Tutorial Questions for WEEK 13

CHAPTER 14

RAISING EQUITY AND DEBT GLOBALLY

13. Cross-Listing. What are the main benefits and disadvantages to firms that cross-list their
shares on multiple stock markets?

15. Localization. What are the main advantages of localization and main disadvantages of
localization?

Problem 14.7

"M.M. Monroe Manufacturing, Inc., a French multinational company, has the following debt
components on its balance sheet. M.M. Monroe’s finance staff estimates their cost of equity
to be 15%. Income taxes are 25% around the world after allowing for credits. Calculate
M.M.Monroe’s weighted average cost of capital based on the below mentioned capital
structure components:

Assumption Value (Given)

Pre-tax Cost (%)
Tax rate 25.00%
25-year euro bonds €10,000,000 6.000%
5-year euro notes €4,000,000 4.000%
Shareholders' equity €50,000,000 15.000%
10-year British pound bonds (GBP) £10,000,000 5.000%
20-year Swiss franc bonds (CHF) 25,000,000 2.000%
Spot rate (€/£) 1.4100
Spot rate (¥/CHF) 0.9600
Spot rate (CHF/€) 138.00

where, Post-tax rate = Pre-tax(1-t)

WACC = Proportion * Post-tax rate

Problem 14.16

ChocTurk Co. is a Turkish chocolate manufacturer that exports its products to neighboring
European nations. Since its clients are mostly European, ChocTurk Co. evaluates all business
results and financial transactions in euros. It needs to borrow €5,000,000 or the foreign
currency equivalent for four years. It decides to issue bonds, making one annual payment at
the end of each year.

The following are the alternatives:

a. Sell Japanese yen bonds at par yielding 2% per annum. The current exchange rate is ¥136/€,
and the yen is expected to strengthen against the euro by 3% per annum.

FIN3034 – INTERNATIONAL FINANCIAL MANAGEMENT

 Tutorial Questions for WEEK 13

b. Sell Sterling-denominated bonds at par yielding 5% per annum. The current exchange rate
is €0.7350/£, and the pound is expected to weaken against the euro by 4% per annum.

c. Sell euro bonds at par yielding 4% per annum.

Which course of action do you recommend Choco Turk Co. take and why?

You are requested to manually calculate the IRR for this problem usually a range of +/- 1%
will be an acceptable answer.

Japanese Sterling Euro

Alternatives yen bonds pound bonds
bonds
Coupon rate 2.000% 5.000% 4.000%
Current cross rate 0.7350
136.00
Expected change in the value of the foreign 3.000% -4.000% 0.000%
currency
Principal needed by ChocoTurk Co. €5,000,000
Refer to Formulae Table for Appreciation and Depreciation Formulae

Reference to the exchange rate for Sterling pound-denominated bonds €0.7350/£, and the
pound is expected to weaken against the euro by 4% per annum.

0.735 0.7067 0.7362 0.7669 0.7988 (EURO/POUND)

1.361 1.415 1.471 1.530 1.592 (POUND/EURO)

FIN3034 – INTERNATIONAL FINANCIAL MANAGEMENT