The document provides non-consolidated and consolidated financial statements for companies XYZ Inc. and ABC Ltd. over four years. It shows assets, liabilities, equity, revenues and expenses increasing over time. Exchange rates fluctuated between years. The financial statements indicate the companies grew in size and profitability through the four years.

11. ₤=1.5$, non consolidated financial statements are as follows( in thousands)
Assets XYZ inc.( $) ABC ltd.( ₤)
Cash 8000 2000
Account Receivable 10000 4000
Inventory 8000 2000
Net plant and equipment 10000 6000
Investment 4500
Total 40500 14000
Liabilities and Net worth
Current liabilities 22000 4000
5 year term loan 4000
capital stock 9000 2000
retained earning 9500 4000
Total 40500 14000

12. Assets XYZ inc.( $) ABC ltd.( ₤)
Cash 8000 3000 11000
Account Receivable 10000 6000 16000
Inventory 8000 3000 11000
Net plant and
equipment 10000 9000 19000
Investment 4500 4500
Total 40500 21000 61500
Liabilities and Net
worth
Current liabilities 22000 6000 28000
5 year term loan 6000 6000
capital stock 9000 2000 11000
retained earning 9500 4000 13500
CTA 3000 3000
Total 40500 21000 61500
Assets XYZ inc.( $) ABC ltd.( ₤)
Cash 8000 3000 11000
Account Receivable 10000 6000 16000
Inventory 8000 2000 10000
Net plant and
equipment 10000 6000 16000
Investment 4500 4500
Total 40500 17000 57500
Liabilities and Net
worth
Current liabilities 22000 6000 28000
5 year term loan 6000 6000
capital stock 9000 2000 11000
retained earning 9500 4000 13500
CTA -1000 -1000
Total 40500 17000 57500

13. Assets XYZ inc.( $) ABC ltd.( ₤)
Cash 8000 3000 11000
Account Receivable 10000 6000 16000
Inventory 8000 3000 11000
Net plant and
equipment 10000 6000 16000
Investment 4500 4500
Total 40500 18000 58500
Liabilities and Net
worth
Current liabilities 22000 6000 28000
5 year term loan 4000 4000
capital stock 9000 2000 11000
retained earning 9500 4000 13500
CTA 2000 2000
Total 40500 18000 58500

14. a. New Source of Demand
b. Existence of various Market Imperfections
c. Economies of Scale
d. Use of foreign raw material and foreign technology
e. Exploit Monopolistic advantage
f. Diversify Internationally
Various alternatives of FDI are:-
a. Joint Venture
b. Merger and Acquisition/ Cross Border Acquisitions
c. Licensing
d. Franchising
a. Arms and Ammunition
b. Atomic Energy
c. Railway Transport
d. Coal, lignite, Mining of Gold, sulphur etc
The fundamental goal of financial manager is to maximize shareholder wealth. Shareholder wealth is
maximized when the firm out of a list of prospective investment select a combination of those projects
that maximize the company’s value to the shareholders. The selection process requires the firm to
discount the project cash flow at their weight age average cost of capital, to determine the net present
value. MNCs face different complexities, like:-
a. Parent cash flow is different from project cash flow
b. All cash flows from the foreign projects must be converted into currency of the parent firm
c. Profits remitted to parent are subject to two taxing jurisdictions- the parent country and host
country
d. Inflation rate differential affects the exchange rate and thus the cash flows
e. If host country provides subsidiaries, tax concessions or other financial concession, then
profitability goes up
f. Host country impose various restrictions on the distribution of cash flows generated from
foreign projects
g. Political risk should be thoroughly measured before investment
h. It is very difficult to determine the terminal value in multinational capital bugeting

15. 1. Net Present Value- Determine the present value of estimated future cash flows , where
estimated future cash flows are discounted at WACC, then are subtracted with the present value
of Initial Investment by making adjustment of exchange rate, withholding tax, blocked funds.
Accept the project whose NPV is positive
2. Internal Rate of Return- Means discount rate that equates present value of expected future
cash flows with the present value of project initial cash outflow.
3. Adjusted Present Value Approach- It allows different components of project’s cash flow to be
discounted seperatly. It is value additivity approach to capital budgeting. It breaks the total
value into 2 parts: one part assuming no debt is used, then extra value created:-

27. ABC Company has a subsidiary in country X that produces computer components and sell
them to another subsidiary in country Y where the production process is completed.
The tax rate in country X is 50% while the tax rate in country Y is 20%. Proforma
Income Statement of subsidies are given below:-
Subsidiary X Subsidiary Y Consolidated Subsidiaries
Revenue 400000 700000 1100000
- COGS 220000 400000 620000
Gross Profit 180000 300000 480000
-less
operating
expenses 80000 100000 180000
EBIT 100000 200000 300000
- Interest 10000 30000 40000
EBT 90000 170000 260000
-
taxes@50%
-X
and 20%-Y 45000 34000 79000
PAT 45000 136000 181000
Total tax
paid 79000

28. Notes:- Sales level of subsidary X is matches with COGS of Subsidiary Y, implying
all subsidiary X sales are to sunsidiary Y. By working on Transfer pricing
the net total taxable income can be reduced.
Subsidiary X Subsidiary Y Consolidated Subsidiaries
Revenue 320000 700000 1020000
- COGS 220000 320000 540000
Gross
Profit 100000 380000 480000
-less
operating
expenses 80000 100000 180000
EBIT 20000 280000 300000
- Interest 10000 30000 40000
EBT 10000 250000 260000
-
taxes@50
%-X
and 20%-Y 5000 50000 55000
PAT 5000 200000 205000
Total tax
paid 55000
Suppose a US parent owns 5 million $ to the English affiliate. The timing of this payment can be
changed upto 90 days in either direction. Assume the following annualized effective dollar
borrowing and lending rates in England and in US:
lending% Borrowing%
US 3.5 4.2
England 3 3
If the US parent is borrowing funds while english affiliate has excess funds, should the US
parent speed up or slow down its payment to England?
Ans= US parent will need to borrow funds, so the cost to parent is 4.2% of borrowed
amount, while the same fund if given to Engliah firm, will invest will get 3%
so , oppurtunity cost say that its better that US parent lag payment to English firm,
tradeoff would be -1.2%, net effect of interest saved will be =.012*5000000*.25 15000 $