The document provides an overview of key topics in international managerial finance covered in Chapter 18, including taxes, accounting practices, risk, international capital markets, and how operating in different countries can affect capital structure. It discusses templates and study guides available for the chapter. The answers to review questions cover topics like international trade agreements, joint ventures, foreign tax considerations, the Euromarkets, translating foreign subsidiary financial statements, foreign exchange rates, political risk, repatriating cash flows, and international business combinations. Case studies and problems provide examples of assessing foreign direct investments and calculating costs of capital and net present values for projects in other countries.
Internal and external institutions and influences of corporateGrace Fatima Abelida
Corporate governance refers to the mechanisms, relations, and processes by which a corporation is controlled and is directed. It involves balancing the many interests of the stakeholders of a corporation. Thus, it is important to know and determine what are the internal and external institutions and influences of a corporate governance.
Internal and external institutions and influences of corporateGrace Fatima Abelida
Corporate governance refers to the mechanisms, relations, and processes by which a corporation is controlled and is directed. It involves balancing the many interests of the stakeholders of a corporation. Thus, it is important to know and determine what are the internal and external institutions and influences of a corporate governance.
a Presentation by Philippine Deposit Insurance Corporation (PDIC) at the BSP Regional Financial Literacy Campaign for OFWs in Bacolod City, Philippines on June 28, 2007
Lecture 21 expenditure cycle part i - accounting information systesm james ...Habib Ullah Qamar
the expenditure cycle, the physical phase, financial phase, the purchases system, the cash disbursement system, conceptual revenue cycle, manual revenue cycle and computer based accounting information systems
Country Risk incorporating into capital budgeting1Country Risk CruzIbarra161
Country Risk incorporating into capital budgeting 1
Country Risk incorporating into capital budgeting 8
Foreign Direct Investment is an investment that a multinational corporation makes in a host country where they act as a parent company and have control and earn a private return. The collaboration between companies, the cross-border partnership can facilitate long-term business solutions. Foreign firms through geographic diversification can safeguard themselves from supply chain disruption and can enhance the economic prospects of both host country and parent country. One of the perplexing issues faced in international business lies within the political and financial risk in project investment. Political risk can be defined as the risk which affects the cash flow of any company dealing in international business and investment which is affected by a change in government action. A subject matter of paradox gets its exposure when several authors and scholars vouch for the way capital budgeting is explained and practiced. The general observation in a corporate finance world is the increase in the value of shareholders with NPV being positive. The project cash flow can be forecasted followed by discounting method at a discounting rate to reflect the price that the capital market is charging for the risk in cash flow; hence the derivation for NPV (Guo & Zheng,2020). The investors only consider the systematic risk of the project while ignoring the imperfection that is captured in the capital market in the case of capital budgeting. It is also believed that that quantification of the political risk is a difficult task even for investors.
In this paper, we will explore the country's risk in a broader aspect and incorporate it with the concepts of capital budgeting. It will also contain empirical evidence of FDI for an Australian company, AUF, investing in a software development business in India. The aim is to investigate the country-specific political and financial risk associated with India and its effect on the capital budgeting decision-making process. To ensure optimality, the key decision-makers often use a rule of thumb while dealing with the high deliberation cost involved in the political risk; thereby supporting the concepts of bounded rationality. Reviewed Literature
FDI involves mergers and acquisitions, reinvesting profits earned from operations carried out in the different countries, the building of new facilities, and company loans. FDI is the control over the firm and can be in any form including joint venture, technological transfer, and enterprise. Globalization has made a severe impact on living standards and trade and has raised the FDI in the international market as well.
