Globalb business final exam

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1. Please visit the following link on the Economist.com and answer the following three questions based on data from any of the tables here. (There are about half a dozen tables linked under “economic and

financial indicators” on the right side of the page. These tables contain data on output, prices, wages,

inflation, interest rates etc.)

 

http://www.economist.com/markets-data

 

For the purposes of answering these questions, assume that interest rates refer to the annual rates on

10-year government bonds. If necessary, please state any other assumptions. Based on Britain (₤)

and Canada (C$):

 

a. For practical purposes, does real interest rate parity exist between these two countries? Please show me your calculations.

 

b. Compared to last year, has the C$ appreciated or depreciated against the pound, and by how much? (Please provide your reasoning and computations). Is this what you would expect based

on your answer to part a? Explain your reasoning.

 

c. Identify any two other factors from the tables that, in general, predict exchange rate appreciation or depreciation, and determine if the appreciation or depreciation of the C$ is consistent with

what you might predict

 

 

 

 

2. In general, several variables appear to affect the future value of a currency. Everything else being equal, with reference to the home country, clearly explain in a couple of sentences how each of the

following variables are likely to appreciate or depreciate the country’s currency: (please think

carefully before you answer these questions). (6 points)

 

a. Increase in GDP/output b. Increase in money supply (M) c. Increase in nominal interest rate (In) d. Increase in real interest rate (Ir) e. Increase in inflation f. Increase in current account surplus

 

 

 

 

3. Compare and contrast home replication, global, transnational and multi-domestic strategies. Please provide some examples of each type of strategy in your discussion. Please ensure that your

discussion contains an understanding of the conditions under which each strategy might be considered

appropriate.

 

 

2 points

2 points

2 points

2 points

3 points

 

 

4. You are considering exchanging Swiss Francs (SF) for Japanese Yen (Y). At the bank, you see the following rates posted. (Please note that for full credit, you must show the steps to the correct answer

clearly and cleanly, not just the final answer.)

SF/$ = 0.9154 Y/$ = 100.26

 

a. What is the Y/SF exchange rate? b. What is the SF/Y exchange rate? c. If the SF appreciated by 10% what would then new rate be? d. If the Yen depreciated by 25% relative to the original exchange rate (i.e. answer to part a, or

part b), what would the new rate be?

 

 

5. In recent months, several emerging markets such as India, Indonesia, Brazil and to a lesser extent Brazil have seen a sharp depreciation of their currencies against the US dollar, as well as an increase

in volatility of their markets. In order to address this issue, suppose a country like Indonesia were

tomorrow to announce the following new policies by the central bank:

ď‚· Fixed exchange rate of the Indonesian rupiah against the dollar through open market operations

ď‚· Free flow of capital in and out of Indonesia

ď‚· Continuous adjustment of monetary policy by the central bank Is this a good strategy? What are the likely outcomes of such a strategy? (This is a thinking question!

Hint: suppose there is a large downward pressure on the rupiah and the bank needs to conduct open

market operations to keep it fixed. What will happen to the other two aspects of the bank’s strategy?)

 

 

6. Consider a small country, MadHatterLand that trades goods and assets with the rest of the world consisting of perfect capital markets.

a. Suppose MadHatterLand has a completely fixed exchange rate maintained through open market purchases and sales of currency. The governor of the Central Bank, Ms. March Hare, attempts to

increase aggregate domestic demand through an open market expansion of money supply.

i. What will happen to the Balance of Payments (BOP- basically trade surplus or deficit) and why?

ii. What will happen to the foreign exchange holdings of the Bank and why? b. Now suppose MadHatterLand has a fully floating exchange rate. Again, Ms. March Hare

chooses to expand domestic demand through expansion in money supply.

i. What will happen to the overall BOP and why? ii. What will happen to the exchange rate and why?

