Semester One Final Examinations, 2022 FINM7406 International Financial Management
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Exam information
Course code
and title
FINM7406
International Financial Management
Semester Semester 1, 2022
Exam type
Online, non-invigilated,
end-of-semester examination
Exam
technology
File upload to Blackboard Assignment
Exam date and
time
Refer to your personal exam timetable for the scheduled date and time of
this exam. Your examination will begin at the time specified in your
personal examination timetable. If commence your examination after this
time, the end for your examination does not change. For example, if your
examination is schedule for 10am with an end time of 11:40am, even if you
commence at 10:30am your end time is still 11:40am.
The total time for your examination from the scheduled starting time will be:
3 hours 10 minutes including 10 minutes planning time.
.
A 15-minute submission period is available for submitting your
examination. If your examination is submitted after this period late
penalties will be applied unless you can demonstrate that there were
problems with the system and/or process that were beyond your control.
Exam window
You must commence your exam at the time listed in your personalised
timetable.
You have from the start date/time to the end date/time listed in which
you must complete your exam.
Permitted
materials
This is an open book exam – all course materials are permitted.
Recommended
materials
Ensure the following materials are available during the exam:
Calculator; bilingual dictionary; phone/camera/scanner
Instructions
You will need to download the question paper included within the
Blackboard Test. Once you have completed the exam, upload the
completed exam answers file to the Blackboard assignment submission
link.
You may choose to either type your response OR hand write and scan-
to-pdf your response
If you believe there is missing or incorrect information impacting your ability
to answer any particular question, please state this when answering that
question.
Semester One Final Examinations, 2022 FINM7406 International Financial Management
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Please ensure you are not using any auto-translation tools with your
browser.
Who to contact
Given the nature of this examination, responding to student queries and/or
relaying corrections to exam content during the exam may not be feasible.
At the end of the exam there will be a free text box field. Please use this to
specify any assumptions you have made in completing the exam and which
questions those assumptions relate to. You may also include queries you
may have made with respect to a particular question, should you have
been able to ‘raise your hand’ in an examination room.
If you experience any interruptions to your examination, please collect
evidence of the interruption (e.g. photographs, screenshots or emails).
If you experience any issues during the examination, contact the Library
AskUs service for advice as soon as practicable:
Chat: support.my.uq.edu.au/app/chat/chat_launch_lib
Phone: +61 7 3506 2615
Email: [email protected]
You should also ask for an email documenting the advice provided so you
can provide this to the course coordinator immediately at:
Important exam
condition
information
Academic integrity is a core value of the UQ community and as such the
highest standards of academic integrity apply to all examinations, whether
undertaken in-person or online.
This means:
•
You are permitted to refer only to the allowed resources for this
exam, and you must not use any instances of work that has been
submitted previously elsewhere.
• You are not permitted to consult any other person – whether
directly, online, or through any other means – about any aspect of
this examination during the period that it is available.
• If it is found that you have given or sought outside assistance with
this examination, then that will be deemed to be cheating.
If you submit your online exam after the end of your specified planning
time, duration, and 15 minutes submission time, the following penalties will
be applied to the total mark available for the assessment:
• Less than 5 minutes – 5% penalty
• From 5 minutes to less than 15 minutes – 20% penalty
• More than 15 minutes – 100% penalty
These penalties will be applied to all online exams unless there is
sufficient evidence of problems with the system and/or process that
were beyond your control.
Semester One Final Examinations, 2022 FINM7406 International Financial Management
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Undertaking this online exam deems your commitment to UQ’s academic
integrity pledge as summarised in the following declaration:
“I certify that I have completed this examination in an honest, fair and
trustworthy manner, that my submitted answers are entirely my own work,
and that I have neither given nor received any unauthorised assistance on
this examination”.
Semester One Final Examinations, 2022 FINM7406 International Financial Management
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The Exam has five (5) questions. The total mark of 100 makes up 45% of the Final Grade.