1.1. Theories
The competitive position of the Australian firms in the global market makes it an acquirer of companies in host countries where the parent firm through its dynamic capability owing to their knowledge and utilization of the available resources hel ...
a Presentation by Philippine Deposit Insurance Corporation (PDIC) at the BSP Regional Financial Literacy Campaign for OFWs in Bacolod City, Philippines on June 28, 2007
Lecture 21 expenditure cycle part i - accounting information systesm james ...Habib Ullah Qamar
the expenditure cycle, the physical phase, financial phase, the purchases system, the cash disbursement system, conceptual revenue cycle, manual revenue cycle and computer based accounting information systems
Country Risk incorporating into capital budgeting1Country Risk CruzIbarra161
Country Risk incorporating into capital budgeting 1
Country Risk incorporating into capital budgeting 8
Foreign Direct Investment is an investment that a multinational corporation makes in a host country where they act as a parent company and have control and earn a private return. The collaboration between companies, the cross-border partnership can facilitate long-term business solutions. Foreign firms through geographic diversification can safeguard themselves from supply chain disruption and can enhance the economic prospects of both host country and parent country. One of the perplexing issues faced in international business lies within the political and financial risk in project investment. Political risk can be defined as the risk which affects the cash flow of any company dealing in international business and investment which is affected by a change in government action. A subject matter of paradox gets its exposure when several authors and scholars vouch for the way capital budgeting is explained and practiced. The general observation in a corporate finance world is the increase in the value of shareholders with NPV being positive. The project cash flow can be forecasted followed by discounting method at a discounting rate to reflect the price that the capital market is charging for the risk in cash flow; hence the derivation for NPV (Guo & Zheng,2020). The investors only consider the systematic risk of the project while ignoring the imperfection that is captured in the capital market in the case of capital budgeting. It is also believed that that quantification of the political risk is a difficult task even for investors.
In this paper, we will explore the country's risk in a broader aspect and incorporate it with the concepts of capital budgeting. It will also contain empirical evidence of FDI for an Australian company, AUF, investing in a software development business in India. The aim is to investigate the country-specific political and financial risk associated with India and its effect on the capital budgeting decision-making process. To ensure optimality, the key decision-makers often use a rule of thumb while dealing with the high deliberation cost involved in the political risk; thereby supporting the concepts of bounded rationality. Reviewed Literature
FDI involves mergers and acquisitions, reinvesting profits earned from operations carried out in the different countries, the building of new facilities, and company loans. FDI is the control over the firm and can be in any form including joint venture, technological transfer, and enterprise. Globalization has made a severe impact on living standards and trade and has raised the FDI in the international market as well.
1.1. Theories
The competitive position of the Australian firms in the global market makes it an acquirer of companies in host countries where the parent firm through its dynamic capability owing to their knowledge and utilization of the available resources hel ...
Comparison beween Multinational Financial Management and Domestic Financial Management?
Discuss evolution and International Financial Management System?
Write Special features of foreign exchange?
Describe the country risk Analysis in International Business?
Short notes on:
(i) Franchise system
(ii) Short term assets and liabilities
(iii) Foreign direct investment
CHAPTER 18 Multinational Capital Budgeting and Cross-Border Acquis.docxcravennichole326
CHAPTER 18 Multinational Capital Budgeting and Cross-Border Acquisitions
When it comes to finances, remember that there are no withholding taxes on the wages of sin.
—Mae West (1892–1980), Mae West on Sex, Health and ESP, 1975.
LEARNING OBJECTIVES
■Extend the domestic capital budgeting analysis to evaluate a greenfield foreign project
■Distinguish between the project viewpoint and the parent viewpoint of a potential foreign investment
■Adjust the capital budgeting analysis of a foreign project for risk
■Examine the use of project finance to fund and evaluate large global projects
■Introduce the principles of cross-border mergers and acquisitions
This chapter describes in detail the issues and principles related to the investment in real productive assets in foreign countries, generally referred to as multinational capital budgeting. The chapter first describes the complexities of budgeting for a foreign project. Second, we describe the insights gained by valuing a project from both the project’s viewpoint and the parent’s viewpoint using an illustrative case involving an investment by Cemex of Mexico in Indonesia. This illustrative case also explores real option analysis. Next, the use of project financing today is discussed, and the final section describes the stages involved in affecting cross-border acquisitions. The chapter concludes with the Mini-Case, Elan and Royalty Pharma, about a hostile takeover (acquisition) attempt that played out in the summer of 2013.
Although the original decision to undertake an investment in a particular foreign country may be determined by a mix of strategic, behavioral, and economic factors, the specific project should be justified—as should all reinvestment decisions—by traditional financial analysis. For example, a production efficiency opportunity may exist for a U.S. firm to invest abroad, but the type of plant, mix of labor and capital, kinds of equipment, method of financing, and other project variables must be analyzed with traditional discounted cash flow analysis. The firm must also consider the impact of the proposed foreign project on consolidated earnings, cash flows from subsidiaries in other countries, and on the market value of the parent firm.
