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multinational business finance

Questions and Answers of Multinational Business Finance

Aidan’s Cost of Capital. Terry McDermott now estimates Aidan’s risk-free rate to be 3.60%, the company’s credit risk premium is 4.40%, the domestic beta is estimated at 1.05, the international
Aidan and Equity Risk Premiums. Using the original weighted average cost of capital data for Aidan used in the section “Sample Calculation: Aidan’s Cost of Capital,” calculate both the CAPM and
Thunderhorse Oil. Thunderhorse Oil is a U.S. oil company. Its current cost of debt is 7%, and the 10-year U.S. Treasury yield, the proxy for the riskfree rate of interest, is 3%. The expected return
Nestlé of Switzerland Revisited. Nestlé of Switzerland is revisiting its cost of equity analysis. As a result of extraordinary actions by the Swiss Central Bank, the Swiss bond index yield (10-year
Corcovado Pharmaceuticals. Corcovado Pharmaceutical’s cost of debt is 7%. The risk-free rate of interest is 3%. The expected return on the market portfolio is 8%. After effective taxes,
WestGas Conveyance, Inc. WestGas Conveyance, Inc., is a large U.S. natural gas pipeline company that wants to raise $120 million to finance expansion.WestGas wants a capital structure that is 50%debt
Dhaka’s Cost of Capital. Dhaka is the largest and most successful garment maker in Dhaka, Bangladesh.It has not yet entered the European market but is considering establishing both manufacturing
Telasco’s Cost of Capital. Telasco is generally considered to be the largest privately held company in South-East Asia. Headquartered in Singapore, the company has been averaging sales of over
The Equity. You have joined your friends at the local tavern, The Equity, for your weekly debate on international finance. The topic this week is whether the cost of equity can ever be cheaper than
Genedak-Hogan Cost of Equity. Senior management at Genedak-Hogan is actively debating the implications of diversification on its cost of equity.All agree that the company’s returns will be less
Genedak-Hogan’s WACC. Calculate the weighted average cost of capital for Genedak-Hogan before and after international diversification.a. Did the reduction in debt costs reduce the firm’s weighted
Genedak-Hogan’s WACC and Effective Tax Rate.Many MNEs have greater ability to control and reduce their effective tax rates when expanding international operations. If Genedak-Hogan were able to
International Diversification via Mutual Funds. All major mutual fund companies now offer a variety of internationally diversified mutual funds. The degree of international composition across funds,
Novo Industri. Novo Industri A/S merged with Nordisk Gentofte in 1989. Nordisk Gentofte was Novo’s main European competitor. The combined company, now called Novo Nordisk, has become the leading
Damodaran’s Cost of Capital Data. Professor Aswath Damodaran of NYU’s Stern School regularly publishes estimates of the cost of capital for a wide spectrum of industries. Use the following
Design a strategy to source capital globally?
Examine the differences in the optimal financial structure of the multinational firm compared to that of the domestic firm?
Describe the various financial instruments that can be used to source equity in the global equity markets?
Understand the role of depositary receipts in raising equity?
Analyze the unique role private placement enjoys in raising global capital?
Explore the different structures that can be used to source debt globally?
Detail the alternative methods of structuring and funding foreign subsidiaries?
Sourcing Global Debt and Equity Markets. What is the sequence of strategies used to source both equity and debt capital globally? Should a firm start by sourcing global debt or equity markets?
Optimal Financial Structure. If the cost of debt is less than the cost of equity, why doesn’t the firm’s cost of capital continue to decrease with the use of more and more debt?
Multinationals and Cash Flow Diversification. How does a multinational’s ability to diversify its cash flows alter its ability to use greater amounts of debt?
Foreign Currency Debt. What are the costs and benefits of taking loans in foreign currency?
Three Keys to Global Equity. What are the three key elements related to raising equity capital in the global marketplace?
Global Equity Alternatives. What are the alternative structures available for raising equity capital on the global market?
Directed Public Issues. What is a directed public issue? What is the purpose of this kind of an international equity issuance?
Depositary Receipts. What is a depositary receipt?What are equity shares listed and issued in foreign equity markets in this form?
GDRs, ADRs and GRSs. What is the difference between a GDR, ADR, and GRS? How are these differences significant?
Sponsored and Unsponsored. ADRs and GDRs can be sponsored or unsponsored. What does it mean, and will it matter to the investors purchasing the shares?
Depository Receipts (DRS). What are the benefits of DRs to issuers and investors? What are the risks associated with delisting DRs?
IPOs and FOs. What is the significance of IPOs versus FOs?