 

 

7. Intellectual property (IP) is one of the most important areas of study in international business. Your textbook discusses TRIPS and attempts to harmonize IP laws across countries. Nevertheless IP laws

continue to be less than harmonized across countries. Please answer the following questions

analytically. Why do we have IP laws in the first place, especially separate from property laws that

already exist? Given the existence of these laws, what explains why for instance in the US we have a

17 year time period for patents, or 70 years after life for copyright, etc? In other words, where do

these numbers come from? Finally, why do different countries differ in their IP laws? For example,

most countries have different time periods for patents and copyrights, as well as different systems

(first-to-file versus first-to-invent) for determining IP ownership. While answering the last part of

this question, please consider cultural, economic, social, political, religious and other factors that

might explain IP differences. (4 points)

 

4 points

3 points

4 points 4 points

3 points

 
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American Greetings

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American Greetings

 

This year American Greetings is demonstrating to naysayers that the greeting card space is not dead. The company has accelerated top-line [growth] through a combination of organic growth and acquisitions, and year-to-date revenues are trending well ahead of our forecast. However, the growth has come at a cost that is also far greater than we had anticipated . . . In Q3 marketing, spending increased by a surprising $10 million . . . The company also accelerated investment spending in the digital space to support the growth of recently launched cardstore.com. In addition, [American Greetings] has incurred . . . incremental expenses this year to roll out new doors in the dollar-store channel.

—Jeff Stein, Managing Director, Northcoast Research

It was New Year’s Day 2012, and the weather was unseasonably warm in Cleveland, Ohio, headquarters for American Greetings Corporation (AG). But while temperatures were up, the same could not be said of AG’s share price, which had been cut in half over the previous several months to a year-end closing price of $12.51 (Exhibit 45.1).

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At times of low equity valuation, AG management historically had turned to share buybacks. With current valuation levels, management was considering going into the market with a $75 million repurchase program. The repurchase was to be funded from AG’s operating profit and cash reserves. The decision hinged on how the future of the enterprise was expected to play out. If the share price reasonably reflected bleak prospects for AG, management should preserve cash for future needs. If, on the other hand, AG stock was simply temporarily out of favor, the buyback plan presented a prudent defensive strategy.

American Greetings

With $1.7 billion in revenue, AG was the second-largest greeting card publisher in the United States. To meet the changing times, AG sold greeting cards as both paper products through traditional retail channels and electronic products through a number of company websites. In addition to gift cards, AG marketed gift wrap, candles, party goods, candles, and other giftware. To strengthen its business, the company owned and maintained the following major brands: American Greetings, Carlton Cards, Gibson, Recycled Paper Greetings, Papyrus, and DesignWare. AG owned the rights to a variety of popular characters, including Strawberry Shortcake, the Care Bears, Holly Hobbie, the Get Along Gang, and the Nickelodeon characters. The company was able to generate additional revenue by licensing the rights to these characters. Overall, management positioned AG as a leader in social expression products that assisted “consumers in enhancing their relationships to create happiness, laughter, and love.”1

The company had a long affiliation with the founding Sapirstein family. Shortly after immigrating to the United States in 1905, Jacob Sapirstein, a Polish entrepreneur, launched a business distributing German manufactured postcards in Cleveland with the help of his young family. Eventually the business leadership was passed on to Jacob’s oldest son, Irving Stone, then to Irving’s son-in-law, Morry Weiss. In 2003, Morry’s sons, Zev and Jeffrey Weiss, were appointed as CEO and president, respectively. Morry Weiss continued to serve as chairman.

Despite the strong family affiliation, AG was widely held in the public equity markets, with more than 11,000 shareholders, including large positions by such institutional investors as the British investment fund MAM Investments (10.6% of AG shares) and U.S. funds Dimensional Fund Advisors (10.5%), BlackRock (7.9%), and LSV Asset Management (6.7%). Dividend payments to investors had been on an upward trend in recent years, rising from 12 cents per share in 2004 to 56 cents in 2010.

Exhibits 45.2 and 45.3 provide AG’s detailed financial statements. Since AG’s fiscal year ended in February, the figures for 2011, for example, included results through February 2012, so remained estimates for the remaining two months.