Question 1 (25 marks)
RainMap is an Australian firm that sells interactive maps to customers across Europe. Its main
competitors are from the U.S. and Europe. The firm expects to receive €10 million in 180 days from
its contract with EuroMap, a German firm. RainMap wishes to hedge against the € exposure. Three
months ago, the European interest rate was 0.5% p.a. which was lower than the Australian interest
rate of 1% p.a. However, after a series of rate hikes, the European prevailing interest rate is 2% p.a.,
while that of Australia is 1.5% p.a. The current spot rate of the € is $1.5. The 180-day forward price
is $1.4/€. The 180-day European call option on $ with an exercise price of €0.66 is selling at a 2%
premium. The 180-day European put option on $ with an exercise price of €0.67 is selling at a 3%
premium.
A) What is the $ receipt of using a forward hedge at the time the payment is due? (3 marks)
B) What is the $ receipt of using money markets to hedge at the time the payment is due?
(5 marks)
C) What is the $ receipt of an option hedge at the time the payment is due assuming you
exercise the option when the payment is due? (5 marks)
D) Based on the answers in (A), (B), and (C), which hedging methods should RainMap choose?
(2 marks)
E) If RainMap is worried about the ability of EuroMap to make the payment when it is due,
what is the preferred transactional hedge and why? (4 marks)
F) During an investor presentation, RainMap’s CEO makes the following comment: “We are
fully hedged against exchange rate movements for the next two years, our attention is to
focus on operational risk as currency risk is no longer an issue”. Evaluate the CEO’s
comment. (6 marks)
Semester One Final Examinations, 2022 FINM7406 International Financial Management
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Question 2 (15 marks)
Momura is an investment asset manager from Japan. The fund invested Yen100 mil to buy
international shares two years ago in 2020. The exchange rate was Yen120/USD. The MSCI World
Equity Index has performed well since then from 4500 to 7000 points. At the same time, the
Japanese stock market has increased from 15000 to nearly 30000 points. The current exchange rate
is Yen100/USD. The fund exits and sells the shares at 7000 points.
A) Compute the rate of return on the investment in Yen terms. Show all the workings.
(5 marks)
B) Momura’s investors were disappointed with the fund performance in the international
market, as it lags far behind that of the Japanese market. They comment: “You should
focus on identifying profitable domestic investments rather than venturing out to
international markets. Most Japanese firms have international exposure anyway. Your
weak performance relative to Japanese investments reflects your inability to understand
that very basic fact.” Evaluate the comment. (10 marks)
Semester One Final Examinations, 2022 FINM7406 International Financial Management
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Question 3 (20 marks)
JPMorgen is a large investment bank that provides funding services for clients across the
world. Gauging the funding demand from clients, they identify swap opportunities that could
potentially lower their clients’ borrowing costs.
Two clients Safety and Risky approach t he firm with
their following requests. Risky prefers to borrow in the variable-rate market, as its main
revenues are sensitive to interest rate changes. On the other hand, most of Safety's incomes in the
next few years are locked. As a result, Safety’s preference is to borrow in the fixed-rate market.
Safety can borrow in the fixed- and variable-rate markets at 15% and LIBOR + 4%, respectively.
Risky can
borrow in the fixed and variable markets at 13% and LIBOR + 3%, respectively.
JPMorgen proposes an interest-rate swap deal in which they advise the two parties to
swap
payments. Risky is particularly unimpressed with the proposal and argues that the swap will only
benefit Safety, as Safety faces higher borrowing costs than Risky in both markets.
