An Assignment

On
Small business dilemmas
Of
Chapter 2,3,4,13,14,17
Course Code: FIN-5102
Course Title: International Financial Management

Submitted To
Dr. Nafisa Rounok
Professor
Department of Finance
Jagannath University

Submitted By
Group - 5

Date of Submission:03-09-2024

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 Group Members

Sl. No Name ID

1 Puja Roy B180203001

2 Sayma Akter Mim B180203009

3 Arin Saha B180203013

4 Utsha Saha B180203044

5 Ali Ibna Reza Pahlovee B180203054

6 Sangida Akther B180203060

7 Priya Saha B180203063

8 Maimuna Rahman B180203065

9 Nayan Saha Turjoy B180203071

10 Siam Hossain B180203078

11 Dawn Argho Mondol B180203104

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 Chapter-2

1.Identify Factors That Will Affect the Foreign Demand at the Sports Exports Company.
Ans: Several factors can affect the foreign demand for sports exports from a company. Here are
some key ones:

Exchange Rates:
The exchange rate between the British pound (GBP) and the U.S. dollar (USD) is a critical factor.
If the pound strengthens against the dollar, British customers would find the footballs relatively
cheaper, potentially increasing demand. Conversely, if the pound weakens, the footballs would
become more expensive, potentially reducing demand.
Income Levels:
Economic conditions and income levels in the UK can significantly affect demand. If the UK
economy is strong and incomes are rising, British consumers may have more disposable income
to spend on hobbies like football, increasing demand for the footballs. Conversely, during
economic downturns, demand may decrease.
Inflation Rates:
Differences in inflation rates between the U.S. and the UK can affect competitiveness. If the UK
experiences higher inflation than the U.S., the relative price of domestic goods in the UK would
rise, making imported goods like the footballs more attractive, potentially increasing demand. If
U.S. inflation is higher, the footballs might become more expensive, reducing demand.
Consumer Preferences:
Shifts in consumer preferences in the UK towards American football or other hobbies can
influence demand. If American football becomes more popular, demand for the footballs would
likely increase. If interest wanes, demand would decrease.
Trade Policies and Tariffs:
Tariffs and trade barriers imposed by either the U.S. or the UK can impact the price and,
consequently, the demand for footballs. If the UK imposes high tariffs on imported sporting goods,
the footballs will become more expensive, reducing demand. Conversely, if tariffs are low or
nonexistent, demand may be higher.
Competitor Actions:

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The presence of competitors, both domestic and international, in the UK market can affect demand.
If competitors enter the market offering similar products at lower prices, it could reduce the
demand for the Sports Exports Company’s footballs. On the other hand, if the company holds a
unique market position, it could capture more demand.
Cultural Factors:Cultural affinity towards American football in the UK plays a significant role.
If American football gains cultural traction in the UK, demand for the footballs is likely to increase.
If the sport remains niche or less popular, demand could be limited.
Seasonality and Sporting Events:
Demand for footballs may be influenced by the sports calendar. For instance, if American football
becomes associated with particular seasons or major events in the UK, demand may spike around
those times.

Each of these factors can interact in complex ways, and understanding their potential impact
requires a careful analysis of the current market and consumer behavior.

Chapter-3
Use of the Foreign Exchange Markets by the Sports Exports
Company
1. Explain how the Sports Exports Company could utilize the spot market to facilitate the
exchange of currencies. Be specific.
Ans: The Sports Exports Company would have an account with a commercial bank. As it
receives payment in pounds each month, it would deposit the check at a bank that provides
foreign exchange services. Each month, the bank would cash the check, and then convert the
British pounds received into dollars for the Sports Exports Company at the prevailing spot rate.
2. Explain how the Sports Exports Company is exposed to exchange rate risk and how it
could use the forward market to hedge this risk.
Ans: The Sports Exports Company is exposed to exchange rate risk because the value of the
British pound will change over time. If the pound depreciates over time, the payment through
pounds will convert to fewer dollars.

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 The Sports Exports Company could engage in a forward contract in which it would sell pounds
forward in exchange for dollars. For example, if it anticipated receiving payment in pounds 30
days from now, it could negotiate a forward contract in which it would sell pounds in exchange
for dollars at a specific forward rate. This would lock in the forward rate at which the pounds
would be converted into dollars in 30 days, thereby removing any concern that the pound could
depreciate against the dollar over those 30 days. This hedges exchange rate risk over the short
run, but does not effectively hedge against exchange rate risk over the long run.

Chapter-4
Exchange Rate Determination
1. Given Jim’s Expectations, forecast whether the pound will appreciate or depreciate
against the dollar over time ?
Answer: Jim expects the pound to depreciate against the dollar over time. The main reason is that
British inflation is expected to be higher than U.S. inflation, which could weaken the pound by
reducing its purchasing power and making British goods less competitive. Even though interest
rates in both countries are expected to move similarly, limiting changes in capital flows, the
inflation difference will likely lead to a decline in the pound's value.

