Questions :
1a. How does forecasting cash flows for a multinational project differ from forecasting cash flows for a US based project?
b. Describe one way the required return for the project located in a foreign country can be determined if the required return for asimilar project located in the US is known.
c. When determining the required return for a capital budgeting project located in a foreign country, why does it matter whether the capital market in that foreign country is integrated with the world market or is segmented? How does the required return in a segmented market differ from that in an integrated market?
2a. A US corporation has anaccount payable to an unrelated Irish company in 90 days. The amount of the payable is €500,000. The spot exchange rate for the euro isEUR/USD 1.2131. The company's combined federal and state income tax rate is 27.3%; the Irish corporate income tax rate is 12.5%. The company expects the exchange rate for the euro to decline to 1.2030 prior to the account's due date. When should the company make the payment? Explain.
b. If the payee on the account is an affiliated corporation, when should the company make the payment? Explain.
c. What is the payment described in part b called? How can the company justify the amount of the payment if it is challenged by the US Internal Revenue Service or Ireland's Revenue authority?
3. An affiliated group of companies makes payments to each other as indicated on the table below. (All amounts are indicated in US dollars.)
|
|
payee
|
|
payor
|
|
Hong Kong
|
Indonesia
|
Japan
|
Singapore
|
US
|
|
Hong Kong
|
|
46000
|
101000
|
76000
|
95000
|
|
Indonesia
|
84000
|
|
63000
|
70000
|
34000
|
|
Japan
|
75000
|
85000
|
|
116000
|
51000
|
|
Singapore
|
38000
|
41000
|
103000
|
|
42000
|
|
US
|
72000
|
113000
|
87000
|
93000
|
|
a. What does it mean for the companies to aggregate payments made to each other company?
b. What does it mean if they bilaterally net the payments?
c. What payments should be made if they use multilateral netting?
d. What payments would be made if the Hong Kong company acts as a re-invoicing center for this group of companies?