Af 455 Problems Set 3

AF 455

Practice Problem Set 1

Hao Han (01388063)

09/19/2018

Answer for question 1:

1. The agency problems reflect a conflict of interests between decision-making manages and the owner of the MNC. Agency costs occur in an effort to assume that manages act in the best interest of the owner

1. The agency costs are normally larger for MNCs than purely domestic firms for the following reasons. First, MNCs incur larger agency costs in monitoring manages of distant foreign subsidiaries. Second, foreign subsidiaries manage raised in different cultures may not follow uniform goals. Third, the sheer size of the larger MNCs would also create large agency problems

Answer for question 2:

1. The theory of comparative advantage implies that countries should specialized in production, thereby relying on other countries for some products. As a result, there is a need for international business.

1. The product cycle theory suggests that a product in domestic market will go through growth and then mature stages. At some point in time, the firm will attempt to sale in other markets where the product could go through new growth stage again.

Answer for question 3:

1. Perfect market is a market with perfect mobility of the factors of the production. While practically, this situation is not found at the international level. Even in the home trade this situation may be found at home limited places only. It is a well known fact that all the factors of production cannot be perfectly mobile and hence their contribution to the cost of production is also different. The firms look for availability of the factors of production at lower rates and when they don’t find it in domestic, they tend to search the same in the international market. Hence, imperfect markets also provide motivation to the firms to search foreign opportunities.

1. In case of presence of perfect market conditions the factors of production are easily mobile. All the factors can be mobilized to the place where they are in demand. This unrestricted mobility of the factors of the production results in availability of the factors at all places of demand at all times.

Answer for question 8:

1. The level of political risk in any country also affects any of three variables used for valuation of the firm. Higher the political imbalance higher is the risk of unfavorable cash flows and increase in cost of capital. In case of unaffected cash flows the cost of capital decides the value of the firm. Higher political imbalances increase a fear of constant return and hence increase in the cost resulting in reducing the valuation of the firm.

Answer for question 14:

1. Snyder can export the clubs, but the transportation expenses may be high. If could establish a subsidiary in Brazil to produce and sell the clubs, but this may require a large investment of fund. It could use licensing, in which it specifies to a Brazilian firm how to produce the clubs. In this way, it does not have to establish its own subsidiary there.

1. If the amount of the golf clubs to be sold in Brazil is small, it may decide to export. However, if the expected sales level is high, it may benefit from licensing. If it is confident that the expected sales level will remain high, it may be willing to establish a subsidiary. The wages are lower in Brazil, and the large investment needed to establish a subsidiary may be worthwhile.

Answer for question 27:

1. As my perspective, it would be the favorable impacts on the home country. Since the value of home currency is depreciating continuously for 10 years foreign currencies will generate more home currency which is favorable for the MNC. The Euro exchange rate is presently depreciating by 2% means the euro value will be decline and the number of Euros has to be given more on that contract. Thus, it is advantageous for Arlington Co.

Answer for question 33:

Cash flow of Chinese subsidiary in yuan=100,000,000

Exchange rate dollar/yuan= $.13/yuan

Cash flow of Chinese subsidiary in dollar=100,000,000*.13=$13,000,000

$13,000,000*.5=$6,500,000

$1,000,000+$6,500,000=$16,500,000