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Chapter 5: Q7DQ (page 679)

What factors would influence a U.S. business firm to go overseas?

Short Answer

Expert verified

The factors are purchasing power parity, interest rate, the balance of paymentsandgovernment policies.

Step by step solution

01

Meaning of Business Firms

Business firms are organisations or corporations of people who come together to carry out activities to earn revenue.

02

Step 2:Factors

The factors that will influence a US business firm to go overseas are as follows:

  1. Purchasing power parity: The difference between the purchasing power of different countries also influences the decision.
  2. Interest Rates: Foreign exchange rates are influenced by the interest rate as it is one of the economic variables; this will influence the decisions to go overseas.
  3. Balance of payments: The balance of payments shows the economic transactions of the nation
  4. Government Policies: The government controls the nation's central bank, which influences the foreign exchange rate. It might influence the decision of US business firms to go overseas.

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Most popular questions from this chapter

Differentiate between the spot exchange rate and the forward exchange rate.

What is a letter of credit?

Chicago Savings Corp. is planning to make an offer for Ernie鈥檚 Bank & Trust. The stock of Ernie鈥檚 Bank & Trust is currently selling for \(44 a share.

a.If the tender offer is planned at a premium of 50 percent over market price, what will be the value offered per share for Ernie鈥檚 Bank & Trust?

b.Suppose before the offer is actually announced, the stock price of Ernie鈥檚 Bank & Trust goes to \)60 because of strong merger rumors. If you buy the stock at that price and the merger goes through (at the price computed in part a), what will be your percentage gain?

c.Because there is always the possibility that the merger could be called off after it is announced, you also want to consider your percentage loss if that happens. Assume you buy the stock at \(60 and it falls back to its original value after the merger cancellation, what will be your percentage loss?

d. If there is an 80 percent probability that the merger will go through when you buy the stock at \)60, and only a 20 percent chance that it will be called off, does this appear to be a good investment? Compute the expected value of the return on the investment.

The Jeter Corporation is considering acquiring the A-Rod Corporation.

The data for the two companies are as follows:

A-Rod Corp. Jeter Corp.

Total earnings ......................................................... \(1,000,000 \)4,000,000

Number of shares of stock outstanding ................. 400,000 2,000,000

Earnings per share ................................................. \(2.50 \)2.00

Price-earnings ratio (P/E) ....................................... 12 15

Market price per share ........................................... \(30 \)30

a.The Jeter Corp. is going to give A-Rod Corp. a 60 percent premium over

A-Rod鈥檚 current market value. What price will it pay?

b.At the price computed in part a,what is the total market value of A-Rod

Corp.? (Use the number of A-Rod Corp. shares times price.)

c.At the price computed in part a,what is the P/E ratio Jeter Corp. is assigning

A-Rod Corp?

d.How many shares must Jeter Corp. issue to buy the A-Rod Corp. at the

total value computed in part b?(Keep in mind that Jeter Corp.鈥檚 price per

share is $30.)

e.Given the answer to part d,how many shares will Jeter Corp. have after the

merger?

f.Add together the total earnings of both corporations and divide by the

total shares computed in part e.What are the new postmerger earnings per

share?

g.Why has Jeter Corp.鈥檚 earnings per share gone down?

h.How can Jeter Corp. hope to overcome this dilution?

What is meant by translation exposure in terms of foreign exchange risk?
See all solutions

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