... ФАКУЛЬТЕТ МЕЖДУНАРОДНОГО БИЗНЕСА И ДЕЛОВОГО АДМИНИСТРИРОВАНИЯ Groupe Ariel S.A. Case Artyom Kirillov Polina Dzyuba Moscow 2011 Groupe Ariel S.A. : Parity Conditions and Cross-Border Valuation Question 1 There are two ways to compute the projects NPV. The first approach is to calculate it in Mexican Pesos and then change the resulting figure into Euros at the spot rate of MXN15.99/EUR. Note that the discount rate that we have used was the yield on the long-term peso-denominated corporate bonds. Below is the screenshot showing how we have done this. Computing NPV in Mexican Pesos (resulting NPV in Euros is 138,902) Question 2 The second approach is to transfer each cash flow from Mexican Pesos into Euros using the future rates (e.g. in year 5 we use the rate for this particular year rather than the spot rate). Note that the discount rate that we have used was the yield on the French 10-year government bonds. Once again, below you will find a screenshot. Computing NPV in Euros (resulting NPV in Euros is 144,633) In case the required rate of return on the project is higher than that on the 10-year government bonds (for instance, 8%), the resulting NPV will be...
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...1. Take a look at Mexico’s balance of payments over the past few years. Use the schedule I have attached to the case – it is in the same format as we used to examine the U.S. balance of payments. What do the trade and current account balances suggest about the likelihood of a potential devaluation of the peso? Why? a. It suggests that because Mexico is importing twice as much as they are exporting that there is a strong chance that the peso will lose value to counter the constant increase in imports. It is also important to point out that the exports in 1974 and 1975 are practically the same. The current account balance is negative 4 billion U.S. dollars which is 4 times larger than it was in 1972. All this leads me to believe that the peso needs to be devalued in order to raise the amount Mexico exports. 2. What does the private capital account suggest about the need for a devaluation of the peso? Why? a. The private capital account is a positive 3 billion which indicates that there are a lot more imports than exports suggesting that Mexico is either borrowing a larger portion of money or selling some of its assets. Consequently there is a need for the devaluation of the peso. 3. What does the private transactions balance suggest about the valuation of the peso and whether a very large devaluation was imminent? Why? a. By looking at the private transactions balance it suggest that there was not a dire need for a very large devaluation because...
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...Farmington Industries Case Write-Up Farmington Industries is a small, publicly traded U.S.-based corporation, which produces programmable control instruments. With high interests in Mexico, the company has expanded to four Mexican-related businesses, which are listed below along with their specific function: • The Maquiladora Assembly Facility – This facility is used to assemble imported U.S.-manufactured components into final products for sale mainly in the U.S. Seeing as the majority of sales occur in the U.S., this facility generates its revenues in USD. • Farmington (Antilles) N.V. – This facility is an offshore “shell corporation” by which the U.S. parent exports U.S.-manufactured products to Mexico and other countries. When dealing with key customers, the exporters do accept pesos, but exports are regularly billed in USD. As a result, they have receivables in both USD and Mexican pesos, which can be seen as both an opportunity and a threat in relation to the devaluation of the peso. • Farmington de Mexico – This facility is a 100% Mexican-owned subsidiary that focuses on locally manufactured products to domestic companies. Seeing as the company’s market share is substantial, their primary practice is to transfer a large percentage of its profits to the parent’s U.S. bank accounts. Sales transactions are made with Mexican pesos, which are then exchanged for USD, before being transferred to U.S. bank accounts. • Exportaciones (Farmington) S.A. – This facility...
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...MEXICAN PESO 1. Take a look at Mexico’s balance of payments over the past few years. Use the schedule I have attached – it is in the same format as we used to examine the U.S. balance of payments. What do the trade and current account balances suggest about the likelihood of a potential devaluation of the peso? Why? 2. What does the private capital account suggest about the need for a devaluation of the peso? Why? 3. What does the private transactions balance suggest about the valuation of the peso and whether a very large devaluation was imminent? Why? 4. Take a look at Exhibit 5 in the case – Mexico’s international reserves. What has happened to Mexico’s total foreign exchange reserves since 1970? How would you interpret this trend in terms of evaluating the strength or weakness of the peso in the foreign exchange market? Would you conclude that the peso was likely to be substantially devalued from this data? Why? 5. Take a look at Exhibit 7 and the forward discounts on the peso versus the dollar. On June 18, what did the market think the peso was likely to do over the next three months? On August 27, what did the market think the peso was likely to do versus the dollar over the next three months? Between June and August, what was the market saying about the magnitude and/or probability of a devaluation of the peso over the next three months? 6. Look at the commercial bank lending rates to prime borrowers in Exhibit 8. Based on these...
