The purpose this week:to learn about the risks and returns of international finance
The following statements comprise the topics for this week’s class discussion:
China is a manufacturing superpower. Assume that you are CFO of an automobile manufacturer looking to build a $U.S.800 million plant in China. You are discussing this project with your spouse, who is intelligent, but has no background in finance.
Answer thede 3 questions:
1. Your discussion should begin with a clear and logical step-by-step explanation of the theory behind the concept of “required return” on proposed capital investments. Explain how cost of equity, cost of debt, WACC, and allowances for various risk factors are involved in determining the “required return” on proposed international capital investments.
2. Discuss each of the main risk factors that should be allowed for in addition to WACC in order to determine the appropriate required return on this capital investment opportunity.
3. Make a reasonable estimate of the required return, starting with a 12% weighted average cost of capital for the U.S. auto manufacturer, and adding reasonable estimated percentages for each of the separate risk elements you can foresee.
A useful website giving current and historical rates of exchange for foreign currency is http://www.oanda.com/
Useful information from the World Bank on the ease of doing business in many different countries:
Also see the Index of Economic Freedom:
Here are some instructions for the assignments in this course.
Always be sure to support your answers with facts and logical reasoning. Never guess or speculate. Avoid subjective opinions. Economics, finance and accounting are fact-based and your answers should be fact-based as well.
In your answers to all assignments, show that you have read the guidance materials and readings (quote them) and that you have understood, and can apply, the key concepts and methods (demonstrate it).
Be sure to show all your calculations for every numerical answer. That helps us see how you got your answer, and how well you understand each topic. It also enables us to give you helpful feedback and guidance.
This week introduces two topics that are very current – exchange rates and foreign investment. These concepts are captured in the China case where you are asked to explain the meaning of a required rate of return, and to apply this concept to a foreign investment. Read the guidance materials provided for you on the subject of required rates of return, and please think carefully about the concepts as well as the numerical answers to the case. This is intended to get you thinking about real-world issues and making solid arguments for your case. The important thing is the quality of your arguments, as well as your result.
The other important concept introduced this week is that of exchange rates – the fluctuating price that one pays to convert into and out of foreign currencies. The Gallagher & Andrew chapter is well-written, and you also have some excellent on-line guidance to introduce you to the subject.
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