Multinational capital budgeting for a foreign project uses the same theoretical framework as domestic capital budgeting—with a few very important differences. The basic steps are as follows:
■Identify the initial capital invested or put at risk.
■Estimate cash flows to be derived from the project over time, including an estimate of the terminal or salvage value of the investment.
■Identify the appropriate discount rate for determining the present value of the expected cash flows.
■Use traditional capital budgeting methods, such as net present value (NPV) and internal rate of return (IRR), to assess and rank potential projects.
Complexities of Budgeting for a Foreign Project
Capital budgeting for a foreign project is considerably more complex than the ...
The Elevator, Private Equity Magazine Editor, Patrick Gruhn discusses the impact of the current world financial crisis on the Alternative Investment fund Industry with Julian Stockley-Smith, Joint CEO of Geneva based JP Fund Services SA
ICMA has prepared a paper for policy makers about why corporate bond markets are so important for economic growth, for investors, for companies, and for governments, around the world; and why it is therefore essential that laws and regulations that affect them avoid any unintended adverse consequences that could inhibit those markets.
Stock market efficiency of pakistan stock exchange a review of literature fro...Fiaz Ahmad
This document contains the literature review on Stock market efficiency of Pakistan stock exchange from 1995 2018. This will be helpful for the Investors and the researchers as well
Human resource practices in pakistan a case of adamjee insurance company limitedFiaz Ahmad
This is a complete project for Principal of Human Resource management Students. it address the all basic concepts of Human Resource management and how Adamjee Insurance implementing these concepts in day to day Operations.
Human resource practices in pakistan a case of adamjee insurance company limitedFiaz Ahmad
This is a complete project for Principal of Human Resource management Students. it address the all basic concepts of Human Resource management and how Adamjee Insurance implementing these concepts in day to day Operations.
Firms management in pakistan a case of adamjee insurance company limited.pdfFiaz Ahmad
This is a complete project for Principal of management Students. it address the all basic concepts of management and how Adamjee Insurance implementing these concepts in day to day Operations.
Firms management in Pakistan a case of Adamjee insurance company LimitedFiaz Ahmad
This is a complete project for Principal of management Students. it address the all basic concepts of management and how Adamjee Insurance implementing these concepts in day to day Operations.
Corporate Governance Pactices in Pakistan; A case of Adamjee and Atlas Insura...Fiaz Ahmad
This document contains the basic Corporate Governance concepts implications in two big insurance firms in Pakistan. How the take advantage of Corporate Governance.
how to sell pi coins on Bitmart crypto exchangeDOT TECH
Yes. Pi network coins can be exchanged but not on bitmart exchange. Because pi network is still in the enclosed mainnet. The only way pioneers are able to trade pi coins is by reselling the pi coins to pi verified merchants.
A verified merchant is someone who buys pi network coins and resell it to exchanges looking forward to hold till mainnet launch.
I will leave the telegram contact of my personal pi merchant to trade with.
@Pi_vendor_247
Even tho Pi network is not listed on any exchange yet.
Buying/Selling or investing in pi network coins is highly possible through the help of vendors. You can buy from vendors[ buy directly from the pi network miners and resell it]. I will leave the telegram contact of my personal vendor.
@Pi_vendor_247
how to sell pi coins effectively (from 50 - 100k pi)DOT TECH
Anywhere in the world, including Africa, America, and Europe, you can sell Pi Network Coins online and receive cash through online payment options.
Pi has not yet been launched on any exchange because we are currently using the confined Mainnet. The planned launch date for Pi is June 28, 2026.
Reselling to investors who want to hold until the mainnet launch in 2026 is currently the sole way to sell.
Consequently, right now. All you need to do is select the right pi network provider.
Who is a pi merchant?
An individual who buys coins from miners on the pi network and resells them to investors hoping to hang onto them until the mainnet is launched is known as a pi merchant.
debuts.
