7.

Benefits and Risks of International Business As an overall review of this chapter, identify possible reasons for growth in international business.
Then list the various disadvantages that may discourage international business.
Growth in international business can be stimulated by (1) access to foreign resources which can reduce costs, or (2) access to foreign markets
which boost revenues. Yet, international business is subject to risks of exchange rate fluctuations, and political risk (such as a possible host
government takeover, tax regulations, etc.).
13. Methods Used to Conduct International Business. Duve, Inc., desires to penetrate a foreign market with either a licensing agreement with a
foreign firm or by acquiring a foreign firm. Explain the differences in potential risk and return between licensing with a foreign firm, and
acquiring a foreign firm.
A licensing agreement has limited potential for return, because the foreign firm will receive much of the benefits as a result of the licensing
agreement. Yet, the MNC has limited risk, because it did not need to invest substantial funds in the foreign country.
An acquisition by the MNC requires a substantial investment. If this investment is not a success, the MNC may have trouble selling the firm it
acquired for a reasonable price. Thus, there is more risk. However, if this investment is successful, all of the benefits accrue to the MNC.
19. Valuation of an MNC. Birm Co., based in Alabama, is considering several international opportunities in Europe that could affect the value of
its firm. The valuation of its firm is dependent on four factors: (1) expected cash flows in dollars, (2) expected cash flows in euros that are
ultimately converted into dollars, (3) the rate at which it can convert euros to dollars, and (4) Birm’s weighted average cost of capital. For each
opportunity, identify the factors that would be affected.
a. Birm plans a licensing deal in which it will sell technology to a firm in Germany for $3,000,000; the payment is invoiced in dollars, and this
project has the same risk level as its existing businesses.
b. Birm plans to acquire a large firm in Portugal that is riskier than its existing businesses.
c. Birm plans to discontinue its relationship with a U.S. supplier so that can import a small amount of supplies (denominated in euros) at a lower
cost from a Belgian supplier.
d. Birm plans to export a small amount of materials to Ireland that are denominated in euros..
OPPORTUNITIES Dollar FC Euro FC Exchange rate at Birm’s weighted average
which Birm Co. cost of capital
converts Euro to
dollars
A. joint venture x

B. acquisitions x x

C. imported supplies x

D. exported to Ireland x

32. MNC Cash Flows and Exchange Rate Risk. Asheville Co. has a subsidiary in Mexico that develops software for its parent. It rents a large
facility in Mexico and hires many people in Mexico to work in the facility. Ashville Co. has no other international business. All operations are
presently funded by Asheville’s parent. All the software is sold to U.S. firms by Asheville’s parent and is invoiced in U.S. dollars.
a. If the Mexican peso appreciates against the dollar, does this have a favorable effect, an unfavorable effect, or no effect on Asheville’s value?
b.Asheville Co. plans to borrow funds to support its expansion in the U.S. The Mexican interest rates are presently lower than U.S. interest rates,
so Asheville obtains a loan denominated in Mexican pesos in order to support its expansion in the U.S. Will the borrowing of pesos increase,
decrease, or have no effect on its exposure to exchange rate risk? Briefly explain.
a. Appreciation of the peso has an unfavorable effect because it results in higher dollar expenses to Asheville Co.
B.Borrowing pesos will increase Asheville's exposure because it will increase the amount of dollar cash outflows that are needed to cover
expenses.
34. Uncertainty Surrounding an MNC's Cash Flows. a. Assume that Bangor Co. (a U.S. firm) knows that it will have cash inflows of $900,000
from domestic operations, cash inflows of 200,000 Swiss francs resulting from exports to Swiss operations, and cash outflows of 500,000 Swiss
francs at the end of the year. Although the future value of the Swiss franc is uncertain, your best guess is that it will be worth $1.10 at the end of
this year. What are the expected dollar cash flows of Bangor Co? b. Assume that Concord Co. (a U.S. firm) is in the same industry as Bangor Co.
There is no political risk that could have any impact on the cash flows of either firm. Concord Co. knows that it will have cash inflows of
$900,000 from domestic operations, cash inflows of 700,000 Swiss francs from exports to Swiss operations, and cash outflows of 800,000 Swiss
francs at the end of the year. Is the valuation of the total cash flows of Concord Co. more uncertain or less uncertain than the total cash flows of
Bangor Co.? Explain briefly.
a. $900,000 + (-$300,000 x $1.10) = $570,000
b. The cash flows of Bangor are more uncertain because a larger proportion of the cash flows are subject to exchange rate risk.
35. Valuation of an MNC. Odessa Co., Midland Co., and Roswell Co. are U.S. firms in the same industry and have the same valuation as of
yesterday, based on the present value of future cash flows of each company. Odessa Co. obtains a large amount of its supplies invoiced in euros
from European countries, and all of its sales are invoiced in dollars. Midland has a large subsidiary in Europe that does all of its business in euros
and remits profits to the U.S. parent every year. Roswell Co. has no international business. Suppose an event occurs that you believe will cause a
substantial depreciation of the euro against the dollar over time, but assume this event will not change the business operations of the firms
mentioned. Which firm will have the highest valuation based on your expectations? Briefly explain.