2. Given Jim’s expectations, will the sports exports company be favorable or unfavorably
affected by the future changes in the value of pound?
Answer: The sports export company will be unfavorably affected by the future depreciation of the
British pound. As the pound weakens, any revenue the company earns in pounds from exports to
the UK will convert into fewer U.S. dollars. This reduction in dollar-equivalent revenue could hurt
the company's profitability, making it more challenging to maintain financial performance when
the pound's value declines against the dollar.

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 Chapter-13
1. Given the information provided here, what are the advantages to Logan of establishing a
firm in the United Kingdom?
Ans: Advantages to Logan of establishing a firm in the UK are,
1. Reduced Shipping and Tariff Costs: Producing footballs and other sporting goods in the UK
would significantly reduce shipping costs, as goods would no longer need to be exported from the
United States to the UK.
2. Faster Delivery to the Market: Manufacturing products closer to the distributor could lead to
faster delivery times, improving the supply chain efficiency. This can be particularly beneficial if
there is a high demand for quick restocking.
3. Local Market Presence and Brand Recognition: Establishing a local firm may enhance
Logan’s brand presence in the UK and potentially across Europe. A local presence often makes a
brand more trustworthy and accessible to customers.
4. Better Control Over Production Quality and Processes: By producing goods in his own UK-
based firm, Logan would have direct control over the production processes and quality. This can
lead to consistent product quality and potentially lower costs associated with quality control.
5. Potential Cost Savings on Labor and Materials: Depending on the local costs in the UK,
Logan might find that labor or materials are less expensive or of higher quality, which could reduce
production costs or increase product quality.
6. Strategic Flexibility: Owning a firm in the UK provides more strategic flexibility, such as
adapting to local market conditions, customizing products to meet UK or European standards, and
rapidly responding to changes in market demand.

2. Given the information provided here, what are the disadvantages to Logan of establishing
a firm in the United Kingdom?
Ans: Disadvantages to Logan of establishing a firm in the UK are,
1. High Initial Capital Investment: Establishing a new firm in the UK would require significant
upfront costs, including purchasing or leasing facilities, equipment, and initial setup costs such as
registration, licensing, and hiring local employees.

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2. Operational and Management Challenges: Managing a business in a foreign country can be
challenging due to differences in business culture, legal regulations, and language barriers. This
could lead to higher management costs and a steeper learning curve.
3. Regulatory and Compliance Risks: Logan would need to comply with UK-specific
regulations, which might be more stringent or different from those in the United States. This could
include labor laws, environmental regulations, and other legal requirements, potentially increasing
operational costs and complexity.
4. Potential Exchange Rate Fluctuation: Although operating in the UK could reduce some
currency risk, Logan’s overall exposure to currency risk might not be completely eliminated. If he
needs to convert profits back to US dollars or pay for some inputs in dollars, he remains exposed
to exchange rate fluctuations.
5. Market Risks and Economic Uncertainty: The UK market and economic conditions could
change unexpectedly, affecting sales and profitability. Local economic downturns, changes in
consumer preferences, or political changes (like Brexit) could pose risks.
6. Loss of Focus on Core Competencies: Expanding operations to include direct manufacturing
and production of goods in the UK may divert attention from Logan's core competencies and his
primary business model of exporting. This could lead to inefficiencies or a lack of focus on areas
where Logan's company has been most successful.
7. Possible Redundancy of Existing Operations: If Logan sets up manufacturing in the UK, his
current production facilities in the US might become redundant, leading to potential layoffs,
underutilized resources, and sunk costs.

Chapter-14

1. Describe the capital budgeting steps that would be necessary to determine whether this
proposed project is feasible, as related to this specific situation.
Ans: To determine whether the proposed expansion of Sports Exports Company into Mexico is
feasible, Jim Logan would need to follow these capital budgeting steps:

Identify and Estimate Cash Flows:

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 • Initial Investment :

Production Facility Costs: Cost of hiring one full-time employee in the U.S. and leasing a
warehouse. This includes the employee’s salary, benefits, and the cost of leasing the warehouse.
• Operating Costs :

Production Costs: Costs associated with producing the footballs, including materials, labor, and
overhead.
Distribution Costs: Expenses related to exporting footballs to Mexico, including shipping, customs
duties, and insurance.
• Revenue Projections:

Sales Forecast: Estimate the number of footballs expected to be sold in Mexico based on market
research.
Selling Price: Price at which footballs will be sold to the distributor in Mexico.
Calculate the Net Cash Flows:
• Determine the net cash inflows revenues from sales minus operating expenses and costs
associated with exporting.
• Consider monthly payments from the distributor in Mexican pesos, which will need to be
converted into U.S. dollars at the prevailing exchange rate.

