CASE DETAILS Multi Diversified (MD) is an established, U S based multinational corporation that is in the business of producing and selling widgets MD is listed on the New York Stock Exchange (NYSE) and is required to report using U S GAAP They are headquartered in Las Vegas, Nevada and employ nearly 50,000 people Sustainability is a major part of their brand and company culture MD voluntarily produces CSR reports in addition to their financials each period After performing a SWOT analysis, MD decided that they needed to expand internationally to areas that have low labor costs, low tax rates, and where there is a sufficient market demand for widgets Before selecting potential geographical areas for expansion, MD wants to gauge the international appetite for widgets by making export sales to the large global market of Singapore They made the sales on May 1, 2020 (sales price 10,000 foreign currency units) and collected payment on May 31, 2020 Management identified three potential international targets for a new and highly efficient production facility Management estimates that they have $1,000,000 to initially invest They need to reclaim their investment within 5 years and require a return of at least 5 The information about these targets is below For whichever target MD chooses, MD plans to be very involved in day to day operations as well as determine sales prices, lend money to the target for wages and capital investment decisions, and have a significant amount of upstream and downstream transactions TARGET DETAILS Location Payback Period ROI NPV IRR Corporate Tax Rate Proposed Sale Price Alpha Company Greece 10 years 5 23 0 0 6 45 29 $5 6 million Bravo Inc Australia 6 5 years 4 98 1 0 4 93 30 $7 8 million Charlie Ltd Venezuela 4 years 6 73 3 2 7 25 34 $4 4 million Notes to Alpha Companys financial statements Greek firms, as part of the EU, are required to use IFRS as of 2005 This year Alpha invested heavily in AIresearch costs were 700,000 and development costs were 1 3 million Euros Notes to Bravo Inc s financial statements Bravo Inc follows Australian GAAP, which is equivalent to IFRS They use the revaluation method for measuring their PP E and check for impairments each year This year they reversed 500,000 Australian Dollar worth of impairments for their PP E Notes to Charlie Ltd s financial statements Venezuelan firms are required to use Venezuelan GAAP, which is a modified and outdated version of IFRS As such, they are still allowed to use LIFO If they were using the up to date IFRS rules, they would have been forced to use an alternative inventory cost flow assumption and would miss out on cost savings of 765,000 Venezuelan Bolivar this period INSTRUCTIONS Please address the following points regarding the case You are free to use your notes, textbook, and the internet If you use the latter, please cite your source to avoid plagiarism You should use your own words to answer the questions or face penalties (see syllabus) Given the format of the case, you are expected to provide detailed answers to each question to receive full credit With respect to the export sale to Singapore, please record the journal entries for May 1 and May 31 1 Do you wish you had hedged (use numbers to support your answer) Comparing the two hedging instruments we discussed in class, which one you would use for future export sales and why 1 You can find historical exchange rates at the following link https www xe com currencytables Please round to two decimal places (e g , 1 23) 2 Before comparing potential targets, we must perform an accounting analysis Using the notes to the financial statements, please suggest the adjustments necessary to be able to compare Charlie Ltd with the other two IFRS following targets (bonus attempt the adjustment journal entries ) 3 Which target do you think would be the best choice for Multi Diversified Please address all details from the case regarding the targets as well as conduct additional research on these potential environments Remember to do a top down analysis This is where you will do most of your outside research for the case List one additional piece of information about the targets that would have been helpful in making your decision and explain why it would have been useful 4 Assume Alpha Co is chosen as the target from this point onward To determine whether the target is meeting their operational and capital budget goals, propose an appropriate performance evaluation measure for this type of division Pay attention to case details 5 All three targets provide financial statements that are audited Is that sufficient assurance that the statements provide a true and fair view Discuss three major areas of diversity with regards to auditing worldwide 6 Assume that Alpha is going to produce the widgets for $400 and sell the widgets for $700 The manager of Alpha Company, in order to meet their performance evaluation goal, decides to sell the widgets to a sales division owned by Multi Diversified that is located in the Cayman Islands (corporate tax rate 0 ) The widgets have an industry average mark up on cost of 40 What is the negotiated transfer price using the cost plus method Assume Multi Diversified (the parent) intervenes and sets a discretionary transfer price of $450 Please explain why MD would take this action and which parties will be harmed in this deal (use financial figures in your answer) 7 Assume Alpha Company produced $285,000 in foreign source income this period that must be claimed by MD for tax purposes Greek local taxes are $75,000 Would MD be better off taking a FTC or a deduction for Alphas income Please show how you reached your conclusion 8 Given the details of the case, when translating Alpha Companys performance (income statement) and position (balance sheet), what translation method should MD use and why Is this the optimal translation method for MD, i e , what are its advantages and disadvantages compared to other options 9 You are in charge of creating MDs newest CSR report The person previously in charge of creating the report was fired because their report was criticized for not being relevant or reliable What mistakes do you think the last person made and what will you do to circumvent these issues (discuss two points)

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CASE DETAILS Multi-Diversified (MD) is an established, U.S.-based multinational corporation that is in the business of producing and selling widgets. MD is listed on the

CASE DETAILS

Multi-Diversified (MD) is an established, U.S.-based multinational corporation that is in the business of producing and selling widgets. MD is listed on the New York Stock Exchange (NYSE) and is required to report using U.S. GAAP. They are headquartered in Las Vegas, Nevada and employ nearly 50,000 people. Sustainability is a major part of their brand and company culture. MD voluntarily produces CSR reports in addition to their financials each period.