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...Groupe Ariel SA: Parity Conditions and Cross-Border Valuation Hints to case study questions: 1. Compute the NPV of Ariel-Mexico's recycling equipment in pesos by discounting incremental peso cash flows at a peso discount rate. How this NPV should be translated into Euros? Assume expected future inflation for France is 3% per year. 1.1. Review principles of estimating project cash flows. Suggested reading: Ch. 9 “Capital Budgeting and Cash Flow Analysis” in “Contemporary Financial Management”, 11th ed. by Moyer, McGuigan, and Kretlow. a. Project Net Investment (NINV): NINV=Capital Expenditure-ATSVold , where ATSVold = After-Tax Salvage Value of the old equipment. ATSVold=MVold+BVold-MVoldt , where MVold = Market Value of the old equipment;BVold = Book Value of the old equipment; t = tax rate; BVold-MVoldt = tax gains. b. Project Net Cash Flows (NCF): NCF=∆R-∆O-∆D1-t+∆D-∆NWC, where R = Revenues; O = Operating Costs; D = Depreciation, NWC = Net Working Capital; t = the tax rate. In Case 1, R = 0; NWC = 0. Therefore, NCF=-∆O-∆D1-t+∆D, or NCF=-∆O1-t+t∆D, where t∆D is the depreciation tax shield. c. Specifics of Case 1: i. -∆O = Incremental Cost Savings; -∆O1-t= Incremental Cost Savings after tax ii. ∆D=DNew-DOld, where DNew = Depreciation of the new equipment; DOld = Depreciation of the old equipment. Thus, the depreciation tax shield includes two components: t∆D=tDNew-tDOld, where tDNew...
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...morning, Francois Belliard arrived at his office in Groupo Ariel’s corporate headquarters in Toulon, France. The prior week, Belliard had requested additional financial information about an investment proposal from Ariel-Mexicana, a wholly-owned subsidiary that operated a manufacturing facility and a regional sales office in Jalisco, Mexico. The information had arrived late Friday, too late for Belliard to analyze due to the weekend. He sat down this morning to examine the proposal, as it was Belliard’s job to evaluate cross-border projects for Ariel, a global manufacturer of printing and imaging equipment. This type of cross-border proposal was not unusual as Ariel was in the process of expanding its global presence beyond Europe. The Mexican investment proposal called for the purchase and installation of new automated machinery to recycle and refurbish toner and printer cartridges for the local market. Recycling and refurbishment had become a large portion of Ariel’s business in all its markets; both European and foreign. This process and market had burgeoning margins and was proving to be a centerpiece of Ariel’s future growth. Many office product retailers operated formal toner cartridge recycling programs, both for environmental reasons of keeping reusable waste from landfills and demonstrating cost savings to customers over continually buying new OEM product. Writing in a leading trade journal, one industry analyst stated, “We are going to see more and more refined approaches...
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...answer each question as fully as possible. Save a copy of your work. The assignment is due on or before the end of class on February 11. 1.) Show how the following transactions would be recorded as debits or credits on the US balance of payments accounts. Identify the amount, whether it is a credit or a debit and on which account it would be recorded (be as specific as possible in identifying account – i.e., be more precise than a simple current account/capital account distinction). A.) A US tourist spends $100 in Mexico renting a fishing boat and the Mexican owner buys $100 of spare parts for the boat from a US company. $100 credit on the merchandise exports section of the current account , $100 debit on the tourism section of the current account B.) A German investor sells her holdings of General Motors stock and deposits the $5000 she receives for the stock in her US bank account. $5000 credit on the “foreigners deposits in US banks” or short term part of the capital account, $5000 debit on the long term part of the capital account. C.) General Electric receives a dividend of $5 million from its Brazilian subsidiary and uses the money to purchase an electronics distribution firm in Australia. $5 million credit on the income part of the goods and services part of the current account $5 million debit on the long term capital account 2.) Wheat costs $$5.00/bushel in the US and the exchange rate is $1 = 10 pesos, the price of US wheat to Mexican buyers is $500...
