Review recent trends in international mergers and joint ventures.

LG 6 Review recent trends in international mergers and joint ventures.

International mergers and joint ventures, including international holding compa- nies, increased significantly beginning in the 1980s. Special factors affecting these mergers include economic and trade conditions and various regulations imposed on MNCs by host countries.

Opener-in-Review

In the chapter opener you read about General Electric’s commitment to a global focus. What makes entering an international marketplace attractive for compa- nies like GE, and what are some common risks associated with operating inter- nationally?

Self-Test Problem (Solution in Appendix)

LG 1 ST19–1 Tax credits

A U.S.-based MNC has a foreign subsidiary that earns $150,000 before local taxes, with all the after-tax funds to be available to the parent in the form of dividends. The applicable taxes consist of a 32% foreign income tax rate, a foreign dividend withholding tax rate of 8%, and a U.S. tax rate of 34%. Calculate the net funds available to the parent MNC if:

a. Foreign taxes can be applied as a credit against the MNC’s U.S. tax liability.

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International Managerial Finance

Warm-Up Exercises All problems are available in

LG 1 E19–1 Santana Music is a U.S.-based MNC whose foreign subsidiary had pretax income of $55,000; all after-tax income is available in the form of dividends to the parent com- pany. The local tax rate is 40%, the foreign dividend withholding tax rate is 5%, and the U.S. tax rate is 34%. Compare the net funds available to the parent corpora- tion (a) if foreign taxes can be applied against the U.S. tax liability and (b) if they cannot.

LG 3 E19–2 Assume that the Mexican peso currently trades at 12 pesos to the U.S. dollar. During the year U.S. inflation is expected to average 3%, while Mexican inflation is expected to average 5%. What is the current value of one peso in terms of U.S. dollars? Given the relative inflation rates, what will the exchange rates be 1 year from now? Which currency is expected to appreciate and which currency is expected to depreciate over the next year?

LG 5 E19–3 If Like A Lot Corp. borrows yen at a nominal annual interest rate of 2% and during the year the yen appreciates by 10%, what will the effective annual interest rate be for the loan?

LG 3 LG 5 E19–4 Carry Trade, Inc., borrows yen when the yen is trading at ¥110/US$. If the nominal annual interest rate of the loan is 3% and at the end of the year the yen trades at ¥120/US$, what is the effective annual interest rate of the loan?

LG 5 E19–5 Denim Industries can borrow its needed financing for expansion using one of two foreign lending facilities. It can borrow at a nominal annual interest rate of 8% in Mexican pesos or at 3% in Canadian dollars. If the peso is expected to depreciate by 10% and the Canadian dollar is expected to appreciate by 3%, which loan has the lower effective annual interest rate?

Problems All problems are available in

LG 1 P19–1 Tax credits

A U.S.-based MNC has a foreign subsidiary that earns $250,000 before local taxes, with all the after-tax funds to be available to the parent in the form of dividends. The applicable taxes consist of a 33% foreign income tax rate, a foreign dividend withholding tax rate of 9%, and a U.S. tax rate of 34%. Calculate the net funds available to the parent MNC if:

a. Foreign taxes can be applied as a credit against the MNC’s U.S. tax liability. b. No tax credits are allowed.

LG 3 P19–2 Translation of financial statements

A U.S.-based MNC has a subsidiary in France (local currency, euro, ; ). The balance sheet and income statement of the subsidiary follow. On December 31, 2112, the exchange rate is US$1.20/;. Assume that the local (euro) figures for the statements remain the same on December 21, 2113. Calculate the U.S. dollar-translated figures for the two ending time periods, assuming that between December 31, 2112, and December 31, 2113, the euro has

PART 8

Special Topics in Managerial Finance

Translation of Income Statement

Cost of goods sold

Operating profits

Translation of Balance Sheet

Plant and equipment (net)

Liabilities and Stockholders’ Equity

Debt

Paid-in capital

Retained earnings

Total

Personal Finance Problem

LG 3 P19–3 Exchange rates Fred Nappa is planning to take a wine-tasting tour through Italy this summer. The tour will cost 2,750 euros (;) and includes transportation, hotels, and a guide. Fred estimates that round-trip airfare from his home in North Carolina to Rome, Italy, will be $1,490; he also will incur another $300 (U.S.) in incidental travel expenses. Fred estimates the cost of meals in Italy to be about ;500, and he will take an additional $1,000 to cover miscellaneous expenditures. Currently the exchange rate is US$1.3411/;1.00 (or ;.7456/US$1.00).

a. Determine the total dollar cost of the trip to Italy. b. Determine the amount of euros (;) Fred will need to cover meals and miscella-

neous expenditures. Personal Finance Problem

LG 4 P19–4 International investment diversification The economies of the world tend to rise and fall in cycles that offset each other. International stocks can provide possible diversification for a portfolio heavy on U.S. equities. Because research on foreign companies is usually difficult for individual investors to track on their own, a foreign equity mutual fund offers the investor the expertise of a global fund manager.

Foreign-stock funds provide exposure to overseas markets at varying levels of

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International Managerial Finance

Hence, diversification is the key to managing risk. Funds that invest overseas fall into four basic categories: global, international, emerging-market, and country-specific. The wider the reach of the fund, the less risky it is likely to be.

a. Go to http://finance.yahoo.com . Click on the “Investing” tab and then click on “Mutual Funds.” On the left, under “Education” click on “Types of Mutual Funds.” In the middle of the page, click on “Foreign Stock Funds Explained.”

b. Briefly explain the differences between the following funds: (1) Global fund (2) International fund (3) Emerging-market fund (4) Country-specific fund

LG 5 P19–5 Euromarket investment and fund raising

A U.S.-based multinational company has two subsidiaries, one in Mexico (local currency, Mexican peso, MP) and one in Japan (local currency, yen, ¥). Forecasts of business operations indicate the following short-term financing position for each subsidiary (in equivalent U.S. dollars):

Mexico: $80 million excess cash to be invested (lent) Japan: $60 million funds to be raised (borrowed)

The management gathered the following data:

Spot exchange rates

¥108.25/US$ Forecast percent change

MP 11.60/US$

+ 1.5% Interest rates Nominal

Determine the effective interest rates for all three currencies in both the Euromarket and the domestic market; then indicate where the funds should be invested and raised. ( Note: Assume that because of local regulations, a subsidiary is not permitted to use the domestic market of any other subsidiary.)

LG 1 P19–6 ETHICS PROBLEM Is there a conflict between maximizing shareholder wealth and never paying bribes when doing business abroad? If so, how might you explain

the firm’s position to shareholders asking why the company does not pay bribes

PART 8

Special Topics in Managerial Finance

Spreadsheet Exercise

As the financial manager for a large multinational corporation (MNC), you have been asked to assess the firm’s economic exposure. The two major currencies, other than the U.S. dollar, that affect the company are the Mexican peso (MP) and the British pound (£). You have been given the projected future cash flows for next year:

Currency

Total inflow

Total outflow

British pounds

Mexican pesos

MP 100,000,000

MP 25,000,000

The current expected exchange rate in U.S. dollars with respect to the two cur- rencies is as follows:

Currency

Exchange rate

British pounds

Mexican pesos