Fabozzi Frank, Peterson Pamela. Financial Management and Analysis Workbook

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250 QUESTIONS AND PROBLEMS

SHORT ANSWER QUESTIONS

Refer to Chapter 25, pages 823–858 in Financial Manage-

ment and Analysis.

1. Why would a ﬁrm participate in the international market?

2. What is free trade?

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International Financial Management 251

3. How are corporations taxed?

4. How is taxable income determined?

5. What are IDRs and ADRs?

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252 QUESTIONS AND PROBLEMS

PROBLEMS

Refer to Chapter 25, pages 823–858 in Financial Manage-

ment and Analysis.

1. Consider the following exchange rates:

■

U.S. $1 to 1,598 Venezuelan Bolivar’s

■

U.S. $1 to 1.56 Australian dollars

a. Calculate the exchange rate of Venezuelan Bolivar’s to an

Australian dollar.

b. Calculate the exchange rate of Australian dollars to a

Venezuelan Bolivar.

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International Financial Management 253

3. Suppose that the exchange rate for U.S. $1 for another

currency is such that U.S. $1 = 3.5 ARS (Argentine pesos).

Further suppose that if the exchange rate remains the

same, you will receive a 25% return on your investment in

ARS currency over the next year’s period. As an investor,

you are aware of the volatility in Argentina’s currency

exchange so sudden movements are expected.

a. If the exchange rate were to change such that $1 = 50

ARS, what return do you expect on the investment?

b. If the exchange rate were to change such that $1 = 2

ARS, what return do you expect on the investment?

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254 QUESTIONS AND PROBLEMS

3. The 3W company is a U.S. corporation with a subsidiary

in another country. 3W’s U.S. corporate marginal tax rate

is 40% and the subsidiary operating in a foreign country

has a marginal tax rate of 52%. 3W manufactures a prod-

uct for U.S. $10 a unit and sells 2 million units at cost to

the subsidiary who further finishes the unit for another

$10 per unit and sells the completed product for $190 per

unit. The fixed costs for 3W and the subsidiary are $1 mil-

lion and $0.5 million, respectively.

a. What are the taxes and the net income of the parent, the

subsidiary, and the company as a whole if the transfer

price is set at $30 per unit? Include the worldwide net

income and taxes.

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International Financial Management 255

b. What are the taxes and the net income of the parent, the

subsidiary, and the company as a whole if the transfer

price is raised to $50 per unit? Include the worldwide net

income and taxes.

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CHAPTER

257

Borrowing Via Structured

Finance Transactions

FILL IN THE BLANKS

Refer to Chapter 26 pages 861–880 in Financial Manage-

ment and Analysis.

1. As an alternative to the issuance of a corporate

______________, a corporation can issue a security

backed by ______________ or ______________. Securities

that have loans or receivables as their ______________ are

referred to as ______________-backed securities. The

transaction in which asset-backed securities are created is

referred to as a structured ______________ transaction or

as a(n) ______________ ﬁnancing.

2. An issuer seeking to raise funds via a(n) ______________

financing must establish itself as an issuer in the

______________-backed securities market. Once an issuer

establishes itself in the market, it can look at both the cor-

porate ______________ market and the ______________-

backed securities market to determine the better

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258 QUESTIONS AND PROBLEMS

______________ source. It will compare the

______________ of funds in the corporate bond market

and the asset-backed securities market and select the one

with the ______________ cost.

3. Analysis of the ______________ quality of the collateral

depends on the ______________ type. The ______________

agencies will look at the underlying borrower’s

______________ to pay and the borrower’s ______________

in the asset. The borrower is the individual or business

entity that took out the ______________. The borrower’s

equity will be a key ______________ as to whether a bor-

rower has an economic incentive to ______________ or to

______________ the asset and pay off a(n) ______________.

4. While viewed as a(n) ______________-party, in many

asset-backed securities transactions, the ______________

is effectively the ______________ of the loans used as the

collateral of the corporation seeking funding. The ser-

vicer also may be responsible for advancing

______________ when there are ______________ in pay-

ments that result in a temporary shortfall in payments to

the investors in the securities issued in a structured

______________ transaction.

5. ______________ agencies look at the ability of a(n)

______________ to perform all the activities that a(n)

______________ will be responsible for before they assign

a(n) ______________ rating to the bonds issued. If a(n)

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Borrowing Via Structured Finance Transactions 259

______________ is unacceptable, a structured finance

transaction will ______________ be rated. The rating

agency may require a(n) ______________ servicer if there

is a concern about the ability of a servicer to perform.

6. Ratings companies analyze the ______________ of cash

flow payments to test whether the collateral’s cash

______________ match the ______________ that must be

made to satisfy the issuer’s ______________. This requires

that the rating company make assumptions about

______________ and delinquencies under various interest

______________ scenarios. Based on its analysis of the col-

lateral and the ______________ testing of the structure to

assess the ______________ that the bondholders will

______________ be repaid in full, a rating agency will deter-

mine the amount of ______________ enhancement necessary

for an issue to receive a particular ______________ rating.

7. The way credit ______________ works is that some third

party is either paid a(n) ______________ or a(n)

______________ premium or earns extra ______________ on

a security in the structure to assume ______________ risk.

______________ credit enhancement involves third-party

guarantees such as insurance or a letter of ______________.

______________ credit enhancement includes overcollat-

eralization, ______________-subordinated structure, and

reserves. Deals will often have ______________ than one

form of credit enhancement. The rating agencies specify

the amount of credit enhancement to obtain a(n)

______________ credit rating.

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