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International Financial and Investments 

ACF6007

Assignment

2022-2023

Section A

International Finance and Forex

(50% of coursework mark)

Answer Any One Question

Q1. Management of foreign exchange exposure (1,500 words ± 20% approximately)

a) Define and present three types of foreign exchange exposure.

b) Discuss and critically evaluate how multinational corporations may manage the three types of foreign exchange exposure. (50 marks)

Q2. Balance of payments and international economic linkages (1,500 words ± 20% approximately)

Write a concise report in word. The report should incorporate the below specified scrutiny and analysis with further discussion of the US economic linkages with the rest of the world through the lens of its international transactions and international investment position.

a) Visit BEA webpages, either https://www.bea.gov/data/intl-trade-investment/international-trade-goods-and-services or https://apps.bea.gov/international/factsheet/ or https://apps.bea.gov/histdata/fileStructDisplay.cfm?HMI=12&DY=2022&DQ=Q1&DV=Preliminary&dNRD=June-23-2022 

b) Scrutinise the US overall trade balance with the rest of the world and with a selection of 4 or 6 countries of your choice in the last decade, whereas approximately half of them having a trade surplus and the rest having a trade deficit with the US. Provide an excel file with raw data, performed calculations (and drawn charts if any).

c) Analyse the trade balance with respect to its components, e.g., balance on goods, balance on services, imports, exports, and so on.

d) Discuss the US economic linkages with the rest of the world through the lens of its international transactions and international investment positions.  (50 marks)

Specific guidelines for Q2

Your report should be self-contained. Your results are based on the chosen countries and are specific to them. As such, pertinent information on US trade with these countries should be available in the report, which should be concise. Your analysis should be case based and case relevant, supported by the gained knowledge and theories, avoiding excessive introduction of theories.

Your excel file is for information storing, processing, calculations and other workings. It is also for validating data and workings. Ideally there would be no need to check the excel fife when the report in word is self-contained and convincing. Anything like “referring to excel” or “see excel” is improper. You may have appendices but still don’t copy paste huge tables - appendices should contain condensed and necessary information only. 

Section B

Corporate Finance

(50% of coursework mark)

Answer All Questions

Q1. Case study - Recapitalisation of Phoenix

Phoenix Centres N.V. is a Netherlands-based property developer focused on shopping and entertainment centres. The company runs its activities in the field of establishing, operating and selling shopping and entertainment centres, as well as other mixed-use projects (retail, office, hotels, residential) in Central and Eastern Europe (CEE), India and the United States. The company was founded in 1993 by Philip Dickens. It has been profitable every year for the past 10 years. The shareholders are satisfied with the company’s management. Mr Dickens, before establishing Phoenix, was a founder and an executive director of a failed mineral mining operation. The bankruptcy of his old company made him strongly averse to debt financing. Consequently, Phoenix is entirely financed by equity, with 16 million shares of common stock outstanding. The stock, currently, traders at € 46.75 per share.

A new project of building a luxury hotel and casino resort in the US has been put forward and is currently evaluated by Phoenix. The estimated cost is $95 million (purchase of land and development of the resort). The project is expected to increase Phoenix’s annual pre-tax earnings by $20.2 million in perpetuity. Olga Wopshott, the company’s new CFO, is in charge of the financial aspect of the project. She learns that the current cost of capital is 10.5 percent. Olga thinks that it would be of financial benefit to include debt in Phoenix’s capital structure. Therefore, she tries to determine whether to finance the project entirely by debt. During consultations with an investment bank it was agreed that if bonds are issued, they would be at par value with a 7 percent coupon rate.  Based on her analysis, she believes that Phoenix’s capital structure in the range of 70 percent equity and 30 percent debt would be optimal. If the debt structure goes beyond 30 percent debt, bonds could carry a lower rating and a higher coupon. This is because of higher associated costs, which could, potentially, cause financial distress to the company. The corporate rate for Phoenix is 21 percent.   

a) If Phoenix wants to maximise its total market value, would you recommend that it issue debt or equity to finance the project? Briefly explain.   (2 marks)

b) Present Phoenix’s market value balance sheet before it announces the purchase and development.   (4 marks)

c) Let’s assume that Phoenix issues equity to finance the project.

i. What is the net present value of the project? (4 marks)

ii. Construct Phoenix’s market value balance sheet after it announces that the company will finance the purchase and development using equity. What would be the new price per share of the company’s stock? How many shares will Phoenix need to issue in order to finance the project? (6 marks)

iii. Construct Phoenix’s market value balance sheet after the equity issue but before the purchase has been made. How many shares of common stock does Phoenix have outstanding? What is the price per share of the company’s stock? (6 marks) 

iv. Construct Phoenix’s market value balance sheet after the purchase has been made. (4 marks)

d) Suppose Phoenix decides to issue debt in order to finance the project.

i. What will the market value of Phoenix company be if the purchase and development is financed with debt? (2 marks) 

ii. Construct Phoenix’s market value balance sheet after both the debt issue and the purchase. What is the price per share of the company’s stock? (4 marks)

e) Which method of financial maximises the per-share stock price of Phoenix’s equity? (2 marks)

(Total 34 marks)

Q2. Discuss how a company’s capital structure may change over its life cycle. (8 marks)

Q3. Investors demand higher returns when asymmetry of information is high. Is this statement true? Explain your answer. (8 marks)