Cross-Listing. What are the main benefits and disadvantages to firms that cross-list their shares on multiple stock markets?
GDR and Domestic Share Prices. Should there be a strong co-movement of GDR price with that of the underlying domestic share? Explain.
Barriers to Cross-Listing. What are the main barriers to cross-listing abroad?
Private Placement. What is a private placement?What are the comparative pros and cons of private placement versus a public issue?
MNE Exit Strategy. Suppose an MNE plans on operating temporarily in a new market. Should it cooperate with a local venture capital or a private equity firm?
Bank Loans Versus Securitized Debt. What is the advantage of securitized debt instruments sold on a market versus bank borrowing for multinational corporations?
International Debt Instruments. What are the primary alternative instruments available for raising debt on the international marketplace?
Eurobond Versus Foreign Bonds. What is the difference between a eurobond and a foreign bond, and why do two types of international bonds exist?
Funding Foreign Subsidiaries. What are the primary methods of funding foreign subsidiaries, and how do host government concerns affect those choices?
Local Norms. Should foreign subsidiaries of multinational firms conform to the capital structure norms of the host country or to the norms of their parent’s country?
Internal and External Financing of Foreign Subsidiaries.Explain if it is advisable for MNEs to seek internal or external sources of finance for their subsidiaries.
Credit Terms. Why do MNEs with high credit rating get better credit terms in comparison to their smaller counterparts?
Copper Mountain Group (USA). The Copper Mountain Group, a private equity firm headquartered in Boulder, Colorado (U.S.), borrows £5,000,000 for one year at 7.375% interest.a. What is the dollar cost
Ex-Post Cost of Borrowing. Many firms in many countries borrow at nominal costs that later prove to be very different. For example, Deutsche Bank recently borrowed at a nominal cost of 9.59% per
McDougan Associates (USA). McDougan Associates, a U.S.-based investment partnership, borrows€80,000,000 at a time when the exchange rate is$1.3460/€. The entire principal is to be repaid in three
Cathay Pacific Airways (Hong Kong). Cathay Pacific Airways, headquartered in Hong Kong, needs HK$200,000,000 for one year to finance working capital. The airline has two alternatives for borrowing:a.
Pantheon Capital, S.A. If Pantheon Capital, S.A. is raising funds via a medium-term euro note with the following characteristics, how much in dollars will Pantheon receive for each $1,000 note
Westminster Insurance Company. Westminster Insurance Company plans to sell $2,000,000 of euro commercial paper with a 60-day maturity and discounted to yield 4.60% per annum. What will be the
Sunrise Manufacturing, Inc. Sunrise Manufacturing, Inc., a U.S. multinational company, has the following debt components in its consolidated capital section.Sunrise’s finance staff estimates their
Petrol Ibérico. Petrol Ibérico, a European gas company, is borrowing US$650,000,000 via a syndicated eurocredit for six years at 80 basis points over LIBOR. LIBOR for the loan will be reset every
Advaart-Gevaert. Advaart-Gevaert consists of a Belgian parent and wholly owned subsidiaries in Malaysia (A-G. Malaysia) and India (A-G. India).Selected portions of their non-consolidated balance
JPMorgan. JPMorgan’s Latin American Equity Research department produced the following WACC calculation for Petrobrás of Brazil versus Lukoil of Russia. Evaluate the methodology and assumptions
UNIBANCO. UNIBANCO estimated the weighted average cost of capital for Petrobrás to be 13.2%in Brazilian reais. Evaluate the methodology and assumptions used in the calculation. Risk-free rate 4.5%
Citigroup SmithBarney (Dollar). Citigroup regularly performs a U.S. dollar-based discount cash flow (DCF) valuation of Petrobrás in its coverage.That DCF analysis requires the use of a discount rate
Citigroup SmithBarney (Reais). Citigroup SmithBarney calculated a WACC for Petrobrás denominated in Brazilian reais (R$). Evaluate the methodology and assumptions used in this cost of capital
BBVA Investment Bank. BBVA utilized a rather innovative approach to deal with both country and currency risk in their report on Petrobrás. Evaluate the methodology and assumptions used in this cost
Petrobrás WACC Comparison. The various estimates of the cost of capital for Petrobrás of Brazil appear to be very different, but are they? Reorganize your answers to Problems 14.10 through 14.14
Grupo Modelo S.A.B. de C.V. Grupo Modelo, a brewery out of Mexico that exports such well-known varieties as Corona, Modelo, and Pacifico, is Mexican by incorporation. However, the company evaluates
Global Equities. Bloomberg provides extensive coverage of the global equity markets 24 hours each day.Using the Bloomberg site listed here, note how different the performance indices are on the same
JPMorgan and Bank of New York Mellon. JPMorgan and Bank of New York Mellon provide up-tothe minute performance of American Depositary Receipts in the U.S. marketplace. The site highlights the
London Stock Exchange. The London Stock Exchange (LSE) lists many different global depositary receipts among its active equities. Use the LSE’s Internet site to track the performance of the largest
Primary Objective. What is the primary objective of multinational tax planning?