Assess the Discount Rate:

• Choose an appropriate discount rate to reflect the risk associated with the project. This
rate often includes the cost of capital and a risk premium for international ventures.

Perform Capital Budgeting Techniques:

• Net Present Value (NPV): Calculate the present value of projected cash flows and
subtract the initial investment. If the NPV is positive, the project is considered feasible.
• Internal Rate of Return (IRR): Compute the rate at which the net present value of cash
flows equals zero. Compare this rate to the company's required rate of return.
• Payback Period: Determine how long it will take for the project to recoup the initial
investment through cash inflows.

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Sensitivity and Scenario Analysis:
• Conduct sensitivity analysis to understand how changes in key variables (such as sales
volume, production costs, or exchange rates) affect the project's feasibility.
• Perform scenario analysis to assess how different potential outcomes could impact the
project's financial performance.

Risk Assessment:
• Evaluate potential risks, including economic, political, and operational risks specific to
Mexico. Consider currency exchange risks and their impact on cash flows.

Make a Decision:
• Based on the analysis, decide whether to proceed with the project. This involves
considering both quantitative results and qualitative factors.

2. Explain why there is uncertainty surrounding the cash flows of this project.
Ans:The cash flows of the project may be uncertain due to several factors:

Exchange Rate Fluctuations:

• The distributor will likely pay in Mexican pesos, which introduces currency exchange risk.
Fluctuations in the exchange rate between the Mexican peso and the U.S. dollar can impact
the actual cash inflows received in U.S. dollars.

Market Demand Variability:

• There is uncertainty around the actual demand for American-style footballs in Mexico.
Market research may provide estimates, but actual sales could vary based on consumer
preferences, competition, and other factors.

Operational Costs:
• The costs of producing, exporting, and distributing the footballs can vary. Changes in
production costs, shipping rates, and other operational expenses can impact overall
profitability.

Economic and Political Risks:

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 • Economic instability or political changes in Mexico could affect the business environment,
including changes in trade policies, tariffs, or regulations that could impact costs and
revenue.

Competitive Response:
• The entry of new competitors or responses from existing competitors in the Mexican
market could influence the company's market share and pricing strategy.

Regulatory and Legal Issues:

• Compliance with local regulations, such as import or export restrictions, taxes, or product
standards, can add uncertainty to the project's cash flows.

Currency Conversion:
• The process of converting Mexican pesos to U.S. dollars might involve transaction costs
or unfavorable exchange rates, which can affect the actual cash received.

Understanding and managing these uncertainties is crucial for making informed decisions and
ensuring the project’s financial viability.

Chapter 17
Multinational Capital Structure Decision at the Sports Exports
Company
1. What is an advantage of using equity to support the subsidiary? What is a
disadvantage?

Advantage
• Reduce the risk of insolvency and burden of interest payment by sole ownership: To
support the subsidiary, An MNC's parent can invest cash into a foreign subsidiary, making
it the sole owner. The subsidiary uses the cash infusion to develop its operations, remit
earnings to the parent, and build more equity by retaining earnings.

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 Using equity to support the subsidiary means Logan avoids taking on debt, which reduces
the risk of insolvency and the burden of interest payments. This provides greater financial
flexibility, as he won’t have to meet regular debt obligations, allowing him to reinvest
profits back into the business as needed

Disadvantage

• High cost of capital due to tax non-deductible and higher expectation of Shareholder:
There is an advantage to using debt rather than equity as capital because the interest
payments on debt are tax deductible. This benefit reduces the effective cost of debt
financing, making Cost of Equity more expensive than debt.
Shareholders may expect dividends, which, while not mandatory, can create an ongoing
financial obligation. Unlike interest payments on debt, dividends are often seen as a return
on investment and may be expected even in less profitable periods.

2. If Logan decides to use long-term debt as the primary form of capital to support this
subsidiary, should be use dollar-denominated debt or pound-denominated debt?

Logan should use pound-denominated debt to use long-term debt as the primary form of capital
to support this subsidiary.

Since the subsidiary will earn revenue in pounds, using pound-denominated debt aligns the
currency of the debt with the revenue. This minimizes the exchange rate risk, as fluctuations
between the pound and the dollar will have a lesser impact on the ability to service the debt.

By matching the currency of debt payments with revenue, Logan creates a natural hedge, reducing
the risk that the debt becomes more expensive due to currency movements. If Logan decides to
use long-term debt, pound-denominated debt will more advantageous

3. How can the equity proportion of this firm’s capital structure increase over time after
it is established?

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As the subsidiary earns profits, Logan can reinvest them back into the company, raising equity
without requiring additional external capital. By holding a share of earnings rather than paying
them out as dividends, the company's equity rises organically, enhancing the capital structure.

If the company grows and needs more funding, Logan can raise equity by issuing shares to himself
or to outside investors. This would raise the equity proportion in relation to debt, assuming no new
debt is issued Over time, as the business matures and produces consistent earnings,

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