international financial management
Please show all formula and workings in the calculation questions.
1. In your own words define the separation of ownership and control based on Agency Theory. Discuss some of the complex issues facing Multinational Enterprises that may arise due to this separation of ownership and control.
2. Discuss in your own words, the functions of the foreign exchange market, market participants and transactions.
3. Discuss in your own words, the theory of Purchasing Power Parity (PPP) and the difference between absolute purchasing power parity and relative purchasing power parity.
4. Happy Days (HDs) is a pet supplies company that is considering establishing a manufacturing plant and distribution facility in Australia through a wholly owned subsidiary. The company is seeking advice from two different investment banks in Australia for projected estimates of costs of capital when it plans to list its Australian subsidiary on the ASX. Using the estimates and assumptions outlined below, calculate the firm’s projected costs of debt, equity, and weighted average cost of capital. Show all workings and formulas.
Assumptions and Estimations OzzBank AustBank
Components of beta (estimates): β
Covariance of returns HDs and Market Covarjm 0.03888 0.05610
Variance of returns HDs σ2j 0.05760 0.09000
Variance of returns market σ2m 0.03240 0.04840
Other required measures
Risk-free rate of interest krf 2.5% 2.5%
HDs cost of debt in Aus market kd 6.5% 6.8%
Market return, forward-looking km 10.0% 13.0%
Corporate tax rate t 30.0% 30.0%
Proportion of debt D/V 42.0% 38.0%
Proportion of equity E/V 58.0% 62.0%
5. John is interested in inter-bank arbitrage. Suppose that the following exchange rates are available to him and that he may either buy or sell at these rates.
Citibank, New York US dollars per euro 0.77495/€
Barclays Bank, London US dollars per pound sterling 0.67782/£
Deutsche Bank, Frankfurt Euros per pound sterling 0.89283/£
(a) Does an opportunity exist to profit from arbitrage between the three markets? In other words, is triangular arbitrage possible? Explain your answer in your own words and show all workings.
(b) If John has US$1 million to arbitrage with, what would be the result (profit or loss) from triangular arbitrage? Illustrate and explain your answer in your own words and show all workings.