I'll provide you the Telegram username
@Pi_vendor_247
Falcon stands out as a top-tier P2P Invoice Discounting platform in India, bridging esteemed blue-chip companies and eager investors. Our goal is to transform the investment landscape in India by establishing a comprehensive destination for borrowers and investors with diverse profiles and needs, all while minimizing risk. What sets Falcon apart is the elimination of intermediaries such as commercial banks and depository institutions, allowing investors to enjoy higher yields.
Poonawalla Fincorp and IndusInd Bank Introduce New Co-Branded Credit Cardnickysharmasucks
The unveiling of the IndusInd Bank Poonawalla Fincorp eLITE RuPay Platinum Credit Card marks a notable milestone in the Indian financial landscape, showcasing a successful partnership between two leading institutions, Poonawalla Fincorp and IndusInd Bank. This co-branded credit card not only offers users a plethora of benefits but also reflects a commitment to innovation and adaptation. With a focus on providing value-driven and customer-centric solutions, this launch represents more than just a new product—it signifies a step towards redefining the banking experience for millions. Promising convenience, rewards, and a touch of luxury in everyday financial transactions, this collaboration aims to cater to the evolving needs of customers and set new standards in the industry.
Turin Startup Ecosystem 2024 - Ricerca sulle Startup e il Sistema dell'Innov...Quotidiano Piemontese
Turin Startup Ecosystem 2024
Una ricerca de il Club degli Investitori, in collaborazione con ToTeM Torino Tech Map e con il supporto della ESCP Business School e di Growth Capital
What price will pi network be listed on exchangesDOT TECH
The rate at which pi will be listed is practically unknown. But due to speculations surrounding it the predicted rate is tends to be from 30$ — 50$.
So if you are interested in selling your pi network coins at a high rate tho. Or you can't wait till the mainnet launch in 2026. You can easily trade your pi coins with a merchant.
A merchant is someone who buys pi coins from miners and resell them to Investors looking forward to hold massive quantities till mainnet launch.
I will leave the telegram contact of my personal pi vendor to trade with.
@Pi_vendor_247
The Evolution of Non-Banking Financial Companies (NBFCs) in India: Challenges...beulahfernandes8
Role in Financial System
NBFCs are critical in bridging the financial inclusion gap.
They provide specialized financial services that cater to segments often neglected by traditional banks.
Economic Impact
NBFCs contribute significantly to India's GDP.
They support sectors like micro, small, and medium enterprises (MSMEs), housing finance, and personal loans.
how can I sell pi coins after successfully completing KYCDOT TECH
Pi coins is not launched yet in any exchange 💱 this means it's not swappable, the current pi displaying on coin market cap is the iou version of pi. And you can learn all about that on my previous post.
RIGHT NOW THE ONLY WAY you can sell pi coins is through verified pi merchants. A pi merchant is someone who buys pi coins and resell them to exchanges and crypto whales. Looking forward to hold massive quantities of pi coins before the mainnet launch.
This is because pi network is not doing any pre-sale or ico offerings, the only way to get my coins is from buying from miners. So a merchant facilitates the transactions between the miners and these exchanges holding pi.
I and my friends has sold more than 6000 pi coins successfully with this method. I will be happy to share the contact of my personal pi merchant. The one i trade with, if you have your own merchant you can trade with them. For those who are new.
Message: @Pi_vendor_247 on telegram.
I wouldn't advise you selling all percentage of the pi coins. Leave at least a before so its a win win during open mainnet. Have a nice day pioneers ♥️
#kyc #mainnet #picoins #pi #sellpi #piwallet
#pinetwork
This assessment plan proposal is to outline a structured approach to evaluati...
Chapter 18:International Managerial Finance
1. Principles of Managerial Finance Solution
Lawrence J. Gitman
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CHAPTER 18
International
Managerial
Finance
INSTRUCTOR’S RESOURCES
Overview
In today's global business environment, the financial manager must also be aware of the international aspects of
finance. A variety of international finance topics are presented in this chapter, including taxes, accounting
practices, risk, the international capital markets, and the effect on capital structure of operating in different
countries. This chapter discusses limited techniques but provides a broad overview of the financial considerations
of the multinational corporation.
PMF DISK
This chapter's topics are not covered in the PMF Tutor or the PMF Problem-Solver.
