This exercise is intended to apply many of the key concepts presented in the tex

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This exercise is intended to apply many of the key concepts presented in the tex

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 points
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

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