Odessa Co. will have the highest valuation because it benefits from the expected depreciation over time. Midland would be adversely affected by
the euro's depreciation.
Solution to Continuing Case Problem: Blades, Inc.
1. What are the advantages Blades could gain from importing from and/or exporting to a foreign country such as Thailand?

ANSWER: The advantages Blades, Inc. could gain from importing from Thailand include potentially lowering Blades’ cost of
goods sold. If the inputs (rubber and plastic) are cheaper when imported from a foreign country such as Thailand, this would increase
Blades’ net income. Since numerous competitors of Blades are already importing components from Thailand, importing would
increase Blades’ competitiveness in the U.S., especially since its prices are among the highest in the roller blade industry.
Furthermore, since Blades is considering longer range plans in Thailand, importing from and exporting to Thailand may present it
with an opportunity to establish initial relationships with some Thai suppliers. As far as exporting is concerned, Blades, Inc. could be
one of the first firms to sell roller blades in Thailand. Considering that Blades is contemplating to eventually shift its sales to Thailand,
this could be a major competitive advantage.
2. What are some of the disadvantages Blades could face as a result of foreign trade in the short run? In the long run?
ANSWER: There are several potential disadvantages Blades, Inc. should consider. First of all, Blades would be exposed to currency
fluctuations in the Thai baht. For example, the dollar cost of imported inputs may become more expensive over time if the baht
appreciates even if Thai suppliers do not adjust their prices. However, Blades’ sales in Thailand would also increase in dollar terms if
the baht appreciates, even if Blades does not increase its prices. Blades, Inc. would also be exposed to the economic conditions in
Thailand. For example, if there is a recession, Blades would suffer from decreased sales to Thailand. In the long run, Blades should be
aware of any regulatory and environmental constraints the Thai government may impose on it (such as pollution controls).
Furthermore, the company should be aware of the political risk involved in operating in Thailand. For example, the likelihood of
expropriation by the Thai government should be assessed. Another important issue involved in Blades’ long-run plans is how the
foreign subsidiary would be monitored. Geographical distance may make monitoring very difficult. This is an especially important
point since Thai managers may conform to goals other than the maximization of shareholder wealth.
3. Which theories of international business described in this chapter apply to Blades, Inc. in the short run? In the long run?
ANSWER: There are at least three theories of international business: the theory of comparative advantage, the imperfect markets
theory, and the product cycle theory. In the short run, Blades would like to import from Thailand because inputs such as rubber and
plastic are cheaper in Thailand. Also, it would like to export to Thailand to take advantage of the fact that few roller blades are
currently sold in Thailand. Both of these factors suggest that the imperfect markets theory applies to Blades in the short run. In the
long run, the goal is to possibly establish a subsidiary in Thailand and to be one of the first roller blade manufacturers in Thailand. The
superiority of its production process suggests that the theory of comparative advantage would apply to Blades in the long run.
However, the product cycle theory also applies to Blades, since its U.S. sales are declining and Blades feels that it must eventually
establish a subsidiary in Thailand in order to preserve its competitive advantage over Thai competitors. 4. What long-range plans other
than establishing a subsidiary in Thailand are possible for Blades? Would these other options be more suitable for the company?
ANSWER: Since Ben Holt is very unfamiliar with international business, and since Blades has never operated outside the United
States, establishment of a subsidiary in Thailand is probably not the best way for Blades, Inc. to gain a foothold in Thailand in the long
run. Blades should initially consider a joint venture with Thai firms that manufacture roller blades. The advantage would be access to
Thai distribution channels, familiarity of the Thai firm with customs and ethics in Thailand, and an established market. Of course,
since Blades’ production process is unique, a joint venture would provide the Thai subsidiary with knowledge of the production

purposes, which it may duplicate after the joint venture terminates.