F4101F23T3-Supplement

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School

Georgia Institute Of Technology *

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INTERNATIO

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Finance

Date

Feb 20, 2024

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docx

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1 GEORGIA GWINNETT COLLEGE School of Business FINA 4101 International Finance Fall 2023 Examination-III - Supplement IMPORTANT INSTRUCTIONS: 1. Please put your name below the following statement: “I confirm that all work is mine without help from anyone, including professional services, e.g., Chegg. I realize that there are strict penalties for cheating in ANY fashion.” YOUR NAME here _________________________________ attests the above. Unnamed exams will not be graded. 2. Show all work to get credit. Good Luck!!! 3. Completed exams must be deposited in the appropriate folder under the Assignment tab in D2L as a SINGLE Word file before the due date. I will not grade multiple pages submitted as separate files. I. Assume that Baps Corporation is considering the establishment of a subsidiary in Norway. The initial investment required by the parent is $6 million. If the project is undertaken the project will last 4 years. Baps’ cost of capital is 10%, and the project is of the same risk as Baps’ existing projects. All cash flows generated from the project will be remitted to the parent at the end of each year. Listed below are the estimated cash flows the Norwegian subsidiary will generate over the project’s lifetime in Norwegian kroner (NOK): Year 1 Year 2 Year 3 Year 4 NOK 10 million NOK 15 million NOK 17 million NOK 30 million The current exchange rate of the Norwegian kroner is $0.135. Baps’ exchange rate forecast for the Norwegian kroner is listed below: Year 1 Year 2 Year 3 Year 4 $0.12 $0.15 $0.14 $0.15 a. What is the net present value (NPV) of the Norwegian project? What’s the investment decisio n? (10) b. If the cost of capital were 15% compute the revised NPV. Does your decision change now? (5) II. A. Suppose an American MNC is contemplating a big construction project in the heart of the Amazon rainforest in Brazil. The MNC’s expected returns from the existing domestic operations are 10% with a standard deviation of 20%. The Amazonian project promises a return of 25% with a standard deviation of 30%. They have $80 billion dollars invested in domestic operations but expect a $20 billion investment in Brazil. Assuming a correlation of - 0.80 between the existing and proposed projects, compute the expected returns and the standard deviation from the combined operations. (5+5) B. As an alternative to Brazil, $20 billion can be invested in the Congo basin in a project that will provide a 35% return with a 40% standard deviation having a correlation of -0.6 with domestic operations. Again, compute the expected returns and the standard deviation from the combined operations. Should they invest in Brazil or Congo? WHY? (2+4+4)

Georgia Gwinnett College School of Business FINA 4101 Examination-III Dr. Atul K. Saxena Page 2 of 2 _____________________________________________________________________________________________________________ III. A. What are the important motives for direct foreign investment (DFI)? Provide real world examples. (5) B. What potential (cost-revenue) benefits do you think were most important in the DFI decision of the Walt Disney to build a theme park in France? (5) IV. What are country risk characteristics and techniques to assess country risk? Explain with specific examples to get full credit. (10) V. Explain ALL steps leading to the derivation of a country’s risk rating. Use some numbers to illustrate your answer. Consult your textbook and/or my lectures. (10)

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