Deck 12: The Global Capital Market

Question 1

Happy Company wants to raise $2 million with debt financing. The funds are needed to finance working capital, and the firm will repay them with interest in one year. Happy Company's treasurer is considering three options:
a) Borrowing U.S. dollars from Security Pacific Bank at 8 percent.
b) Borrowing British pounds from Midland Bank at 14 percent..
c) Borrowing Japanese yen from Sanwa Bank at 5 percent.
If Happy borrows foreign currency, it will not cover it; that is, it will simply change foreign currency for dollars at today's spot rate and buy the same foreign currency a year later at the spot rate that is in effect. Happy Company estimates the pound will depreciate by 5 percent relative to the dollar and the yen will appreciate 3 percent relative to the dollar in the next year. From which bank should Happy Company borrow?

Answer 1

For all choices, Happy Company receives 2 million now.
If Happy borrows dollars from Security Pacific, Happy will repay in a year 2 million principle plus.16 due to the 8% interest. The total payment is 2.16 million dollars.
If Happy borrows pounds from Midland Bank, the pounds depreciation of 5% must be considered. Assuming for easy calculation the pound and the dollar traded at an equal 1 to 1 ratio at the start of the year, Happy will have to repay 2.28 million pounds. The new exchange rate is.95 dollars for 1 pound due to 5% depreciation in value of the pound. 1 pound can buy 5% less dollars. Happy will be able to pay less on the loan in dollars because each dollar is converted into more pounds than at the beginning of the year. 2.166 million dollars would be needed to pay back the loan in pounds.
If happy borrows Japanese yen from Sanwa bank, the yen's appreciation by 3% must be considered. Again assuming an original 1 to 1 exchange rate, the end of year exchange rate is 1.03 dollars for 1 yen. 2 million plus.06 interest results in 2.06 million yen that must be paid back. The amount of dollars to exchange into yen is 2.1218 million dollars.
Happy should borrow from Sanwa bank.

Question 2

Explain the significance of microfinance to the developing world. Why is it so important to ensure that the industry continues to grow? How can multinational companies capitalize on the microfinance trend?

Answer 2

not answer

Question 3

Explain how the rise in the value of the Korean currency, the won, against the dollar impacts upon the competitiveness of Hyundai and Kia's exports to the United States.

Answer 3

Fluctuations in the currency of an economy are likely to have adverse effects on the country and the corporations in that country. Foreign exchange risk is likely to increase the complexity associated with an increased cost of a product/service. This could lead a company to a down surge and eventually result in loss.
Companies H and K have been the fastest growing car manufacturers in Country K. They have benefited from growth that has been led by exports to foreign countries, especially Country U. Their excellent product quality and aggressive pricing, together with intelligent design have enabled them to be market leaders in the industry.
The rise in value of the currency of Country K against the Currency D has had a negative impact on the competitiveness of Company H and Company A. Both these companies are involved in manufacturing and exporting vehicles to Country U that uses Currency D. A strong currency in Country K implies that the value of their vehicles is likely to have a reduced value. Though these countries are aiming to increase their market share by offering their vehicles at lower prices, both automakers are experiencing reduced profit margins due to the currency fluctuations. This necessitates both the companies to sell more cars when compared to the past in order to make up for the loss now.

Question 4

What were the causes of the surge in inflation in Russia during the early 1990s? Could this have been avoided? How?

Question 5

Hyundai and Kia are both expanding their presence in the United States. How does this hedge against adverse currency movements? What other reasons might these companies have for investing in the United States? What are the drawbacks of such a strategy?

Question 6

What does the decline in the value of the ruble against the dollar between 1992 and 1998 teach you about the relationship between inflation rates and currency values?

Question 7

If Hyundai expects the value of the won to strengthen appreciably against the U.S. dollar over the next decade, should it still expand its presence in the United States?

