6-1 Module Six Homework: Multinational Capital Budgeting and i have attached the rubrics resources and overview that is needed to look into and have insight on this assignment

INT 620 Module Six Homework Guidelines and Rubric Read the \"Small Business Dilemma\" on page 462 in Chapter 14 of your textbook. Answer the two questions at the end of the case. Guidelines for Submission: Your submission must be submitted as a one- to two-page Microsoft Word document with double spacing, 12-point Times New Roman font, one-inch margins, and at least three sources cited in APA format. Instructor Feedback: This activity uses an integrated rubric in Blackboard. Students can view instructor feedback in the Grade Center. For more information, review these instructions. Critical Elements Capital Budgeting Steps Proficient (100%) Submission analyzes the specific steps necessary to determine whether this proposed project is feasible and explains each step using specific details Uncertainties of Cash Flows Analyzes the uncertainties surrounding the cash flows of this project, and submission includes examples of the uncertainties Submission has no major errors related to citations, grammar, spelling, syntax, or organization Articulation of Response Needs Improvement (70%) Submission includes an analysis of the specific steps necessary to determine whether this proposed project is feasible, but the explanations lacks important details Submission analyzes the uncertainties surrounding the cash flows, but does not include specific examples Not Evident (0%) Submission does not include an analysis Value 40 Submission does not analyze the uncertainties surrounding the cash flows of this project 40 Submission has major errors related to citations, grammar, spelling, syntax, or organization that negatively impact readability and articulation of main ideas Submission has critical errors related to citations, grammar, spelling, syntax, or organization that prevent understanding of ideas 20 Earned Total 100% Module Five introduced the concept of economic exposure as well as several strategies to mitigate the risks. Once a strategy is chosen, the capital budgeting process needs to be analyzed. Module Six examines, in detail, the process of multinational capital budgeting, or investment in real assets in foreign countries. Subsidiary Versus Parent Perspective When analyzing a project, if its equity is wholly owned by the parent, it is best to analyze from the parent's viewpoint. In other words, the ultimate cash flow needs to flow to the parent. When analyzing a project's cash flow of an investment or a subsidiary, the project may look feasible in the subsidiary's view. However, there could be several obstacles. Once the obstacles are factored into the ultimate cash flow remitted to the parent, they could cause the project to be unprofitable from the parent's perspective. For example, if the new subsidiary creates a lot of profit, the created profit unfortunately will turn out to be at the expense of the parent's profit. Because of the subsidiary's created profit, after adjusting for all the risks and foreign exchange translation, the consolidated net profit of the MNE will have dwindled. As a result, this new investment is not feasible. It is important to always consider the project from the parent's perspective to conform to the goal of finance, which is to create shareholder wealth. Therefore, if establishing a subsidiary in another country ends up destroying the wealth of the equity holder, then the project should be discouraged. If the subsidiary's equity holders are not 100% from the parent, then the ultimate goal for the new entity, which is the subsidiary, is still the sameto create wealth for the shareholders. Yet, the shareholders are no longer solely the parent shareholders. The shareholders are the new owners who could be composed of the parent's shareholders and the local or foreign shareholders. Although the goal is the same, which is to create value for the subsidiary's shareholders, the value for the subsidiary's shareholders could conflict with the MNE's parent's value. Therefore, when investing in another country using a joint venture strategy, the MNE must INT 620 Module Six 1 make sure to align the goals or values of shareholders of both the subsidiary and the parent before proceeding. Complexities of Budgeting for a Foreign Project In planning the remittance cash flows to the parent, the budgeting process must consider the tax differentials, the legal ramifications, the political restrictions in remitting the funds, the business norms, and the expected exchange rate movements. Furthermore, the foreign country's economic development is one of the most important factors in remittance considerations because the economic development potential might be one of the reasons the MNE set up the subsidiary in the first place. In this case, setting up the subsidiary could be done to capture the economic growth of the country. So, if the subsidiary is growing as expected, perhaps continuing to reinvest the company's earnings in the subsidiary instead of remitting the funds back would be the best alternative. Another complexity in the multinational capital budgeting process is the financing of the subsidiary. The MNE can utilize the foreign local capital market to raise both the debt and the equity. However, this depends on the stage of development of the financial capital market of the foreign country, the legal details, the political endowment from the local government, and the purpose of raising the capital. Raising local debt could create an economic as well as a transaction hedge on the cash flow of the subsidiary (as discussed in Module Five). Moreover, the cost of debt could very well be in line with the subsidiary risk. Raising local equity is not common. However, if the company feels the need for local market acceptance as well as capital, then it will likely raise the local equity. Also, once the MNE's stock is traded on the local capital market with a number of local members of the public gaining ownership, the political risk from the foreign government against the company is likely to be subdued. The debt financing could also be in another currency, different from that of the target country and the home country. Occasionally, MNEs have good relationships with certain global financial institutions that can provide the enterprises with an exceptionally good rate on financing. In addition, the economic conditions of the financing currency might be in the MNE's favor. As an example, some MNEs finance acquisitions in Japanese yen because they believe that the yen will continue to depreciate against its home and subsidiary's currency (as discussed in Module Two). In that event, the MNE might take on this debt to fund another investment in another country. In Module Seven, students will explore and estimate the cost of capital for a MNE. They will also find that each of the MNE's subsidiary or investment projects will also have different 2 INT 620 Module Six cost of capital, which is different from that of the parent. Cost of capital depends on the risk of the investment project, and