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Chapter 5: Q9DQ (page 680)

What factors beyond the normal domestic analysis go into a financial feasibility study for a multinational firm?

Short Answer

Expert verified

Factors considered for studying the financial feasibility of the multinational firm:

1. Foreign exchange fluctuations

2. Political interference:

3. Tax system

Step by step solution

01

Definition of Multinational Firm

A business entity operating in domestic and foreign countries is a multinational firm. These types of business entity generate employment in other countries as well.

02

Factors beyond the domestic analysis

Following are the factors that go beyond the normal domestic analysis while studying the financial feasibility of the multinational firm:

1. Foreign exchange fluctuations: The study must evaluate the degree of fluctuation in the foreign exchange rate of the country where the business entity wishes to invest.

2. Political interference: Extent of political interference in the country in which the MNC wishes to invest.

3. Tax system: The tax procedure and the country鈥檚 tax system.

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Most popular questions from this chapter

You are the vice president of finance for exploratory resources, headquartered in Houston, Texas. In January 20X1, your firm鈥檚 Canadian subsidiary obtained a six-month loan of 150,000 Canadian dollars from a bank in Houston to finance the acquisition of a titanium mine in Quebec province. The loan will also be repaid in Canadian dollars. At the time of the loan, the spot exchange rate was U.S. \(0.8995/ Canadian dollars and the Canadian currency was selling at a discount in the forward market. The June 20X1 contract (face value = C\)150,000 per contract) was quoted at U.S. $0.8930/ Canadian dollar.

a. Explain how the Houston bank could lose on this transaction assuming no hedging.

b. If the bank does hedge with the forward contract, what is the maximum amount it can lose?

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