PMF Templates
A spreadsheet template is included for the following problem:
Problem Topic
18-1 Tax credits
Study Guide
The following Study Guide example is suggested for classroom presentation:
Example Topic
1 Exchange rates
2. Part 6 Special Topics in Managerial Finance
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ANSWERS TO REVIEW QUESTIONS
18-1 The first trading bloc was created by the North American Free Trade Agreement (NAFTA) which is the
treaty that establishes free trade and open markets between Canada, Mexico, and the United States. The
European Open Market is a second trading bloc and was created by a similar agreement among the 12
western European nations of the European Economic Community (now called the European Union, or EU)
and eliminates tariff barriers to create a single marketplace. The EU is establishing a single currency for
all participating countries called the Euro. The third bloc is called the Mercosur Group and consists of
many of the countries in South America.
An important component of free trade among countries, including those not part of one of the three trading
blocs, is the General Agreement on Tariffs and Trade (GATT). GATT extends free trade to broad areas of
activity–such as agriculture, financial services, and intellectual property–to any member country. GATT
also established the World Trade Organization (WTO) to police and mediates disputes between member
countries.
18-2 A joint venture is a partnership under which the participants have contractually agreed to contribute
specified amounts of money and expertise in exchange for stated proportions of ownership and profit. It is
essential to use this type of arrangement in countries requiring that majority ownership of MNC joint
venture projects be held by domestically-based investors.
Laws and restrictions regarding joint ventures have effects on the operating of MNCs in four major areas:
1) majority foreign ownership reduces management control by the MNC, 2) disputes over distribution of
income and reinvestment frequently occur, 3) ceilings cap profit remittances to parent company, and 4)
there is political risk exposure.
18-3 From the point of view of a U.S.-based MNC, key tax factors that need to be considered are 1) the level of
foreign taxes, 2) the definition of taxable income, and 3) the existence of tax agreements between the U.S.
and the host country. Unitary tax laws refer to taxes placed by state governments on MNCs, who pay taxes
based on a percentage of their total worldwide income rather than on their earnings arising within the
jurisdiction of each respective government.
18-4 The emergence and the subsequent growth of the Euromarket, which provides for borrowing and lending
currencies outside the country of origin, have been attributed to the following factors: the desire by the
Russians to maintain their dollars outside the U.S.; consistent U.S. balance of payments deficits; and the
existence of certain regulations and controls on dollar deposits in the United States.
Certain cities around the world⎯including London, Singapore, Hong Kong, Bahrain, Luxembourg, and
Nassau⎯have become known as major offshore centers of Euromarket business, where extensive
Eurocurrency and Eurobond activities take place. Major participants in the Euromarket include the U.S.,
Germany, Switzerland, Japan, France, Britain, and the OPEC nations. In recent years, developing nations
have also become part of the Euromarkets.
18-5 The rules for consolidation of foreign subsidiaries currently rely on a parent MNC's percentage of
beneficial ownership in a subsidiary. For 0-19% ownership, consolidation of only dividends as received
by the parent is required; in the 20%-49% range, a pro rata inclusion of profits and losses is required; and
for 50%-100%, full consolidation must take place. FASB No. 52 requires MNCs first to convert the
financial statement accounts of foreign subsidiaries into functional currency (the currency of the economy
where the entity primarily generates and spends cash and where its accounts are maintained) and then to
translate the accounts into the parent firm's currency, using the all-current-rate method.
3. Chapter 18 International Managerial Finance
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18-6 The spot exchange rate is the rate of exchange between two currencies on any given day. The forward
exchange rate is the rate of exchange between two currencies at some future date. Foreign exchange
fluctuation affects individual accounts in the financial statements; this risk is called accounting exposure.
Economic exposure is the risk arising from the potential impact of exchange rate fluctuations on the firm's
value. Accounting exposure demonstrates paper translation losses, while economic exposure is the
potential for real loss.
18-7 If one country experiences a higher inflation rate than a country they trade with, the high inflation country
will experience a decline (depreciation) in the value of their currency. This depreciation results from the
fact that relatively high inflation causes the price of goods to increase. Foreign purchasers will decrease
their demand for the high inflations country’s products due to the higher cost. This decrease in demand
forces the value of the inflated currency is decline to bring the exchange-rate-adjusted price back into line
with pre-inflation prices.