After performing a SWOT analysis, MD decided that they needed to expand internationally to areas that have low labor costs, low tax rates, and where there is a sufficient market demand for widgets.

Before selecting potential geographical areas for expansion, MD wants to gauge the international appetite for widgets by making export sales to the large global market of Singapore. They made the sales on May 1, 2020 (sales price: 10,000 foreign currency units) and collected payment on May 31, 2020.

Management identified three potential international targets for a new and highly efficient production facility. Management estimates that they have $1,000,000 to initially invest. They need to reclaim their investment within 5 years and require a return of at least 5%. The information about these targets is below.

For whichever target MD chooses, MD plans to be very involved in day-to-day operations as well as determine sales prices, lend money to the target for wages and capital investment decisions, and have a significant amount of upstream and downstream transactions.

TARGET DETAILS

	Location	Payback Period	ROI	NPV	IRR	Corporate Tax Rate	Proposed Sale Price
Alpha Company	Greece	10 years	5.23%	0.0	6.45%	29%	$5.6 million
Bravo Inc.	Australia	6.5 years	4.98%	1.0	4.93%	30%	$7.8 million
Charlie Ltd.	Venezuela	4 years	6.73%	3.2	7.25%	34%	$4.4 million

Notes to Alpha Companys financial statements:

Greek firms, as part of the EU, are required to use IFRS as of 2005. This year Alpha invested heavily in AIresearch costs were 700,000 and development costs were 1.3 million Euros.

Notes to Bravo Inc.s financial statements:

Bravo Inc. follows Australian GAAP, which is equivalent to IFRS. They use the revaluation method for measuring their PP&E and check for impairments each year. This year they reversed 500,000 Australian Dollar worth of impairments for their PP&E.

Notes to Charlie Ltd.s financial statements:

Venezuelan firms are required to use Venezuelan GAAP, which is a modified and outdated version of IFRS. As such, they are still allowed to use LIFO. If they were using the up-to-date IFRS rules, they would have been forced to use an alternative inventory cost flow assumption and would miss out on cost savings of 765,000 Venezuelan Bolivar this period.

INSTRUCTIONS

Please address the following points regarding the case. You are free to use your notes, textbook, and the internet. If you use the latter, please cite your source to avoid plagiarism. You should use your own words to answer the questions or face penalties (see syllabus). Given the format of the case, you are expected to provide detailed answers to each question to receive full credit.

With respect to the export sale to Singapore, please record the journal entries for May 1 and May 31[1]. Do you wish you had hedged (use numbers to support your answer)? Comparing the two hedging instruments we discussed in class, which one you would use for future export sales and why?

[1] You can find historical exchange rates at the following link: https://www.xe.com/currencytables/. Please round to two decimal places (e.g., 1.23).

2. Before comparing potential targets, we must perform an accounting analysis.

Using the notes to the financial statements, please suggest the adjustments necessary to be able to compare Charlie Ltd. with the other two IFRS-following targets (bonus: attempt the adjustment journal entries!)

3. Which target do you think would be the best choice for Multi-Diversified? Please address all details from the case regarding the targets as well as conduct additional research on these potential environments. Remember to do a top-down analysis. This is where you will do most of your outside research for the case.

List one additional piece of information about the targets that would have been helpful in making your decision and explain why it would have been useful.

4. [Assume Alpha Co. is chosen as the target from this point onward.]

To determine whether the target is meeting their operational and capital budget goals, propose an appropriate performance evaluation measure for this type of division. Pay attention to case details!

5. All three targets provide financial statements that are audited. Is that sufficient assurance that the statements provide a true and fair view? Discuss three major areas of diversity with regards to auditing worldwide.

6. Assume that Alpha is going to produce the widgets for $400 and sell the widgets for $700. The manager of Alpha Company, in order to meet their performance evaluation goal, decides to sell the widgets to a sales division owned by Multi-Diversified that is located in the Cayman Islands (corporate tax rate = 0%). The widgets have an industry-average mark-up on cost of 40%.

What is the negotiated transfer price using the cost-plus method?
Assume Multi-Diversified (the parent) intervenes and sets a discretionary transfer price of $450. Please explain why MD would take this action and which parties will be harmed in this deal (use financial figures in your answer).

7. Assume Alpha Company produced $285,000 in foreign source income this period that must be claimed by MD for tax purposes. Greek local taxes are $75,000. Would MD be better off taking a FTC or a deduction for Alphas income? Please show how you reached your conclusion.

8. Given the details of the case, when translating Alpha Companys performance (income statement) and position (balance sheet), what translation method should MD use and why? Is this the optimal translation method for MD, i.e., what are its advantages and disadvantages compared to other options?

9. You are in charge of creating MDs newest CSR report. The person previously in charge of creating the report was fired because their report was criticized for not being relevant or reliable. What mistakes do you think the last person made and what will you do to circumvent these issues (discuss two points)?