Inc.). Describe the items that would be included on a spreadsheet if you were to conduct a multinational capital budgeting analysis of investing dollars to expand your existing language business in a different location.

b. Assume that you recognize your limitations in predicting the future exchange rate of the invoice currency for your expanded business. You think that there are several possible exchange rate scenarios, each with equal probability of occurrence. Explain how you could use this information to estimate the future NPV and make a decision about whether to accept or reject the project.

c. Now assume that there is also much uncertainty about the demand for your service by individuals. Explain how you can attempt to incorporate this uncertainty along with the uncertainty of exchange rate movements so that you can make a decision about whether to accept or reject the project.

d. Explain how you would derive a required rate of return for your capital budgeting analysis. What type of information would you use to derive the required rate of return?

Read Chapters 16, 17 & 18

Chapter 16

a. Review the political risk factors, and identify those that could possibly affect your business. Explain how your cash flows could be affected?

b. Explain why any threats of terrorism due to friction between two countries could possibly your business, even if the terrorism has no effect on the relations between the U.S. and Mexico.

c. Assume there is an upcoming election in Mexico that may result in a complete change in government.

d. Explain why such an election can have significant effects on your cash flows.

Chapter 17

a. Assume that your business is considering expansion within Mexico. You plan to invest a small amount of U.S. dollar equity into this project, and finance the remainder with debt. You can obtain debt financing for the expansion in Mexico , but the interest rates in Mexico are higher than in the U.S. Yet, if you used mostly U.S. debt financing, you are more exposed to exchange rate risk. Explain why.

b. If you pursue a new project in Mexico , you want to assess the feasibility of the project if you use mostly U.S. debt financing, versus mostly Mexican debt financing. Yet, you also want to capture possible exchange rate effects on your cash flows over time. How can you use capital budgeting to conduct your comparison?

c. You would prefer to avoid using Mexican debt to finance your expansion in Mexico because the interest rates are high. A consultant suggests that you seek one or more investors in Mexico who would be willing to take an equity position in your business. You would provide them with periodic dividends and they would be partial owners of your company. The consultant suggests that this strategy circumvents the high cost of capital in Mexico because it uses equity financing instead of debt financing. Is the consultant correct?

Chapter 18

a. Recall from the previous chapter that your business is considering expansion within Mexico. Recall that you plan to invest a small amount of U.S. dollar equity into this project, and finance the remainder with debt. You can obtain debt financing for the expansion in Mexico , but the interest rates in Mexico are higher than in the U.S. Today, you receive credit offers from different banks. You can either obtain a fixed-rate loan in the U.S. at 8 percent for the life of this project, or a floating-rate loan (rate changes each year in response to market interest rates) in Mexico at 10 percent. Explain how you could estimate the net present value of the project for each alternative financing method. Include in your explanation how you would account for the uncertainty of future interest rate movements of the Mexican debt.

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