how its capital structure is constructed. INT 620 Module Six 3 Financial Daily from THE HINDU group of publications Monday, Mar 04, 2002 Mentor - Accountancy Home News Multinational capital budgeting News Update Shahrokh M. Saudagaran Mentor Columns Mentor Index Features Investment World eWorld Catalyst Mentor Life Canvas Praxis Urban Pulse Brand Quest Stocks Quotes SE Diary Scoreboard Port Info Ships in Ports Stories in this Section Basically speaking Shahrokh M. Saudagaran on the additional factors that MNCs must consider while getting into foreign projects MULTINATIONAL companies are constantly acquiring and disposing of assets globally in the normal course of business. Shareholder wealth is created when the MNC makes an investment that will return more (in present value terms) than what it costs. Among the most important decisions that MNC managers face is the choice of capital projects globally. These investments will determine the firm's competitive position in the marketplace, its overall profitability, and, ultimately, its long-run survival. Multinational capital budgeting, like domestic capital budgeting, focuses on the cash flows of prospective long-term investment projects. It is used both in traditional foreign direct investment analysis, such as the construction of a chain of retail stores in another country, as well as cross-border mergers and acquisitions activity. Capital budgeting for a foreign project uses the same net present value (NPV) discounted cash flow model used in domestic capital budgeting. However, multinational capital budgeting is considerably more complex due to a number of additional factors that need to be considered. Some of these factors are as follows. Parent versus project cash flows: Parent (that is, homecountry) cash flows must be distinguished from project (that is, host-country) cash flows. While parent cash flows reflect all cash flow consequences for the consolidated entity, project cash flows look only at the single country where the project is located. For example, cash flows generated by an investment in Spain may be partly or wholly taken away from one in Italy, with the end result that the net present value of the investment is positive from the Spanish affiliate's point of view but contributes little to the firm's world-wide cash flows. Financing versus operating cash flows: In multinational investment projects, the type of financing package is often critical in making otherwise unattractive projects attractive to the parent company. Thus, cash may flow back to the parent because the project is structured to generate such flows via What's in a Budget Multinational capital budgeting Meandering thru the amendments You can do it! Archives Yesterday Datewise Group Sites The Hindu Business Line The Sportstar Frontline royalties, licensing fees, dividends, and so on. Unlike in domestic capital budgeting, operating cash flows cannot be kept separate from financing decisions. Foreign currency fluctuations: Another added complexity in multinational capital budgeting is the significant effect that fluctuating exchange rates can have on the prospective cash flows generated by the investment. From the parent's perspective, future cash flows abroad have value only in terms of the exchange rate at the date of repatriation. In conducting the analysis, it is necessary to forecast future exchange rates and to conduct sensitivity analysis of the project's viability under various exchange rates scenarios. Long-term inflation rates: Differing rates of national inflation and their potential effect on competitiveness must be considered. Inflation will have the following effects on the value of the project: a) it will impact the local operating cash flows both in terms of the prices of inputs and outputs and also in terms of the sales volume depending on the price elasticity of the product, b) it will impact the parent's cash flow by affecting the foreign exchange rates, c) it will affect the real cost of financing choices between foreign and domestic sources of capital. Subsidised financing: In situations where a host government provides subsidised project financing at below-market rates, the value of that subsidy must be explicitly considered in the capital budgeting analysis. If a company uses the subsidised rates in the analysis, there is an implicit assumption that the subsidy will exist through the life of the project. Another approach might be to incorporate the subsidised interest rates into the analysis by including the present value of the subsidy rather than adjusting the cost of capital. Political risk: This is another factor that can significantly impact the viability and profitability of foreign projects. Whether it be through democratic elections or as a result of sudden developments such as revolutions or military coups, changes in a country's government can affect the attitude in that country towards foreign investors and investments. This can affect the future cash flows of a project in that country in a variety of ways. Political developments may also affect the life and the terminal value of foreign investments. Terminal values: While terminal values of long-term projects are difficult to estimate even in the domestic context, they become far more difficult in the multinational context due to the added complexity from some of the factors discussed above. An added dimension is that potential acquirers may have widely divergent perspectives on the value to them of acquiring the terminal assets. This is particularly relevant if the assets are located in a country that is economically segmented due to a host of restrictions on cross-border flow of physical or financial assets. In conducting multinational capital budgeting analyses from a parent's perspective, the additional risk arising from projects located abroad can be handled in at least two ways. One possibility is to add a foreign risk premium to the discount rate that would be used for a domestic project. This higher rate is intended to capture the additional uncertainties arising from exchange risk, political risk, inflation, and such factors. The second possibility is to adjust the cash flows for the foreign projects to reflect the additional risk. The discount rate stays the same as for domestic projects.Thus, the additional complexities resulting from doing business abroad must be incorporated in the analysis through adjustments to either the discount rate or the projected cash flows. Rather than make these adjustments arbitrarily, firms can use wide-ranging publicly available data, historical analysis, and professional advice to make reasonable decisions. (Edited extracts from International Accounting A User Perspective. Book courtesy: Taxmann Publications (P) Ltd, New Delhi. www.taxmann.com) Send this article to Friends by E-Mail The Hindu Group: Home | About Us | Copyright | Archives | Contacts | Subscription Group Sites: The Hindu | Business Line | The Sportstar | Frontline | Home | Copyright 2002, The Hindu Business Line. Republication or redissemination of the contents of this screen are expressly prohibited wi the written consent of The Hindu Business Line