.
,.
I
1
,
...
THE UNITE(;) REPUBLIC OF _TANZANIA
MINISTRY OF EDUCATION, SCIENCE AND
TECHNOLOGY
MZUMBE UNIVERSITY
(CHUO KIKUU MZUMBE)
SCHOOL OF BUSINESS
Semester II Examinations: AUGUST 2021
-.
Course Code:
FIN 325
Course Title:
INTERNATIONAL FINANCE
Programme:
-_BAF (BS & PS) Ill
Date:
09/08/2021
Time:
08:00 -11 :00
C
-.
IN-ST8UCJIONS
E
1. Ther:e are FIVE (5) questions in this paper.
- 2. Answer ALL questions.
3. Be neat and specific to the point.
4. An questions carry equa_lmarks
1
tt
(20 MARKS)
QUESTION ONE
(a)
With an example, distinguish the following terms:
1.
Currency devaluation and currency revaluation
(04 Marks)
11.
(b)
Currency
appreciation
depreciation
and
currency
(04 Marks)
CRDB bank has provided the £/US$ quotation as
l.1168~ 1.1173.
Required:
Answer the following questions:
a)
What is the cost of buying £200,000? (03 Marks)
b)
How much would it cost to purchase US$ 4m?
(03 Mar~s)
c)
How many dollars would be received from selling
£800,000?
(03 Marks)
d)
How many sterling pounds would_ be received
from selling US$ 240,000?
(03 Marks)
QUESTION TWO
(20 MARKS)
Identify and discuss the aims of the Bretton
Woods Institutions? ·
. _ ( 10 Marks)
~
-
F-inestra, S.A., located in the state of Baja
' Calfonia,
Mexico, manufactures frozen Mexican food
which enjoys a large market share following in the
U.S States of California and Arizona to the north. In
order to be closer to its U.S market Finestra is
consid~ring moving some of its m~ufacturing
ope~atio~s to Southern California. Operations in
California would begin in year 1 and After three
years, the subsidiary would be sold to U.S investors
2
for US$2,809,802.80.
follows:
Other attributes
'
Sales ptj.ce per unit, year 1
S8;1-~s price mcrease, per year
Imtial sales volume, year 1, units
Sales volume increase, per year
Production cost per unit, year 1
Production cost per unit increase
per year
General and administrative
expenses per year
Depreciation expenses per year
Finestra's WACC (pesos)
U .S corporate tax rate
are
as
US$5 .00
3.0%
1,000,000
10.0%
US$4.00
4.0°lo
US$100,000
US$80,000
20.00%
30.0%
The peso/dollar exchange rates (MXN/US$) are expected
to be 8.00 (year 0), 9.00 (Year 1), 10.00 (Year 2) and
1:1.00 (Year 3). The operations-in California will pay 80%
of its. accounting profit to .Finestra as an annual cash
dividend. Mexican taxes
calculated on grossed up
dividends from foreign countries, with a credit ·for hostcountry taxes already paid.
are
REQUIRED:
·Estimate the maximum U.S dollar price Finestra _
should offer in year 1 for the investment. (10 Marks)
(2~ MARKS)
QUESTION THREE
a)
Briefly discuss the significance of . cover:ed
interest rate parity theory in. the determination of
forward currency rates.
(8 Marks)
b)
The financial -rnanager of USW AZI plc uses the
concepts of Purchasing Power Parity (PPP) and the
International Fisher Effect (IFE) to forecast spot
exchange rates. She has gathered the following
financial information:
100
105
Base price level
Current Kenya price level
3
Current Tanzania price level
111
Base TZS spot exchange rate
KSH.0.175
Current TZS spot exchange rate
. KSH.0 .158
Expected annual Kenya inflation
7%
~xpe<?ted annual Tanzania
5%
inflation
.
Expected Kenya one-year interest
10%
rate
Expected Tanzania one-year
8%
interest rate
-~-,
REQUIRED:
Calculate the following_ _e xchange rates:
(i) The current TZS. : spot rate that could have.
been forecasted by PPP.
(04 Marks)
(ii)
The expected TZS: spot rate one year from now
based on the JFE.
(04 Marks)
(iii) The expected TZS. spot rate four years from
now based on PPP.
(04 Marks)
QUESTION FOUR
(20 MARKS]
Nevada, Inc., needs to borrow _$100,000 for one year and
obtain~ _the foVowing interest :rate quotes:
• Interest rate for a one-year _loan in U.S. dollars is 15%.
• Interest rate for a one-year loan in Swiss francs is 8%.
• Interest rate for a one-year loan in Japanese yen is 9%.
Since the quotes for a foan in Swiss francs (SF) or
Japanese yen (JY) are relatively 1.Jw, Nevada may desire
~b
.
.
.
orrow m a foreign currency.
s
ume that Nevada has established · the following
information·
.
'
As
turrency
I Possible Change in
l
SFandJY
I
Probability of Change
Occurring
1%
30%
4
swiss Francs
Swiss Francs
3%
9%
Japanese Yen
Japanese Yen
Japanese Yen
-1%
3%
7%
50%
20%
100%
35%
40%
25%
100%
Required:
a) Determine the effective financing rate for both, Swiss
francs and Japanese Yen. ·
(10 Marks)
b) If Nevada, Inc., borrows half of its .needed funds in
each of the foreign currencies, will this option be more
favorable than those of either of the individual foreign
currencies? (Justify your answer with computations).
(10 Marks)
. [20 MARKS]
QUESTION FIVE
,
Mega-Mega is a multinational company that has
operations in two developing countries. The investments
are each approximately equal in value. The company's
objective is to reduce risk through diversification, and it
believes that the return on one investment is nof
correlated with the return to anotherifivestment. The
estimated risk and return for the two investment s are
shown below:
Country
Standard Return(%)
Risk
(%
Deviation)
Tanzania
4
Uganda
16
5
9
22.
Required:
a) Estimate the risk and return of the portfolio of the two
investments.
. .
.
(15 Marks)
b) Discuss the validity of investors of Mega-Mega's
objectives for risk reduction through international
diversification.
{5 Marks)