42. An entity has a subsifliary which operates in a country where the.pdf

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42. An entity has a subsifliary which operates in a country where the exchange rates are volatile asd there are wild scasenal variations ie costs and revenue. Which rates of exelange may best be ased to tranalate the forcign sabsidiary statement of comprehensive income? 45. An eotity, whose fonactianl carrency is the dellar, than a fereien subaidiary. The aelulalitry declared a dividend te the parent of 9 million eures which was recerded ia the partat flasacial atatrmente. The eachage rate at that date was 1.5 ewres =1 dollar. At the dete of recelpt of the dividend, the esehasge rate had moved to 1.6 euros =1 dellar. The exchange difference ariding en the dividend moeld be treated as follews in the fientiol atntemente. A An exchanpe differince of 55.6 million will be takm to the parcat eatity income B No exchange differmoe will arise as it will be clitinatod on consolidation \begin{tabular}{l|l} C & An exehiage difference of 5375,000 will be taken to equity \\ D & An exchange difference of 5375,000 will be taken to the purent entity and the group \end{tabular} statement of comprehensive income Where a foreign eatity fuactioas independrntly from the pareat, the functional curreacy of the foreign eatity will be - A Deternined using the gridance for determinits the functiceal cumency of an entity B The presentation currency \begin{tabular}{|l|l|} \hline C & That of the country of origin \\ \hline D & That of the country of origin \\ \hline \end{tabular} 47. Aa eatiry started tradiag in the USA. Afier several years the entity expaded trading in Eurepe through a subsidiary. The subuldiary is ensentially an extenalon of their own business and the directers of the twe entities are the same. The fuactional curreney of the subsialary is . \begin{tabular}{|l|l|l|l} A & The dollar or the euro \\ \hline \end{tabular} \begin{tabular}{|l|l|l} B & The euro \\ \hline C & The \\ \hline \end{tabular} D Catnot be deternined 48. An entify, whose functional currency in the doller, lat a fornign mubsidiary. The Aubsidiary aold gods to the parest for 42 million eares whes the exchange rate was 2 ewros =1 doflis. The cest of the geods to the mobilliary wa 24 millioe eures. The goeds were uasold at the year end of 31 December 2068 whre the nalbage rate was 1.5 eures = I dallar. What is the valae of the intra srowp prefir which will be eliminated at 31 Decrmber 20es? \begin{tabular}{|l|l|} \hline A & $127 million \\ \hline B & 516 mitlian \\ \hline C & 59 million \\ \hline D & 521 milition \\ \hline \end{tabular}.

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FAI-lT .1 Financing the Global Firm Cost of Capital ('/d 30 28 26 24 20 1B 16 14 12 10 B 6 4 2 The Cost of Capital and Financial Structure ke = cost of equity k'vncc = weighted average after-tax cost of capital ka r x) = after-iax cost of debt Total Debt (D) Debt Ratio (o/"\ = - Total Assets (V) Partly offsetting the favorable effect of more debt is an increase in the cost of equity (k"), because investors perceive greater financial risk. Nevertheless, the overall lveighted average after-tax cost of capital (kwacc) continues to decline as the debt ratio increases, until financial risk becomes so serious that investors and management alike pierceive a real danger of insoivency. This result causes a sharp increase in the cost of new debt and equity, thus increas- ing the weighted average cost of capital. The lou,point on the resulting U-shaped cost of capital curve. which is at 14"/" in Exhibit 13.2. defines the debt ratio range in which the cost of capital is minimized. Most theorists believe that the low point is actually a rather broad flat area encompass- ing a wide range of debt ratios, 30% to 60% In Exhibit 13.2, rvhere little difference exists in the cost of capital. They also believe that, at least in the United States, the range of the flat area and the location of a particular firm's debt ratio rvithin that range are determined by such variables as 1) the industry in which it competes;2) volatility of its sales and operating income; and 3) the collateral value of its assets. *ptirt:;:l Finasreial Strer*t*r* and the MfdH The domestic theory of optimal financial structures needs to be modified by four more variables in order to accommodate the case of the MNE. These variables, in order of appearance, are 1) availability of capital; 2) diversification of cash flows; 3) foreign exchange risk; and 4) expectations of international portfoiio investors. Availability of Capital. Chapter 12 demonstrated that access to capital in global markets allows an MNE to lower its cost of equity and debt compared rvith most domestic firms. It also per- mits an MNE to maintain its desired debt ratio, even when significant amounts of new funds must be raised. In other wordq a multinational firm's marginal cost of capital is constant for considerable ranges of its capital budget. This statement is not true for most small domestic k"). 1ge an- 'of ras- ap- .of firms because they do not have access to the national equity or debt markets' They must either rely on internally generated funds or borrow for the short and medium terms from commel- cial banks. : r ^^-:+-r *^.lzatc are Multinational firms domiciled in countries that have illiquid capital markets ale rn almost the same ,it,ruiion u, small domesri" tlt*t uniess they have gained a global cost and availability of capital. They must rely on l"t"t"u!V generated funds and bank borrowing' If they need to raise significant u*o,rrrt. of new iunO--t to finance gr ...

