intructions on the PDF
Library/Keystone Assignment submission (KSLO9, SLO7, CO3,C04)
This exercise is intended to apply many of the key concepts presented in the text to broad
issues that are discussed by managers who make financial decisions. It focuses on broad
financial issues to facilitate your understanding of the material covered.. It serves as a
running case in which concepts from every chapter are applied to the same business
throughout the school term. This exercise not only enables students to apply concepts to
the real world but also develops their intuitive and communication skills.
You will apply it on a selective chapter basis to ensure that the broad chapter concepts
are understood before moving on to the next chapter.
You should write in essay format and not list/answer questions for maximum ooints
Background
One of the best ways to learn the broad concepts presented in this text is to put yourself
in the position of a manager or board member for a multinational corporation (MNC) and
apply the concepts to financial decisions. Although board members usually do not make
the decisions discussed here, they must have the conceptual skills to monitor the policies
that are implemented by the MNC’s managers. Thus, they must frequently consider what
they would do if they were making the managerial decisions or setting corporate policies.
This exercise is based on a business that you could easily create: a business that teaches
individuals in a non-U.S. country to speak English. Although this business is very basic, it
still requires the same types of decisions faced by large MNCs.
Assume that you live in the United States and invest to establish a language school called
Escuela de Inglés in Mexico City, Mexico. You set up a small subsidiary in Mexico with an
office and an attached classroom that you lease. You hire local individuals in Mexico who
can speak English and teach it to others. Your school offers two types of courses: a one-
month structured course in English and a one-week intensive course for individuals who
already know English but want to improve their skills before visiting the United States.
You advertise both types of teaching services in local newspapers.
All revenues and expenses associated with your business are denominated in Mexican
pesos. Your subsidiary sends most of the profits from the business in Mexico to you at the
end of each month. Although your expenses are fairly stable, your revenue varies with the
number of clients who sign up for the courses in Mexico.
This background is sufficient to enable you to answer the questions that are asked about
your business throughout the term. Answer each question as if you were serving on the
board or as a manager of the business. The questions in the early chapters force you to
assess the firm’s opportunities and exposure, and those in later chapters force you to
consider potential strategies that your business might pursue.
Chapter 1
a. Discuss the corporate control of your business. Explain why your business in Mexico
is exposed to agency problems.
b. How would you attempt to monitor the ongoing operations of the business?
c. Explain how you might be able to use a compensation plan that limits the potential
agency problems.
d. Assume that you have been approached by a competitor in Mexico to engage in a
joint venture. The competitor would offer the classroom facilities (so that you would not
need to rent classroom facilities), and your employees would provide the teaching. You
would split the profits with this business. Discuss how your potential return and your risk
would change if you decided to pursue the joint venture.
e. Explain the conditions that would cause your business to be adversely affected by
exchange rate movements.
f. Explain how your business could be adversely affected by political risk.
Chapter 4
Given the factors that affect the value of a foreign currency, describe the type of
economic or other conditions in Mexico that could cause the Mexican peso to weaken
and, in turn, adversely affect your business.
Using the LIRN Databases (Statista or other) find the most recent 10 year average
Mexican peso to US Dollar exchange rates. What does this data tell you?
LIRN and Statista tips below.
Chapter 8
Mexican interest rates are usually substantially higher than U.S. interest rates.
What does this imply about the inflation differential (Mexico inflation minus U.S.
inflation), assuming that the peso interest rate is the same in both countries? Does this
imply that the Mexican peso will appreciate or depreciate? Explain.
It could be argued that the high Mexican interest rate should entice U.S. investors to
invest in Mexican money market securities, which could cause the peso to appreciate.
Reconcile this theory with your answer in part (a). If you believe that the high Mexican
interest rate does not entice U.S. investors, explain why.
Chapter 10
Recall that your Mexican business invoices in Mexican pesos.
You are already aware that a decline in the value of the peso could reduce your dollar
cash flows. Yet, according to purchasing power parity, a weak peso should occur only in
response to a high level of Mexican inflation, and such high inflation should increase your
profits. If this theory holds precisely, your cash flows would not really be exposed. Should
you be concerned about your exposure? Explain.
If you shift your invoicing policy to be only in dollars, how will your transaction exposure
be affected?
Why might the demand for your business change if you shift your invoice policy? What
are the implications for economic exposure?
Chapter 12
Explain how your business is subject to translation exposure.
How could you hedge against this translation exposure?
Is it worthwhile for your business to hedge the translation exposure?
Chapter 16
Review the political risk factors, and identify those that could possibly affect your
business. Explain how your cash flows could be affected.
Explain why any threats of terrorism due to friction between two countries could
potentially affect your business, even if the terrorism has no effect on the relations
between the United States and Mexico.
Assume that an upcoming election in Mexico may result in a complete change in
government. Explain why such an election can have significant effects on your cash flows.
RUBRICS
Your assignment grade will be based on the following “Rubrics”
• APA Formatting (running head, page numbering, font style & size, double spacing,
margins1″, paragraphs indents, proper and complete referencing for your
references sources, references page hanging indents, in-text referencing) = 20 pts
• Originality Report (70% or higher, titles and references do not count against your
work) = 20 pts
• Content Volume & Structure (5 pages of writing content, titles for each of the
required elements) = 20 pts
• Content Relevancy (100% relevant content to the subject matter) 30 pts
• References Sources (Textbook, at least one other source from LIRN STATISTA or
other database) = 10 pts
• Total = 100 pts
LIRN Tips
You will be able to access LIRN STATISTA or other database by going to your FNU
Library “LIRN” (Access ID> 24439 / Password> onlinelibrary39)
• Once you have signed to LIRN
• Go to your Business section
• Select STATISTA or other database.
• Type the topic to be searched (As examples) type:
• “Name-of-Company” 30 years stock returns.
• You will get search results for your selection
• Re[eat if chosen company returns is less than S&P 500 for number of years.
• Click on your selection and it will display information to be used on your
assignment (text,data, graphs, etc.)
• It will also give you a window for your citation (choose APA) and copy/paste on
your assignment’s references page
Use the data from the reports to supplement your questions’ answers. Remember that at
least this assignment requires one reference from STATSTA and at least one reference
from your course assigned textbook. Not meeting these referencing requirements will
result in a substantial deduction of points for your paper. If you are having problems in
accessing STATISTA, I urge you to contact the FNU Library and request assistance with
one of the Librarians which are knowledgeable and ready to assist you during the library
hours M-F 9 to 9 PM.
The “STATISTA” citation/referencing information from a Blue/Icon should be entered
(copied/pasted) just as it shows up; but if it is the Orange/Icon you will need to enter the
citation/referencing manually.