EXHIBIT 45.2 | American Greetings Income Statement, December 20111 (in millions of dollars)

 

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Greeting Cards

Two players, Hallmark and AG, dominated the U.S. greetings card industry. Hallmark, privately held by the Hall family, was the larger of the two, with total worldwide revenue at $4 billion. From its headquarters in Kansas City, Missouri, Hallmark had aggressively expanded its business internationally with operations in more than 100 countries. Hallmark maintained licensing agreements with independent Hallmark Gold Crown retail stores that marketed Hallmark products and owned ancillary businesses such as Crayola (the crayon maker) and the Hallmark Channel cable network. Other card companies, such as Avanti Press, Blyth, CSS Industries, and Deluxe had found successful niches in the $6 billion U.S. greeting card market.

Mintel, the industry analyst firm, maintained that the overall greeting card market had contracted by 9% since 2005 and that the contraction would continue (Exhibit 45.4). Mintel’s best-case scenario called for a 4% market decline over the next four years; its worst-case called for a 16% decline. The market contraction was thought to be driven by the substitution for greeting cards of other forms of social expression products, due to the ease of such alternative forms as smart phones, electronic social networking, and digital imaging, the last of which affected the traditional Christmas card market in particular. The rapid expansion of social media networks such as Facebook provided even stronger challenges to electronic cards. An industry survey found that the social media substitution was particularly acute in a younger demographic (Exhibit 45.5). Analysts expected the trend to continue as the ease of digital communication substituted for traditional forms of social expression.

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The industry had responded to the substantive technological shift with important market innovations. Both Hallmark and AG had created an extensive collection of electronic cards that made it easy for customers to send

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cards electronically. Card manufacturers maintained websites that allowed consumers to purchase paper greeting cards on the Internet via computer or smart phone and have the physical cards delivered directly to the recipient. Kiosks had been placed in retail stores that allowed customers to create custom cards. Distribution had expanded to build a substantive presence in the expanding dollar-store retail channel, where greeting cards were reported to be a top-selling item.

Despite the trends, large numbers of people continued to buy greeting cards. In a recent survey, 52% of U.S. respondents had purchased a greeting card in the past three months. This figure was down from 59% who had responded affirmatively in 2006.2

Valuation

With an end-of-year close of $12.51 per share, AG’s PE ratio was at 6 times, its enterprise value to EBITDA ratio at 3.5 times, and its market-to-book ratio was below 1. All these valuation ratios were at the bottom of AG’s group of comparable companies. Exhibit 45.6 contains financial details and business descriptions for the AG-comparable group. AG’s management believed its valuation suggested an opportunity, but low levels also demonstrated substantial concern by the capital market regarding the prospects of the company. For example, equity analysts at Standard and Poor’s maintained a hold recommendation on the stock, claiming the following:

We see [AG’s 2012] sales increasing 2.5% to $1.73 billion. . . . We see demand benefitting from increased promotional spending in a more stable economic environment as the company pursues growth within the discount distribution channel . . . acquisitions . . . [and] international sales . . . We expect margins to narrow . . . reflecting a shift in customer mix toward the discount channel, increasing marketing costs to spur demand, distribution expansion costs, and expenses related to plans to move AG’s headquarters building. While we believe channel migration will result in a permanent negative margin shift, we do not believe transition costs related to expanded distribution efforts will be a factor in the long term.3

EXHIBIT 45.6 | Comparable Firms, End of 2011 (in millions of dollars except share price)

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Orly Seidman, a Value Line analyst, held a more optimistic view, expecting steady margins and steady long- term growth:

The company has been improving the product pipeline. Management should continue to follow consumer and societal trends to better brand its offerings. It has shifted its focus from its core segment to pursue noncard

merchandise. Product innovation, stronger retail partnerships, and sell-diversified portfolio ought to drive customer interest in its goods. Technological enhancements will likely remain key to its long-term approach. Over the past few quarters, [AG] rolled out several complementary interactive products (i.e., mobile apps) and should continue to bolster its digital position.4

It was clear that there was substantial disagreement regarding the future growth trajectory and operating margins for the company. Over the past several years, revenue growth had been near to below zero. In 2011, however, revenue growth was anticipated to be more than 7% (Exhibit 45.7). Similarly, operating margins, which had been abnormally low two to five years previously, had improved to 9% recently. The marginal tax rate for AG income was 39%.

