4th Lesson Flashcards
a situation in which a company buys and takes
control of a company in another country or the company that is bought
INTERNATIONAL ACQUISITIONS
- organized or located, as the case may be, outside the United States
and which does not become Loan Party and pledges its Collateral upon the consummation of
the applicable Permitted Acquisition.
FOREIGN TARGET
purchase price is the price an investor pays for an investment,
and the price becomes the investor’s cost basis for calculating gain or loss when selling the
investment.
FUTURE SALES PRICE.
A state of uncertainty where some possible outcomes have an undesired
effect or significant loss. Measurement of risk.
UNCERTAINTY
The recent cash flows per period may serve as an
initial base from which future cash flows per period can be estimated after accounting for other
factors.
Target’s Previous Cash Flows.
it may allow the target firm to
be managed as it was before the acquisition.
Managerial Talent of the Target.
Potential targets in countries where economic conditions
are strong are more likely to experience strong demand for their products in the future and may
generate higher cash flows.
Target’s Local Economic Conditions
Potential targets in countries where political conditions are
favorable are less likely to experience adverse shocks to their cash flows. The sensitivity of cash
flows to political conditions is dependent on the firm’s type of business. Political conditions are
also difficult to predict over along-term period, especially for emerging countries.
Target’s Local Political Conditions
Industry conditions within a country can cause some targets to
be more desirable than others.
Target’s Industry Conditions
. In the typical case, ideally the foreign currency would be weak at the
time of the acquisition (so that the MNC’s initial outlay is low) but strengthen over time as funds
are periodically remitted to the U.S. parent
Target’s Currency Conditions
Potential target firms that are publicly held are
continuously valued in the market, so their stock prices can change rapidly. As the target firm’s
stock price changes, the acceptable bid price necessary to buy that firm will likely change as
well.
Target’s Local Stock Market Conditions.
First, the applicable corporate tax rates are applied to the
estimated future earnings of the target to determine the after-tax earnings. Second, the after-tax
proceeds are determined by applying any withholding tax rates to the funds that are expected to
be remitted to the parent in each period. Third, if the acquiring firm’s government imposes an
additional tax on remitted earnings or allows a tax credit, that tax or credit must be applied.
Taxes Applicable to the Target
, an MNC may consider a partial international acquisition of a fi rm, in which it
purchases part of the existing stock of a foreign fi rm. A partial international acquisition requires less
funds because only a portion of the foreign target’s shares are purchased.
International Partial Acquisitions
represents a proposed project that contains an option of pursuing
an additional venture.
call option
represents a proposed project that contains an option of divesting part or
all of the project
put option
is the required return necessary to make a capital budgeting project,
such as building a new factory, worthwhile. It refers to the cost of equity if the business is
financed solely through equity or to the cost of debt if it is financed solely through debt.
cost of capital
s the theoretical rate of return of an investment with zero risk.
RISK FREE RATE-
A differential is the degree of adjustment to the value or grade of
physical deliverables, or to their location, as permitted by a futures contrac
RISK DIFFERENTIAL
proportion of debt versus equity
financing
capital structure
An MNC fi nances its operations by ___ that can minimize its cost of capital
capital structure
suggest that the cost of capital is generally
lower for MNCs than for domestic firms for the reasons just presented.
Capital asset pricing theory
two types of risk of a project
(1) unsystematic variability in cash flows unique to the firm and (2)
systematic risk.
y suggests that the unsystematic risk of projects can be
ignored because it will be diversified away.
Capital asset pricing theory
m is primarily determined by the prevailing risk-free interest rate in
the currency borrowed and the risk premium required by creditors.
cost of debt