A)Explain to Risky why they might benefit from the swap. Make sure that your explanation
includes the potential savings from the interest rate swap deal? (8 marks)
B)Show both clients that the interest rate swap will work with the following assumptions: 1)
Risky will have 60% of the potential savings, and Safety will receive 30% of the potential
savings 2) JPMorgen will receive the rest of the savings. Note that you can have multiple
correct answers. Your answer will need to detail all of the necessary transactions in the
swap. (12 marks)
Semester One Final Examinations, 2022 FINM7406 International Financial Management
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Question 4 (15 marks)
Goodie Ltd. is an Australian firm whose operations are mainly in Japan. Most of its
revenues are in Yen term. They consider issuing AUD100mil worth of debts to fund their expansion
plans in the next 10 years. The firm hires Goldman Bank as their lead underwriter. Goldman Bank
proposes three options.
i. Goodie can raise the capital in the domestic bond market. The coupon rate is 6.10% p.a. The
coupon is paid semiannually. The bond will mature in 10 years. The underwriting fees are
0.8% of the issue size.
ii. Alternatively, the firm can tap into the Eurobond market. The Eurodollar bonds have 10 years
to maturity. The annual coupon payment is slightly higher at 6.15% p.a. Macquarie has a
reputation in this market, so the underwriting fees are lower at 0.75%. The current spot rate is
USD0.70/AUD.
iii. Finally, Goodie can issue ten-year Samurai bonds in Japan with a coupon rate of 6.13% paid
annually. The underwriting fee is 0.9%. The current spot rate is Yen120/AUD.
A) Based on the all-in cost method, which bond should Goodie choose? Hint: Use Excel or
financial calculator. (10 marks)
B) Goodie’s CEO has concerns over the rising competition from Japanese local firms. Given
the situation, which bond should Goodie choose and why? (5 marks)
Semester One Final Examinations, 2022 FINM7406 International Financial Management
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Question 5 (25 marks)
Novonik, an Australian firm, has recently experienced significant competition across
Europe. To diversify their customer base, the firm plans to expand its operations to Southeast Asia
through Thailand. The research has cost Thai Baht 20mil. The plant expansion cost is THB 600
million, which must be immediately expended. Additionally, to set up the plan, Novonik would
need to fund additional working capital of THB 50mil at the time of the expansion. Additional net
working capital would be THB 60mil, THB 80mil, and THB 100mil in years 1, 2, and 3,
respectively. Novonik is a capital-intensive firm, so it will depreciate the plant at a rate of THB 50
million per year (starting in year 1). To maintain and improve the plan, Novonik will have to inject
additional capital expenditures of THB50mil per year.
The cash flows are projected up to three years, and the terminal value is computed based
on the year 3 free cash flow (FCF) assuming a growth rate that equals the region’s long-run GDP
growth rate. The Earnings before Interests, Taxes, Depreciation and Amortisation (EBITDA) are
projected to be THB150mil, THB250mil, and THB290 mil for year 1, year 2, and year 3,
respectively.
All taxes are paid in Thailand in the year the income is earned. The following information
applies to the valuation.
Thailand Australia
Price Inflation 5.00% 2.00%
Annual return on government bonds 3.00% 2.5%
Corporate tax rate 30.00% 40.00%
Equity market risk premium 8.00% 5.00%
Spot rate (AUD/THB) 0.042
Before tax cost of debt 7.00% 6.00%
Debt-to-value ratio (D/V) 0.3 0.3
Systematic risk (beta) 1.5 1.2
Additional information is collected. The region’s long-term GDP growth rate is 4% p.a. The
country political risk premium is 2%, which should be added to the cost of capital.
Required:
A)Calculate the project-specific cost of capital in THB term. (5 marks)
B)Calculate the Free Cash Flows of the project in THB term. (5 marks)
C)Calculate the NPV of the project in THB term. (2 marks)
D)Calculate the forward exchange rates, F
1
(AUD/THB) through F
3
(AUD/THB), for the years
1,
2, and 3 based on the spot rate and the interest rates given in the question. (round to 5
decimal places).
(3 marks)
Semester One Final Examinations, 2022 FINM7406 International Financial Management
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E) Calculate the AUD value of FCF for the years 0, 1, 2 and 3 and the terminal value using the
forward rates calculated in (D). What is the NPV of the project in AUD? Hint: Use
Australian discount rate. (6 marks)
F) Do you think whether the NPV in part C or Part E is more accurate in capturing the project
value? Should Novonik invest in Southeast Asia? Explain your answer. (4 marks)
[END OF THE ASSESSMENT]