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CHAPTER 11 Translation Exposure What gets measured gets managed. —Anonymous LEARNING OBJECTIVES ■Examine how the process of consolidation of a multinational firm’s financial results creates translation exposure ■Illustrate both the theoretical and practical differences between the two primary methods of translating or remeasuring foreign currency-denominated financial statements ■Understand how translation can potentially alter the value of a multinational firm ■Explore the costs, benefits, and effectiveness of managing translation exposure Translation exposure, the second category of accounting exposures, arises because financial statements of foreign subsidiaries—which are stated in foreign currency—must be restated in the parent’s reporting currency so that the firm can prepare consolidated financial statements. Foreign subsidiaries of U.S. companies, for example, must restate foreign currency-denominated financial statements into U.S. dollars so that the foreign values can be added to the parent’s U.S. dollar-denominated balance sheet and income statement. Using our example U.S. firm, Ganado, this is shown conceptually in Exhibit 11.1. This accounting process is called translation. Translation exposure is the potential for an increase or decrease in the parent’s net worth and reported net income that is caused by a change in exchange rates since the last translation. Although the main purpose of translation is to prepare consolidated financial statements, translated statements are also used by management to assess the performance of foreign subsidiaries. While such assessment by management might be performed using the local currency statements, restatement of all subsidiary statements into the single “common denominator” of one currency facilitates management comparison. This chapter reviews the predominate methods used in translation today, and concludes with the Mini-Case, McDonald’s, Hoover Hedges, and Cross-Currency Swaps, illustrating how one major multinational manages its investment and translation risks. EXHIBIT 11.1 Ganado’s Cross-Border Investments and Consolidation Overview of Translation There are two financial statements for each subsidiary that must be translated for consolidation: the income statement and the balance sheet. Statements of cash flow are not translated from the foreign subsidiaries. The consolidated statement of cash flow is constructed from the consolidated statement of income and consolidated balance sheet. Because the consolidated results for any multinational firm are constructed from all of its subsidiary operations, including foreign subsidiaries, the possibility of a change in consolidated net income or consolidated net worth from period to period, as a result of a change in exchange rates, is high. For any individual financial statement, internally, if the same exchange rate were used to remeasure each and every line item on the individual statement—the income statement and balance sheet—there would b ...

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Da ?tobUr'\ JrL+-, )^ tlCeLDog Bankruptcy, Reorganization, anti Liquidation b. After distribution to general crefitors and subordination adjustments are made, how much of the proceeds are received by the second-mortgage holders? By holders of the notes payable? By the subordinated debentures? By the common stockholders? Chapter 24 Subordinated debentures Total debt Common equity Total assets The trustee's costs total $281,250, and the firm has no accrued taxes or wages. The debentures are subordinated only to the notes payable. If the firm goes bankrupt and liquidates, how much will each class of investors receive if a total of $2.5 million is received from sale ofthe assets? The Verbrugge Publishing Company's 2012 balance sheet and statement are as Reorganization follows (in miliions of dollars): ce Sheet Current Intermediate Problenr 2 Southwestern Wear Inc. has the following balance sheet: Current assets Fixed assets Net fixed Goodwill $1,875,000 Accounts payabie 1,875,000 Notes payable &,759,gqq Total liabilities and equity $ 37s,000 750,000 750,000 $1,875,000 1,875,000 $ulgqqq $+z 78 6 135 9 9 $168 153 15 Current Advance stock, $112.50 par value ,200,000 shares) $10.50 preferred stoch no par, callable at $150 (60,000 shares) Common stoch $1.50 par value shares) Ret earnings Total assets Total Income S Net expense operating income income EBT Taxes (50%) Net income Dividends on $6 preferred Dividends on $10.50 preferred Income available to common stockholders 57 $33€$336 $540.0 516.0 $ 24.0 3.0 $ 27.0 13.5 $ l3.s 7.2 0.6 $_s3 a Chapter Wn 2)-l ? )2'2,- t', &o k903t22 Mergers and Corporate Control (sr-1) Valuation Red Valley is considering an acquisition of Flagg Markets' Fiagg currently has a cost of equity of 10%; of its financing is in the form of and the rest is in common equity. Its federal-plus: tax rate is 407o. uisition, Red Vailey expects Flagg to have the following FCFs the next 3 years (in millions): Year 2 Year 3 $10.00 $20.00 $2s.00 24.00 20.28 Year 1 exPense After the free cash flows are expected to at a constant rate of 5D/a, and the capital will stabilize at 35o/o debt with an rate of 7o/o. 'u. Wtrut is Flagg's unlevered cost of equity? What its levered cost of equity and cost of capital for the post-horizon period? b. Uiing the adjusted present value approach, what is Flagg's value of operations to Red Valley? Easy Problem 1 ,,R Intermediate ' Problems 2-3 ,"rr*,rrl, The fotlowing infonnation is required to work Problems 22-1 through 22-4' Hastings Corporation is interested in acquiring Vandell Corporation. Vandell has 1 million shares outstanding and a target capitai structure consisting csf 30o/o debt. Yandell's debt interest rate is 8%. Assume that the risk-free rate of interest is 5% and the market risk premium is 6%. Both Vandell and Hastings face a 40oio tax rate. Vandell's free cash flotv (FCFo) is $2 million per year and is expected .

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