Question 8

During the mid 1990s, the IMF wanted Russia to raise tax rates, close loopholes in the tax system, and cut public spending. Russia was unable to do this. Why?

Question 9

In 2008 the Korean won depreciated 28 percent against the U.S. dollar. Does this imply that Hyundai and Kia were wrong to invest in the United States? How does this explain the relative strength of car sales from Hyundai and Kia in the U.S. market during early 2009?

Question 10

In the early 2000s Russia cut tax rates for individuals and corporations, and government tax revenues surged. Why? Does this result suggest that the IMF policy prescriptions were wrong?

Question 11

S. leaders have expressed concern over the financial crisis in the European Union. Why should the United States be concerned? How could the European Union's problems affect the U.S. economy and U.S. companies?

Question 12

How have the changes in the global economy over the last two decades contributed to the financial crisis within the European Union? What do these changes imply about the European Union's ability to overcome it current difficulties?

Question 13

Reflect on the fundamental differences between members of the European Union. How might different approaches to economic policy, different cultures, and different legal systems influence how member countries face the current financial crisis affecting the trading bloc?

Question 14

Why did ICBC feel it was necessary to issue equity outside of China? What are the advantages of such a move? Can you see any disadvantages?

Question 15

Discuss the loss of political and economic sovereignty that is associated with economic integration. Do countries in the European Union have the right to reject suggestions on how to solve the bloc's current financial crisis simply because the recommendations have a negative impact on their own situation?

Question 16

Why has the global capital market grown so rapidly in recent decades? Do you think this growth will continue throughout the next decade? Why?

Question 17

What role did the Korean government play in creating the 1997 crisis?

Question 18

The top management team of your not-for-profit organization would like to find out more concerning socially responsible companies in Europe. Remembering the FTSE index company has a responsible investment index that addresses this issue, you decide to use the index's factsheet for your analysis. Evaluate the risk categories, countries, and industries represented in this index's leading companies.

Question 19

What role did Korean enterprises play in creating the 1997 crisis?

Question 20

What was the attraction of the ICBC listing to foreign investors? What do you think are the risks for a foreigner associated with investing in ICBC?

Question 21

Why was the Korean central bank unable to stop the decline in the value of the won?

Question 22

In 2008-2009, the world economy retrenched in the wake of a global financial crisis. Did the globalization of capital markets contribute to this crisis? If so, what can be done to stop global financial contagion in the future?

Question 23

In late 1997, the IMF stepped in with a rescue package that included $55 billion in emergency loans to support the currency. These loans had the effect of stabilizing the won and over the next few years South Korea enjoyed a strong recovery. If the IMF had not stepped in, what might have occurred?

Question 24

The Bureau of Economic Analysis is an agency of the U.S. Department of Commerce. It lists data about the U.S. Economic Accounts, including current investment positions and the amount of direct investment by multinational corporations in the U.S. and abroad. Prepare a brief report regarding the direct investments of other countries in the U.S. Which are the leading countries in foreign direct investment in your report?

Question 25

How would you classify countries like Zambia and the Democratic Republic of Congo? Explain how developing countries differ from developed countries. Do you think developed countries have a responsibility to help poorer countries?

Question 26

Reread the Country Focus on the search for capital in the Czech Republic. What are the advantages to Czech firms of listing their equity on the London stock exchange? Can you see any disadvantages?

Question 27

How has the recent global recession affected the developing world? What does your response tell you about the interdependent nature of the global economy?

Question 28

A firm based in Mexico has found its growth is restricted by the limited liquidity of the Mexican capital market. List the firm's options for raising money on the global capital market. Discuss the pros and cons of each option, and make a recommendation. How might your recommended options be affected if the Mexican peso depreciates significantly on the foreign exchange market over the next two years?

Question 29

Reflect on what globalization means for developing countries. In your opinion, has it been advantageous to lower income countries? Has the gap between the developed world and the developing countries increased or decreased as a result of globalization?