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...2003 CFA® Level II Examination Morning Session – Essay Candidate Number: FOR AIMR USE ONLY FOR AIMR USE ONLY _____ _____ _____ _____ _____ _____ THIS BOOK IS THE PROPERTY OF: Association for Investment Management and Research® 560 Ray C. Hunt Drive Charlottesville VA 22903-0668 USA Tel: 434-951-5499 © 2003 Association for Investment Management and Research. All rights reserved. The following list contains the command words used on the Morning Session of the 2003 Level II examination. Candidates may want to refer to this list as they formulate their answers. Calculate: Cite: Compute: Define: Determine: To ascertain or determine by mathematical processes. To quote by way of evidence, authority, or proof. To determine, especially by mathematical means. To set forth the meaning of; specifically, to formulate a definition of. To come to a decision as the result of investigation or reasoning; to settle or decide by choice among alternatives or possibilities. To transmit a mental image, an impression, or an understanding of the nature and characteristics of. To discourse about through reasoning or argument; to present in detail. To judge the value, worth, or significance of. To give the meaning or significance of; to provide an understanding of; to give the reason for or cause of. To establish the identity of; to show or prove the sameness of. To point out or point to with more or less exactness; to show or make known with a fair degree of certainty. To prove or...
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...1. CHAPTER 1, question 1: The term globalization has become widely used in recent years. How would you define it? = “I define globalization as producing where it is most cost-effective, selling where it is most profitable, and sourcing capital where it is cheapest, without worrying about national boundaries.” 2. CHAPTER 1, question 10: Financial Globalization. How do the motivations of individuals, both inside and outside the organization or business, define the limits of financial globalization? = If influential insiders in corporations and sovereign states continue to pursue the increase in firm value, there will be a definite and continuing growth in financial globalization. But, if these same influential insiders pursue their own personal agendas, which may increase their personal power, influence, or wealth, then capital will not flow into these sovereign states and corporations. The result is the growth of financial inefficiency and the segmentation of globalization outcomes, creating winners and losers. The three fundamental elements—financial theory, global business, management beliefs and actions—combine to present either the problem or the solution to the growing debate over the benefits of globalization to countries and cultures worldwide. 3. Problem 9-1 Americo’s Earnings and the Fall of the Dollar. The dollar has experienced significant swings in value against most of the world’s currencies in recent years. a. What would be the impact on Americo’s consoli-dated...
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...Assignment 5 Valerie Lagana Strayer University Eco550 – Economics for Managers September 5, 2011 Question: Describe the changing economic variables in China that influenced McDonald’s expansion strategies. The main changing economic variables in China that influenced McDonald’s Expansion were the increase in GDP and the economic stimulus package. In 2007, the increase in GDP showed a level of strong jobs in China as well as increase income for the Chinese (Farnham, 2010). This allowed the Chinese to spend more money on eating out at restaurants which gave McDonald’s a great opportunity for expansion. In addition, the Chinese government had a stimulus package after the economy dropped in 2008. The stimulus package included building more highways which allowed the Chinese to be accessible to the drive through window opportunity that McDonalds was able to offer as part of their expansion. Question: What factors led to the Mexican currency crisis and peso devaluation in 1994? The factors that led to the Mexican currency crisis and peso devaluation were the Appreciation of the exchange rate, falling interest rates, and the foreign savings. The appreciation of the exchange rate resulted in a decrease in savings with an increase in investment due to the expansion of credit without any federal regulations (Farnham, 2010). The falling interest rates were a result of the appreciation of the exchange rate attracting private capital via privatization of banks and...
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...CRITICAL THINKING AND DISCUSSION QUESTIONS QUESTION 1: The interest rate on South Korean government securities with one-year maturity is 4% and the expected inflation rate for the coming year is 2%. The U.S. interest rate on government securities with one-year maturity is 7% and the expected rate of inflation is 5%. The current spot exchange rate for Korean won is $ 1 = W1, 200. Forecast the spot exchange rate one year from today. Explain the logic of your answer. ANSWER 1: Drawing on what we know about the Fisher effect, the real interest rate in both the U.S. and South Korea is 2%. The international Fisher effect suggests that the exchange rate will change in an equal amount but in an opposite direction to the difference in nominal interest rates. Hence since the nominal interest rate is 3% higher in the U.S. than in South Korea, the dollar should depreciate by 3% relative to the South Korean Won. Using the formula from the book: (S1 - S2) / S2 x 100 = i $ - iWon and substituting 7 for i $, 4 for iWon, and 1200 for S1, yields a value for S2 of $ 1 = W1165. QUESTION 2: Two countries, Great Britain and the U.S., produce just one good: beef. Suppose that the price of beef in the U.S. is $ 2.80 per pound, and in Britain it is £ 3.70 per pound. (A) According to PPP theory, what should the $ / £ spot exchange rate be? (B) Suppose the price of beef is expected to rise to $ 3.10 in the U.S., and to £ 4.65 in Britain. What should be the one year forward $ / £ exchange rate? ...