18-8 Macro political risk means that due to political change, all foreign firms in the country will be affected.
Micro political risk is specific to the individual firm or industry which is targeted for nationalization.
Techniques for dealing with political risk are outlined in Table 18.4 and include joint venture agreements,
prior sale agreements, international guarantees, license restrictions, and local financing.
18-9 If cash flows are blocked by local authorities, the NPV of a project and its level of return is "normal," from
the subsidiary's point of view. From the parent's perspective, however, NPV in terms of repatriated cash
flows may actually be "zero." The life of a project, of course, can prove to be quite important. For longer
projects, even if the cash flows are blocked during the first few years, there can still be meaningful NPV
from the parent's point of view if later years' cash flows are permitted to be freely repatriated back to the
parent.
18-10 Several factors cause MNCs' capital structure to differ from that of purely domestic firms. Because MNCs
have access to international bond and equity markets and, therefore, to a greater variety of financial
instruments, certain capital components may have lower costs. The particular currency markets to which
the MNC has access will also affect capital structure. The ability to diversify internationally also affects
capital structure and may result in either higher leverage and/or higher agency costs. The differing
political, legal, financial, and social aspects of each country can also impact capital structure
considerations.
18-11 A foreign bond is an international bond sold primarily in the country of the currency in which it is issued.
A Eurobond is sold primarily in countries other than the country of the currency in which the issue is
denominated. Foreign bonds are generally sold by those resident underwriting institutions which normally
handle bond issues. Eurobonds are usually handled by an international syndicate of financial institutions
based in the United States or Western Europe. In the case of foreign bonds, interest rates are generally
directly correlated with the domestic rates prevailing in the respective countries. For Eurobonds, several
domestic and international (Euromarket) interest rates can influence the actual rates applicable to these
bonds.
18-12 In terms of potential political risks and adverse actions by a host government, having more local debt (and
thus more local investors or investments) in a foreign project can prove to be a valuable protective measure
over the long-run. This strategy will likely cause the local government to be less threatening in the event
of governmental or regulatory changes, since the larger amount of local sources of financing are included
in the subsidiary's capital structure.
4. Part 6 Special Topics in Managerial Finance
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18-13 The Eurocurrency market provides short-term, foreign-currency financing to MNC subsidiaries. Supply
and demand are major factors influencing exchange rates in this market. In international markets, the
nominal interest rate is the stated interest rate charged when only the MNC’s parent currency is involved.
Effective interest rates are nominal rates adjusted for any forecast changes in the foreign currency relative
to the parent MNC’s currency. Consideration of effective rates of interest is critical to any MNC
investment and borrowing decisions.
18-14 In dealing with "third parties," when the subsidiary's local currency is expected to appreciate in value,
attempts must be made to increase accounts receivable and to decrease accounts payable. The net result
would be to increase the subsidiary's resources in the local currency when it is expected to appreciate
relative to the parent MNC's currency.
18-15 When it is expected that the subsidiary's local currency will depreciate relative to the "home" currency of
the parent, intra-MNC accounts payable must be paid as soon as possible while intra-MNC accounts
receivable should not be collected for as long as possible. The net result would be to decrease the
resources denominated in that local currency.
18-16 The motives of international business combinations are much the same as for domestic combinations:
growth, diversification, synergy, fund-raising, increased managerial skills, tax considerations, and
increased ownership liquidity. Additional considerations are entry into foreign markets, and a conducive
legal, corporate and tax environment.