 

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A bullish view held that AG would be able to maintain operating margins at 9% and achieve long-term ongoing revenue growth of 3%. A bearish view held that AG’s prospective revenue growth would be near zero into the future and that margins would continue to erode to a long-term rate of 5%. The expectation was that recent investments and ongoing electronic product substitution would generate some future working capital efficiency for AG, but there was little evidence that fixed asset turnover would improve. Exhibit 45.8 details the specific assumptions for the two scenarios.

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Management understood that returns and growth were challenging to achieve in early 2012. Yields on U.S. Treasury bills and bonds were at historic lows of 0.1% and 2.8%, respectively (Exhibit 45.9). In such an environment, investors would richly reward returns of even small magnitudes.

EXHIBIT 45.9 | Capital Market Data

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Financial Market And Instruments

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Economic Analysis Project

Note that the project should be approximately 30 pages and a minimum of 15 scholarly references are required.

Please ensure that the project conforms to the APA standard. Also note, your project will be subject to a Turn-It-In / UNICHECK examination and results should not exceed 25% unoriginality.

Good luck!

Interest Rate Forecasts and Investment Decisions

This problem requires an understanding of how economic conditions affect interest rates and bond yields. Your task is to use information about existing economic conditions to forecast U.S. and Canadian interest rates. The following information is available to you.

1. Over the past six months, U.S. interest rates have declined and Canadian interest rates have increased.

2. The U.S. economy has weakened over the past year while the Canadian economy has improved.

3. The U.S. saving rate (proportion of income saved) is expected to decrease slightly over the next year; the Canadian saving rate will remain stable.

4. The U.S. and Canadian central banks are not expected to implement any policy changes that would have a significant impact on interest rates.

5. You expect the U.S. economy to strengthen considerably over the next year but still be weaker than it was two years ago. You expect the Canadian economy to remain stable.

6. You expect the U.S. annual budget deficit to increase slightly from last year but be significantly less than the average annual budget deficit over the past five years. You expect the Canadian budget deficit to be about the same as last year.

7. You expect the U.S. inflation rate to rise slightly but still remain below the relatively high levels of two years ago; you expect the Canadian inflation rate to decline.

8. Based on some events last week, most economists and investors around the world (including yourself) expect the U.S. dollar to weaken against the Canadian dollar and against other foreign currencies over the next year. This expectation was already accounted for in your forecasts of inflation and economic growth.

9. The yield curve in the United States currently exhibits a consistent downward slope. The yield curve in Canada currently exhibits an upward slope. You believe that the liquidity premium on securities is quite small.

Questions

1. Using the information available to you, forecast the direction of U.S. interest rates.

2. Using the information available to you, forecast the direction of Canadian interest rates.

3. Assume that the perceived risk of corporations in the United States is expected to increase. Explain how the yield of newly issued U.S. corporate bonds will change to a different degree than will the yield of newly issued U.S. Treasury bonds.

Fed Watching

This problem requires an understanding of the Fed (Chapter 4) and monetary policy (Chapter 5). It also requires an understanding of how economic conditions affect interest rates and securities’ prices (Chapters 2 and 3). Like many other investors, you are a “Fed watcher” who constantly monitors any actions taken by the Fed to revise monetary policy. You believe that three key factors affect interest rates. Assume that the most important factor is the Fed’s monetary policy. The second most important factor is the state of the economy, which influences the demand for loanable funds. The third factor is the level of inflation, which also influ- ences the demand for loanable funds. Because monetary policy can affect interest rates, it affects economic growth as well. By controlling monetary policy, the Fed influences the prices of all types of securities. The following information is available to you.

â–  Economic growth has been consistently strong over the past few years but is beginning to slow down.

â–  Unemployment is as low as it has been in the past decade, but it has risen slightly over the past two quarters. â–  Inflation has been about 5 percent annually for the past few years.

â–  The dollar has been strong.

â–  Oil prices have been very low.

