Read Chapters 13 & 14

International Financial Management 11th Edition

Jeff Madura

978-0-538482967

Cengage

Chapter 13

Assume that you wanted to expand your Learning English business to other non-U.S. countries where some individuals may want to speak English.

a. Explain why you might be able to stabilize the profits of your total business in this manner. Review the motives for direct foreign investment that are identified in this chapter. Which of these motives are most important?

b. Why would a city such as Montreal be a less desirable site for your business than a city such as Mexico City?

c. Describe the conditions in which your total business would experience weak effects even if the business was spread across 3 or 4 countries.

d. What factors affect the probability of these conditions occurring? (In other words, explain why the conditions could occur in one set of countries, but not another set of countries).

e. What data would you review to assess the probability of these conditions occurring?

f. Consider that the prevailing service you offer is teaching individuals in Mexico to speak English, and your business has already created some supplemental pamphlets and CDs that translate common Spanish terms into English. How could you expand your business in a manner that may allow you to benefit from economies of scale (and perhaps even benefit from your existing business reputation)? When you attempt to benefit from economies of scale, do you forgo diversification benefits? Explain.

g. How would you come to a decision on whether to pursue business expansion that capitalizes on economies of scale even if it would forgo diversification benefits? Do you think economies of scale would be more important or less important than diversification for your business?

h. Is there any way to achieve economies of scale and yet still achieve diversification benefits?

Chapter 14

a. Review the different items that are used in the multinational capital budgeting example (Spartan Inc.). Describe the items that would be included on a spreadsheet if you were to conduct a multinational capital budgeting analysis of investing dollars to expand your existing language business in a different location.

b. Assume that you recognize your limitations in predicting the future exchange rate of the invoice currency for your expanded business. You think that there are several possible exchange rate scenarios, each with equal probability of occurrence. Explain how you could use this information to estimate the future NPV and make a decision about whether to accept or reject the project.

c. Now assume that there is also much uncertainty about the demand for your service by individuals. Explain how you can attempt to incorporate this uncertainty along with the uncertainty of exchange rate movements so that you can make a decision about whether to accept or reject the project.

d. Explain how you would derive a required rate of return for your capital budgeting analysis. What type of information would you use to derive the required rate of return?

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