Chapter 17 Homework Questions
3. Country Differences Describe general differences between the capital structures of firms based in the United States and those of firms based in Japan. Offer an explanation for these differences.
9. Financing Decision Veer Co. is a U.S.-based MNC that has most of its operations in Japan. Since the Japanese companies with which it competes use more financial leverage, it has decided to adjust its financial leverage to be in line with theirs. With this heavy emphasis on debt, Veer should reap more tax advantages. It believes that the market's perception of its risk will remain unchanged, since its financial leverage will still be no higher than that of its Japanese competitors. Comment on this strategy.
Chapter 18 Homework Questions
3. Exchange Rate Effects
a. Explain the difference in the cost of financing with foreign currencies during a strong-dollar period versus a weak-dollar period for a U.S. firm.
b. Explain how a U.S.-based MNC issuing bonds denominated in euros may be able to offset a portion of its exchange rate risk.
5. Borrowing Combined with Forward Hedging Cedar Falls Co. has a subsidiary in Brazil, where local interest rates are high. It considers borrowing dollars and hedging the exchange rate risk by selling the Brazilian real forward in exchange for dollars for the periods in which it would need to make loan payments in dollars. Assume that forward contracts on the real are available. What is the limitation of this strategy?