 

Yesterday, an event occurred that you believe will cause much higher oil prices in the United States and a weaker U.S. economy in the near future. You plan to determine whether the Fed will respond to the economic problems that are likely to develop. You have reviewed previous economic slowdowns caused by a decline in the aggregate demand for goods and services and found that each slowdown precipitated a stimulative policy by the Fed. Inflation was 3 percent or less in each of the previous economic slowdowns. Interest rates generally declined in response to these policies, and the U.S. economy improved. Assume that the Fed’s philosophy regarding monetary policy is to maintain economic growth and low inflation. There does not appear to be any major fiscal policy forthcoming that will have a major effect on the economy. Thus the future economy is up to the Fed. The Fed’s present policy is to maintain a 2 percent annual growth rate in the money supply. You believe that the economy is headed toward a recession unless the Fed uses a very stimulative monetary policy, such as a 10 percent annual growth rate in the money supply. The general consensus of economists is that the Fed will revise its monetary policy to stimulate the economy for three reasons:

(1) it recognizes the potential costs of higher unemployment if a recession occurs,

(2) it has consistently used a stimulative policy in the past to prevent recessions, and

(3) the administration has been pressuring the Fed to use a stimulative monetary policy. Although you will consider the economists’ opinions, you plan to make your own assessment of the Fed’s future policy. Two quarters ago, GDP declined by 1 percentage point. Last quarter, GDP declined again by 1 percentage point. Thus there is clear evidence that the economy has recently slowed down.

Questions

4-1. Do you think that the Fed will use a stimulative monetary policy at this point? Explain.

5-2. You maintain a large portfolio of U.S. bonds. You believe that if the Fed does not revise its monetary policy, the U.S. economy will continue to decline. If the Fed stimulates the economy at this point, you believe that you would be better off with stocks than with bonds. Based on this information, do you think you should switch to stocks? Explain.

Asset Allocation

This problem requires an understanding of how economic conditions influence interest rates and security prices (Chapters 6, 7, 8, and 9). As a personal financial planner, one of your tasks is to prescribe the allocation of available funds across money market securities, bonds, and mortgages. Your philosophy is to take positions in securities that will benefit most from your forecasted changes in economic conditions. As a result of a recent event in Singapore, you expect that in the next month investors in Singapore will reduce their investment in U.S. Treasury securities and shift most of their funds into Singapore securities. You expect that this shift in funds will persist for at least a few years. You believe this single event will have a major effect on economic factors in the United States, such as interest rates, exchange rates, and economic growth in the next month. Because the prices of securities in the United States are affected by these economic factors, you must determine how to revise your prescribed allocation of funds across securities.

Questions:

6-1. How will U.S. interest rates be directly affected by the event (holding other factors equal)?

7-2. How will economic growth in the United States be affected by the event? How might this influence the values of securities?

8-3. Assume that day-to-day exchange rate movements are dictated primarily by the flow of funds between countries, especially international bond and money market transactions. How will exchange rates be affected by possible changes in the international flow of funds that are caused by the event?

9-4. Using your answer to (1) only, explain how prices of U.S. money market securities, bonds, and mortgages will be affected.

10-5. Now use your answer to (2) along with your answer to (1) to assess the impact on security prices. Would prices of risky securities be affected more or less than those of risk-free securities with a similar maturity? Why?

11-6. Assume that, for diversification purposes, you prescribe that at least 20 percent of an investor’s funds should be allocated to money market securities, to bonds, and to mortgages. This allows you to allocate freely the remaining 40 percent across those same securities. Based on all the information you have about the event, prescribe the proper allocation of funds across the three types of U.S. securities.(Assume that the entire investment will be concentrated in U.S. securities.) Defend your prescription.

12-7. Would you recommend high-risk or low-risk money market securities? Would you recommend high-risk or low-risk bonds? Why?

13-8. Assume that you would consider recommending that as much as 20 percent of the funds be invested in foreign debt securities. Revise your prescription to include foreign securities if you desire (identify the type of security and the country).