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...Valuation Abstract This case discusses Cross-Border valuation of projects. This kind of analysis is common for companies that are operating in many countries. Groupe Ariel is one such company that is considering investing in a project in its own subsidiary in Mexico. The company manufactures and sells printers, copiers and other document production equipment in many countries. As far as, expansion into new markets is concerned, company is very slow in taking initiatives as compared to its competitors owing to the recent recession. But the management of the company believes that better durability and lower after-sales service costs of their products enable the company to build customer loyalty. The company is now considering replacing the manual equipment used for recycling in Mexico by new equipment that requires less material and labour costs. But, the uncertainty linked with certain macroeconomic factors like exchange rate, inflation and interest rate has made the valuation of the project very complex. Compute the NPV of Ariel-Mexico’s recycling equipment by counting incremental peso cash flows at a peso interest rate. How should this NPV be translated into Euros? Assume expected future inflation for France is 3% per year. For the purpose of calculating NPV in Pesos, incremental cash flows of the project for the next 10 years should be calculated first. The initial outflow of cash flow at time “0” is the cost of new equipment. This cost is 3500,000 Pesos. The cash value of...
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...Section I The Market at the Bottom of the Pyramid CEMEX: Innovation in Housing for the Poor CEMEX is a multinational cement manufacturing company operating out of Mexico. It is the largest cement manufacturer in Mexico, the second largest in the United States, and the third largest in the world. The company has operations on four continents and recorded global revenues of $6.54 billion in 2002 with a gross margin of 44.1 percent. THE INNOVATION. . . CEMEX leads the paradigm shift of companies profitably providing housing for the poor, the Tier 4 population, instead of governments or not-for-profit organizations. CEMEX manufactures and sells raw cement, ready-mix concrete, aggregates, and clinker (used to make cement) under different brand names. As the largest cement company in Mexico, CEMEX operated in a highly protected legal environment with little competition until the 1990s. It competed mainly on price and controlled 65 percent of the market share in Mexico. However, during the 1990s, the legal barriers in Mexico broke down, paving the way for international competition. CEMEX found itself operating in a highly competitive open environment. Starting in 1987, under the leadership of Mr. Lorenzo Zambrano, CEMEX experienced explosive growth, mainly through acquisitions and global expansion. Today, the company has 235 cement and ready-mix plants in Mexico, 60 in the United States, 85 in Spain, 45 in Venezuela, 4 in Indonesia, and 4 in Egypt. In the new competitive arena...
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...Chapter 01 Globalization and the Multinational Firm End of chapter question 1,2,4,5,6 Multiple Choice Questions 1. What major dimension sets apart international finance from domestic finance? A. Foreign exchange and political risks B. Market imperfections C. Expanded opportunity set D. All of the above 2. An example of a political risk is A. expropriation of assets. B. adverse change in tax rules. C. the opposition party being elected. D. both answers a) and b) are correct. 3. Production of goods and services has become globalized to a large extent as a result of A. natural resources being depleted in one country after another. B. skilled labor being highly mobile. C. multinational corporations' efforts to source inputs and locate production anywhere where costs are lower and profits higher. D. common tastes worldwide for the same goods and services. 4. Recently, financial markets have become highly integrated. This development A. allows investors to diversify their portfolios internationally. B. allows minority investors to buy and sell stocks. C. has increased the cost of capital for firms. D. answers a) and c) are both correct 5. Suppose your firm invests $100,000 in a project in Italy. At the time the exchange rate is $1.25 = €1.00. One year later the exchange rate is the same, but the Italian government has expropriated your firm's assets paying only €80,000 in compensation. This is an example of A. exchange rate risk. B. political...
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...Tutorial Answers 6 1. Transaction Exposure. Fischer Inc., exports products from Florida to Europe. It obtains supplies and borrows funds locally. How would appreciation of the euro likely affect its net cash flows? Why? ANSWER: Fischer Inc. should benefit from the appreciation of the euro, because it should experience a strong demand for its products when the euro has more purchasing power (can obtain dollars at a low price). 2. Transaction Exposure. Aggie Co. produces chemicals. It is a major exporter to Europe, where its main competition is from other U.S. exporters. All of these companies invoice the products in U.S. dollars. Is Aggie’s transaction exposure likely to be significantly affected if the euro strengthens or weakens? Explain. If the euro weakens for several years, can you think of any change that might occur in the global chemicals market? ANSWER: If the euro strengthens, European customers can purchase Aggie’s goods with fewer euros. Since Aggie’s competitors also invoice their exports in dollars, Aggie Company will not gain a competitive advantage. Nevertheless, the overall demand for the product could increase because the chemicals are now less expensive to European customers. If the euro weakens, European customers will need to pay more euros to purchase Aggie’s goods. Since Aggie’s competitors also invoice their exports in dollars, Aggie Company may not necessarily lose some of its market share. However, the overall...
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