5. Chapter 18 International Managerial Finance
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SOLUTIONS TO PROBLEMS
18-1 LG 1: Tax Credits
MNC's receipt of dividends can be calculated as follows:
Subsidiary income before local taxes $250,000
Foreign income tax at 33% 82,500
Dividend available to be declared $167,500
Foreign dividend withholding tax at 9% 15,075
MNC's receipt of dividends $152,425
a. If tax credits are allowed, then the so-called "grossing up" procedure will be applied:
Additional MNC income $250,000
U.S. tax liability at 34% $85,000
Total foreign taxes paid (credit)
($82,500 + $15,075) (97,575) (97,575)
U.S. taxes due 0
Net funds available to the MNC $152,425
b. If no tax credits are permitted, then:
MNC's receipt of dividends $152,425
U.S. tax liability ($152,425 x .34) 51,825
Net funds available to the MNC $100,600
18-2 LG 3: Translation of Financial Statements
Balance Sheet
12/31/03 12/31/04
U.S.$ U.S.$*
Cash 26.67 28.17
Inventory 200.00 211.27
Plant and Equipment (net) 106.67 112.68
Total 333.34 352.12
Debt 160.00 169.01
Paid-in capital 133.33 140.85
Retained earnings 40.00 42.25
Total 333.33** 352.11**
Income Statement
12/31/03 12/31/04
U.S.$ U.S.$
Sales 20,000.00 21,126.76
Cost of goods sold 19,833.33 20,950.70
Operating profits 166.67 176.06
6. Part 6 Special Topics in Managerial Finance
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* At 6% appreciation, the new exchange rate becomes 1.42 €/U.S.$
** Differences in totals result from rounding.
18-3 LG 5: Euromarket Investment and Fund Raising
The effective rates of interest can be obtained by adjusting the nominal rates by the forecast percent
revaluation in each case:
US$ MP ¥
Effective rates
Euro market 5.0% 8.0% 7.2%
Domestic 4.5% 7.6% 6.7%
Following the assumption outlined in the problem, the best sources of investment and borrowing are the
following:
$80 million excess is to be invested in the MP Mexican
$60 million to be raised in the US$ Euromarket.
7. Chapter 18 International Managerial Finance
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CHAPTER 18 CASES
Assessing a Direct Investment in Chile by U.S. Computer Corporation
In this case, students evaluate the feasibility of a proposed foreign investment⎯construction of a factory in Chile.
They must consider many factors that make international transactions complex, including political and foreign
exchange rate risks and raising funds in international markets.
a. Cost of Capital-US$:
Type of Capital Amount Weight Cost Weighted Cost
Long-term debt 6,000,000 60.00% 6.0% 3.60%
Equity 4,000,000 40.00 % 12.0% 4.80%
Total $12,000,000 100.00% 8.40%
WACC = 8.40%, or 8% to the nearest whole percent
* Includes both dollar- and peso-denominated working capital
b. Present value, 5 years:
Operating cash flow = sales x .20
= $20,000,000 x .20
= $4,000,000
PV = $4,000,000 x PVIFA8%,5 yrs.
PV = $4,000,000 x 3.993
PV = $15,972,000
If the dollar appreciates (gets stronger) against the Chilean peso, it takes more pesos to buy each dollar.
For example, if the exchange rate changes to 500 pesos per dollar, sales of Ps 8 billion equals $16,000,000,
compared to $20,000,000 at the current exchange rate. Peso cash flows are therefore worth less, and the
PV would decrease.
c. USCC faces foreign exchange risks because the value of the Chilean peso can fluctuate against the dollar,
and it is not a currency that can be hedged. Any changes in exchange rates will result in a corresponding
change in USCC's dollar-denominated revenues, costs, and profits.
To minimize foreign exchange risk, USCC can purchase more components with pesos, sell more products
priced in dollars, or both. It could purchase or produce more computer components in Chile rather than
importing them from the U.S. USCC could also export finished computers to market outside of Chile with
sales denominated in dollars.
d. Local (peso) financing carries a much higher cost, 12% for working capital versus 5% in the Eurobond
market, and 14% for long-term funds versus 6% in the Eurobond market. Also, if the peso depreciates
against the dollar, the value of USCC's investment will decrease, as will any repatriated amounts. The use
of peso financing minimizes exchange rate risk.
An unstable political environment increases both political and exchange rate risks. The factory could be
seized by the Chilean government if it decides to nationalize foreign assets. The value of the peso relative
to the dollar would be likely to depreciate.
8. Part 6 Special Topics in Managerial Finance
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Joining NAFTA would strengthen Chile's economic ties with the U.S. This should make the project more
attractive.
