INTERNATIONAL FINANCE
MULTINATIONAL FINANCIAL MANAGEMENT CASE I
Cernerica Inc. is a medium-sized producer of textile clothing located in Alabama, USA. Until now, the company has made its sales in the USA, but the marketing director wants to expand its operations into Europe. The first step would be to set up subsidiaries in Tazmania and Kangooria. The firm’s Chief Financial Analyst becomes so enthusiastic about the plan, bur gets worried about the outcomes of the international expansion on the firm’s financial operations. So they come to ask you to answer their questions on the basics of multinational financial management. To get you prepare for the real world, please answer these questions by paying to much attention into them. You might get a nice job offer from Cernerica if they like your answers and end up working in Kangooria or in Tazmania.
1. What is a multinational corporation? Why do firms expand into other countries?
2. Is there any difference between multinational financial management and domestic financial management? If so, exlain some major differences.
3. Consider the following illustrative exchange rates,
US dollars required to buy one unit of Kangooria mucho .0093
Tazmania keto .0067
a. Are these currency prices direct quotations or indirect quotations.
b. Calculate the indirect quotations for mucho and keto.
c. What is a cross rate? Calculate the two cross rates between mucho and keto.
4. Assume Cernerica charges $1.75 for a shirt it produces. If the firm wants a 50 percent markup on the product, what should be the shirt’s sale price in Kangooria and Tazmania.
5. Define exchange rate risk.
6. Briefly describe the history and the current international monetary system.
7. What is a convertible currency? What problems arise if Tazmania’s and Kangooria’s currencies are not convertible?
8. What impact does relative inflation have on interest rates and exchange rates?
9. Briefly discuss the international money and capital markets.