14-9. Suppose that, instead of reducing the supply of loanable funds in the United States, the event increased demand for them. Would the assessment of future interest rates be different? What about the general assessment of economic conditions? What about the general assessment of bond price?

Stock Market Analysis

This problem requires an understanding of the different methods for valuing stocks. As a stock portfolio manager, you spend most of your day searching for stocks that appear to be undervalued. In the last few days, you have received information about two stocks that you are assessing, Olympic stock and Kenner stock. Many stock analysts believe that these stocks are undervalued because their price-earnings ratios are lower than the industry average. Olympic, Inc., has a PE ratio of 6 versus an industry PE ratio of 8. Its stock price declined recently in response to an announcement that its quarterly earnings would be lower than expected because of expenses from recent restructuring. The restructuring is expected to improve Olympic’s future performance, but its earnings will take a large onetime hit this quarter. Kenner Company has a PE ratio of 9 versus a PE ratio of 11 in its industry. Its earnings have been decent in recent years, but it has not kept up with new technology and may lose market share to competitors in the future.

Questions

15-1. Should you still consider purchasing Olympic stock in light of the analysts’ arguments about why it may be undervalued?

16-2. Should you still consider purchasing Kenner stock in light of the analysts’ arguments about why it may be undervalued?

17-3. Some stock analysts have just predicted that the prices of most stocks will fall because interest rates are expected to rise, which would cause investors to use higher required rates of return when valuing stocks. The analysts used this logic to suggest that the present value of future cash flows would decline if interest rates rise. The expected increase in interest rates is due to expectations of a stronger economy, which will result in an increased demand for loanable funds by corporations and individuals. Do you believe that stock prices will decline if the economy strengthens and interest rates rise?

 
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Activity-Based Costing

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Instructions

All information required for this assignment is provided in the Unit 2 Student WorkbookPreview the document [Excel] for this unit.

Read the Chandler CorporationPreview the document [PDF] case study and complete the following requirements.

Quantitative Analysis: 

Chandler Corporation is currently producing several products, including both custom and standard designs. It has received requests for two new products: swimming pool shades and landscape trellises. It is considering whether to produce either or both of these products. Based on the projections in Exhibits 1 to 3 describing the current capacity and required capacity needs for the new products, complete the following requirements:

  1. Using ABC, compute the Predetermined Overhead Rate for each activity.
  2. Compute the cost of unused capacity for each activity and in total.
  3. Compute the TOTAL and UNIT cost of making the full demand of pool shades assuming that Chandler bases its rates on the predetermined overhead rate.
  4. Compute the TOTAL and UNIT cost of making the full demand of trelli, assuming that Chandler bases its rates on the predetermined overhead rate.
  5. Compute the TOTAL and UNIT cost of making the full demand of pool shades assuming that Chandler bases its rates on EXPECTED capacity (used capacity plus required capacity for the full demand of pool shades).
  6. Compute the total and unit cost of making the full demand of trellises assuming that Chandler bases its rates on EXPECTED capacity (used capacity plus required capacity for the full demand of trellises).

Qualitative Analysis:

In a 2-3 page report, based on your quantitative analysis, discuss the results of what your quantitative analysis means for Chandler.  When considering a decision to make the new products, would costs computed using practical capacity (c and d) or expected capacity (e and f) as the denominator provide better information to Chandler’s management? Explain your answer.  Support your recommendation with a minimum of 3 academic resources.

READ this: Please make sure prepare a 2-3 page summary

Deliverables

  • Quantitative Analysis (Excel Required): You are required to use the provided Excel workbook to complete the quantitative analysis for this assignment.
  • Qualitative Analysis (Word Required): Prepare a 2-3 page summary addressing the required qualitative analysis, as noted in the Student Workbook.  Your paper is required to be formatted according to APA requirements.  Be sure to incorporate key concepts from this unit’s readings and properly cite your references according to APA requirements.  Do NOT embed the results of your quantitative analysis in your Word document.  You should only reference parts of your quantitative analysis in your written analysis.  Your written responses to the qualitative prompts should not be presented in a question and answer format.

Assignment Resource(s)

 
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