9. Chapter 18 International Managerial Finance
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INTEGRATIVE CASE 6
ORGANIC SOLUTIONS
Integrative Case 6, Organic Solutions, asks students to evaluate a proposed acquisition by means of either a cash
transaction or a stock swap. The effects on the short- and long- term EPS should be calculated and other proposals
to achieve the merger discussed. The students must also consider the qualitative implications of acquiring a non-
U.S.-based company.
a. Price for cash acquisition of GTI:
Year
Incremental
Cash Flow PVIF,16%
Present Value
of GTI
1 $18,750,000 .862 $16,162,500
2 18,750,000 .743 13,931,250
3 20,500,000 .641 13,140,500
4 21,750,000 .552 12,006,000
5 24,000,000 .476 11,424,000
6-30 25,000,000 (6.177 - 3.274) 72,575,000
Total $139,239,250
Calculator Solution: $139,243,245
The maximum price Organic Solutions (OS) should offer GTI for a cash acquisition is $139,239,250.
b. (1) Straight bonds – Financing such a large portion of the acquisition with straight bonds will
dramatically increase the financial risk of the firm. The management of OS must be very
comfortable that the combined firm is able to generate adequate cash to service this debt. The
coupon rate on these bonds could also be quite high. The potential benefit to the OS owners is the
magnified return on equity that could result from the leverage.
(2) Convertible bonds – Initially convertibles will provide much of the same concern as straight bonds
since financial leverage will increase. There are two benefits to convertible bonds not available with
straight bonds. First is that the coupon rate will be lower. Investors will value the conversion feature
and will be willing to pay more, thus reducing the cost, for the convertible bond. The second
advantage is that the leverage will decrease as conversion occurs, assuming the benefits of the
acquisition ultimately proves favorable, and the value of the firm increases by the merger. The
drawback is the potential dissolution of ownership that will occur if and when the bonds are
converted.
(3) Bonds with stock purchase warrants attached – The benefits and disadvantages of this security mix
are similar to those of a convertible bond. However, there is one major difference. The attached
warrants may eventually be used to supply the firm with additional equity capital. This inflow of
capital will lower the financial risk of the firm and generate additional funds. There will still be the
dissolution of ownership potential.
c. (1) Ratio of exchange: $30 ÷ $50 = .60
Organic Solutions must exchange .60 shares of its stock for each share of GTI's stock to acquire the
firm in a stock swap.
10. Part 6 Special Topics in Managerial Finance
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(2) The exchange of stock should increase Organic Solutions' EPS to $3.93, an increase from $3.50.
Calculations:
New OS shares required: 4,620,000 x .60 = 2,772,000
Total OS shares: 10,000,000 + 2,772,000 = 12,772,000
EPS for OS: $3.93=
000,772,12
000,246,15$000,000,35$ +
EPS for GTI: $3.93 x .60 = $2.36, a decrease from $3.30
The decrease in EPS for GTI can be explained by looking at the price/earnings ratio for OS and the
price/earnings ratio based on the price paid for GTI:
OS GTI
Price per share $50 $30
(market) (price paid)
EPS - premerger $3.50 $3.30
P/E ratio 14.29 9.09
EPS - postmerger $3.93 $2.36
When the P/E ratio paid is less than the P/E ratio of the acquiring company, there is an increase in the
acquiring company's EPS and a decrease in the target's EPS.
(3) Over the long run, the EPS of the merged firm would probably not increase. Usually the earnings
attributable to the acquired company's assets grow at a faster rate than those resulting from the
acquiring company's premerger assets.
d. OS could make a tender offer to GTI's stockholders or the firm could propose a combination cash
payment-stock swap acquisition.
e. The fact that GTI is actually a foreign-based company would impact many areas of the foregoing analysis.
Regulations that apply to international operations tend to complicate the preparation of financial
statements for foreign-based subsidiaries. Certain factors influence the risk and return characteristics of a
multinational corporation (MNC), particularly economic and political risks. There are two forms of
political risk: macro, which involves all foreign firms in a country, and micro, which involves only a
specific industry, individual firm, or corporations from a particular country. International cash flows can
be subject to a variety of factors, including local taxes in host countries, host-country regulations that may
block the return of MNCs' cash flow, the usual business and financial risks, currency and political actions
of host governments, and local capital market conditions. Foreign exchange risks can also complicate
international cash management.