Tax Morality.a. Discuss “tax morality” in regard to tax evasion and avoidance.b. What are the implications of MNEs’ decisions to invest in low-tax nations? How can MNEs weigh their cost-cutting
Tax Neutrality. Does the tendency of nations to move toward territorial taxation lead to tax neutrality at the global level?
Approaches to Taxing MNEs. Different countries adopt diverse approaches to taxing income generated by MNEs. What are the main advantages of each of these tax approaches? Explain how these approaches
Direct versus Indirect Taxes. Do direct or indirect taxes place more burdens on the poor?
VAT versus Income Tax. Explain the importance of income tax over VAT in emerging economies.
Value-Added Tax. Answer the following questions:a. Compare sales tax to value-added tax.b. Sales taxes and VAT are a major source of fiscal revenue, reaping more proceeds in developed nations in
Withholding Tax. What is a withholding tax, and why do governments impose them?
Tax Treaty. What is usually included within a tax treaty?
Active and Passive Income Tax. Are portfolio earnings taxed as active or passive income?
Tax Types. Taxes are classified based on whether they are applied directly to income—direct taxes—or to some other measurable performance characteristic of the firm—indirect taxes. Classify
Foreign Tax Credit. What is a foreign tax credit? Why do countries give credit for taxes paid on foreignsource income?
Earnings Stripping. What is earnings stripping, and what are some examples of how multinational firms pursue earnings stripping?
Controlled Foreign Corporation. What is a controlled foreign corporation, and what is its significance in global tax management?
Transfer Pricing. What is a transfer price, and can a government regulate transfer prices? What difficulties and motives does a parent multinational firm face in setting transfer prices?
Fund Positioning. What is fund positioning?
Income Tax Effect. What is the income tax effect, and how may a multinational firm alter transfer prices as a result of the income tax effect?
Correct Pricing. What is meant by “correct” or proper transfer pricing? How can local national authorities impose “correct” transfer pricing on MNEs? What is the main requisite for the
Cross-Crediting. Define cross-crediting, and explain why it may or may not be consistent with a worldwide tax regime.
Purposes of Transfer Pricing. In addition to calculating and setting the tax liabilities of firms, what other purposes may transfer prices serve?
Measuring Managerial Performance. What role does transfer pricing have within multinational companies when measuring management performance? How can transfer pricing practices within a firm conflict
Tax Avoidance and Havens. One example of tax avoidance is when firms park their funds in tax havens. While considered legal, do you think that tax avoidance is entirely ethical?
Corporate Inversion. What is a corporate inversion, and why do many U.S. corporations want to pursue it even when it is highly criticized by public and private parties alike?
Digital Commerce. How is cross-border digital commerce challenging the traditional ways in which multinational companies are taxed?
Tax Competitiveness. What does it mean for a country—or its government—to compete for business on the basis of taxation?
Explore the tax principles and practice employed by governments around the globe?
Examine how multinational firms manage their global tax liabilities?
Analyze how Google has creatively repositioned its global profits for tax management purposes?
Evaluate the relative tax competitiveness of country tax environments globally?
Describe the U.S. tax law changes that went into effect in January 2018?
Avon’s Foreign-Source Income. Avon is a U.S.-based direct seller of a wide array of products. Avon markets leading beauty, fashion, and home products in more than 100 countries. As part of the
Pacific Jewel Airlines (Hong Kong). Pacific Jewel Airlines is a U.S.-based air-freight firm with a wholly owned subsidiary in Hong Kong. The subsidiary, Jewel Hong Kong, has just completed a
Kraftstoff of Germany. Kraftstoff is a German-based company that manufactures electronic fuel-injection carburetor assemblies for several large automobile companies in Germany, including Mercedes,
Costa Ambrosa SpA’s Tax Averaging. Costa Ambrosa SpA is a relatively new Italian-based retailer of specialty furniture and wood carvings. The firm is vertically integrated with wood raw materials
Kaili Razor (A). Corporate management of Supermax is considering repositioning profits within the multinational company. What happens to the profits of Kaili Razor and Supermax, and the consolidated

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