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Multinational Financial Management for InfoXchange

1. Exchange gains and losses, You are the vice president of International InfoXchange, headquartered in Chicago, Illinois. All shareholders of the firm live in U.S. Earlier this month, you obtained a loan of $5M Canadian dollars from a bank in Toronto to finance the construction of a new plant in Montreal. At the time the loan was received, the exchange rate was 0.75 U.S cents to the Canadian dollar. By the end of the month, it has unexpected dropped to 70 cents. Has the company made a gain or loss as a result, and by how much?

Rate of Return discussion:
Should firms require higher rates of return on foreign projects than on identical projects located at home? Explain. Do not forget the effect of foreign rates.

Solution Preview

1.Exchange gains and losses, You are the vice president of International InfoXchange, headquartered in Chicago, Illinois. All shareholders of the firm live in U.S. Earlier this month, you obtained a loan of $5M Canadian dollars from a bank in Toronto to finance the construction of a new plant in Montreal. At the time the loan was received, the exchange rate was 0.75 U.S cents to the Canadian dollar. By the end of the month, it has unexpected dropped to 70 cents. Has the company made a gain or loss as a result, and by how much?
1Canadian Dollar=.75 US dollar

The loan amount in US dollars= 5000000*.75= US$3750000

After dropping to.7 the loan amount in US dollar is = 5000000*.7= $3500000

Thus there is a gain of = $3750000-3500000=$250000
As the loan amount or the liability has reduced.

Rate of Return discussion:

Should firms require higher rates of return on foreign projects than on identical projects located at home? Explain. Do not forget the effect of foreign rates.

Yes the firm will require higher rates of return on foreign projects. The major concern will be whether the investment in the foreign country will give adequate returns or not. This will be dependent on environmental factors of the country, which will define the risk and return matrix of the country. As an investor main concern will be of:

To have Favorable Political environment
Foreign investor will like the country to have stable political environment which means preferably democratic system, stable regime and transparent judicial system. All these make favorable environment for the business.
To have Favorable Socioeconomic environment
If a country has high literacy rate, high GDP growth, high public expenditure in health, a high-expected age and low infant mortality indicating sound health infrastructure in the country. Moreover the growth in tourism and exports is also positive.
Other major factors are the presence of special ...

Solution Summary

Your tutorial is 1,161 words plus five references. The questions center around working out losses and gains resulting from changes in the exchange rate. 5 references included.

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