Corporate and International Finance risks

Transaction risks involve the uncertainty that the exchange rate will change between the transaction date and the date when the business transactions are settled. The risks majorly affect the company imports and export activities (Bierman & Smidt, 2012). Economic uncertainty, on the other hand, encompasses the changes in the exchange rate on the market value of the company and therefore affecting the future value of its cash flows while the translation risks record how changes in the exchange rates affect the translated value of foreign assets and liabilities. Brazil altered its foreign exchange from the fixed regime to a floating system in 1999. The floating exchange regime severely increased the exposure of the foreign firms operating in Brazil. Political risks mostly interfere with international firms like the GBATT subsidiary.

Brazil political climate has not been stable for business activities (Oliveira, 2012). This is evident by the continuous political and economic woes that have left senior politicians and government institutions struggling for survival. For instance, the struggle started when President Dilma Rousseff was accused of corruption and abuse of power. The government was blamed for the increased level of debt and even hard terms of doing business within the country. GBATT subsidiary is financed using the combination of bonds (debts) and stocks (equity). The company capital structure is composed of 60% equity capital and 40% debt capital. Correct computation of WACC requires the accurate determination of the cost of capital for the specific sources of finance. For GBATT the projected cost of equity is 6% while the cost of debt is 3%.

Computation of weighted Average cost of capital Item Interest weight (B) A*B Equity 6% 0. GBATT management should accept project B because it has a higher NPV. Year Choice (A) Choice (B) D. factor @ 4. 38% (C) A*C B*C 0 ($15,000) ($10,000) 1. 223 6 Present value Inflows 20064. The historical information only indicates the past performance of the firm hence may not give its accurate reflection. The knowledge of NPV is essential to a firm in the projection of its future cash flows. The discounting technique takes into account the time value of money and therefore is useful in determining future earnings (Ehrhardt & Brigham, 2016). NPV is also useful for evaluating the different type of investment which is being undertaken by companies. References Bierman Jr, H. F. Corporate finance: A focused approach.