Fundamentals of Corporate Finance
11th Edition
ISBN: 9780077861704
Author: Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Bradford D Jordan Professor
Publisher: McGraw-Hill Education
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Chapter 21, Problem 4M
S&S Air Goes International
Mark Sexton and Todd Story, the owners of S&S Air, have been in discussions with a light aircraft dealer in Monaco about selling the company’s planes in Europe. Jarek Jachowicz, the dealer, wants to add S&S Air to his current retail line. Jarek has told Mark and Todd that he feels the retail sales will be approximately €5.3 million per month. All sales will be made in euros, and Jarek will retain 5 percent of retail sales as a commission, which will be paid in euros. Because the planes will be customized to order, the first sales will take place in one month. Jarek will pay S&S Air for the order 90 days after it is filled. This payment schedule will continue for the length of the contract between the two companies.
Mark and Todd are confident the company can handle the extra volume with its existing facilities, but they are unsure about the potential financial risks of selling their planes in Europe. In their discussion with Jarek, they found that the current exchange rate is $1.37/€. At the current exchange rate, the company would spend 80 percent of the sales on production costs. This number does not reflect the sales commission paid to Jarek.
Mark and Todd have decided to ask Chris Guthrie, the company’s financial analyst, to prepare an analysis of the proposed international sales. Specifically, they ask Chris to answer the following questions.
4. How could the company hedge its exchange rate risk? What are the implications for this approach?
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MARKETING QUESTION: Video streaming service Netflix is expanding rapidly around the globe. It is currently available in 50 countries with the goal of expanding to 200 countries by the end of 2016. The next countries to get Netflix are Italy, Spain, and Portugal. Similar to Netflix's other European offerings, service will be offered at a price of euro€6.47 per month, which converts to U.S. $7.03 during the time of expansion. There are 19,069,600 television households in Spain, with 70 percent having high-speed Internet. Assume 45 percent of the households are willing and able to purchase the service and would purchase one subscription at an average price of euro€6.47 per month ($7.03) Calculate the annual market sales potential for Spain in euros and U.S. dollars. Is the dollar strong or weak compared to the euro? Why are U.S.-based international companies concerned when the U.S. dollar is strong compared to other currencies? The number of households in the market can be…
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Chapter 21 Solutions
Fundamentals of Corporate Finance
Ch. 21.1 - What are the differences between a Eurobond and a...Ch. 21.1 - Prob. 21.1BCQCh. 21.2 - Prob. 21.2ACQCh. 21.2 - Prob. 21.2BCQCh. 21.2 - Prob. 21.2CCQCh. 21.3 - Prob. 21.3ACQCh. 21.3 - Prob. 21.3BCQCh. 21.4 - Prob. 21.4ACQCh. 21.4 - Prob. 21.4BCQCh. 21.5 - What financial complications arise in...
Ch. 21.5 - Prob. 21.5BCQCh. 21.6 - Prob. 21.6ACQCh. 21.6 - How can a firm hedge short-run exchange rate risk?...Ch. 21.7 - Prob. 21.7ACQCh. 21.7 - Prob. 21.7BCQCh. 21 - Prob. 21.1CTFCh. 21 - Prob. 1CRCTCh. 21 - Prob. 2CRCTCh. 21 - Prob. 3CRCTCh. 21 - Prob. 4CRCTCh. 21 - Prob. 5CRCTCh. 21 - Prob. 6CRCTCh. 21 - Prob. 7CRCTCh. 21 - Prob. 8CRCTCh. 21 - Prob. 9CRCTCh. 21 - Prob. 10CRCTCh. 21 - Prob. 1QPCh. 21 - Prob. 2QPCh. 21 - Prob. 3QPCh. 21 - Using Spot and Forward Exchange Rates [LO1]...Ch. 21 - Cross-Rates and Arbitrage [LO1] Suppose the...Ch. 21 - Interest Rate Parity [LO2] Use Figure 21.1 to...Ch. 21 - Interest Rates and Arbitrage [LO2] The treasurer...Ch. 21 - Prob. 8QPCh. 21 - Prob. 9QPCh. 21 - Prob. 10QPCh. 21 - Prob. 11QPCh. 21 - Prob. 12QPCh. 21 - Prob. 13QPCh. 21 - Capital Budgeting [LO2] Lakonishok Equipment has...Ch. 21 - Capital Budgeting [LO2] You are evaluating a...Ch. 21 - Prob. 16QPCh. 21 - Prob. 17QPCh. 21 - Using the Exact International Fisher Effect [LO2]...Ch. 21 - SS Air Goes International Mark Sexton and Todd...Ch. 21 - SS Air Goes International Mark Sexton and Todd...Ch. 21 - SS Air Goes International Mark Sexton and Todd...Ch. 21 - SS Air Goes International Mark Sexton and Todd...Ch. 21 - Prob. 5M
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