Ch3 - International Ops and International Investment Appraisal

Question 1

Additional Challenges

Answer 1

Forecasting future exchange rates
Double taxation
Inter-company flows (mgmt charges and royalties)
Remittance restrictions

Question 2

PPPT

Answer 2

Uses inflation to calculate the expected future spot (exchange rates). - S1 = S0 * (1+hc)/(1+hb)

Question 3

IRPT

Answer 3

IRPT = Uses interest rates to calculate the forward rate e.g. a future exchange rate agreed now. - F0 = S0 = (1+ic)/(1+ib)

Question 4

If given a spread in PPPT or IRPT

Answer 4

Calculate the midpoint to calculate S0

Question 5

Cross rates

Answer 5

Given two exchange rates but not the link required:
Two methods
Split into two stages e.g. convert to £ and then £ to Euro

Or divide the Higher by the lower

Question 6

Changing Inflation rates

Answer 6

E.g. if Inflation rate is decreasing, this is giving you different 1+hc, or 1+hb to be used in the PPPT calc. E.g. if the inflation is to reduce by 25% each year

E.g. 80%*0.75 = 60% = 1.60 as 1+hc or 1+hb

Question 7

Taxation

Answer 7

Taxation is always charged at the higher rate in the export country
If interest rate is higher in the home country, it’s charged at the at the extra in the UK and remainder in the US

Question 8

Inter-company cash flows - transfer pricing

Answer 8

A company can lower it’s tax charge by selling products from say Company A where corp tax is 50% to Company B where corp tax is 20%.
Company B can then sell the product back to Cpmpany A at a higher price. That’s why often tax authorities only allow arms length transfer pricing
If it is to increase, this should be incorporated into the NPV, but state it’s likely to be unsuccessful
Also note that lower tax rates are often due to weak currencies, and the depreciation of the currency relative to home currency could then outweigh the tax saving

Question 9

Taxation and double taxation, and royalties

Answer 9

Calculate revenues minus costs, and loyalties - loyalties will be converted at the spot rate and treated as a cash flow

Calculate pre tax profit and tax within in the secondary entity, convert it to home currency for the parent to get cashflow
Cashflow
+ Royalties as above
- UK tax

UK tax will be the extra 8% on the pre-tax profit converted on the spot rate, and full tax on the royalty

Question 10

Remittance Restrictions

Answer 10

Calculate thamount remitted and the extra tax payable in home currency

Question 11

Exchange Controls how MNCs deal with it

Answer 11

Management charges - for mgmt of foreign operations
Transfer pricing
Royalty payments - when foreign subsidiary is granted right to make certain patented goods
Loans - interest rate can be set by parent to ensure the required amount of money is transferred

Question 12

Working Capital

Answer 12

Inflate working capital

Question 13

CAPM

Answer 13

E(r)i = Rf + Bi*(E(rm)-Rf)
E(r)i = required return on investment
Rf = risk free rate of return
Bi = the beta factor - the systematic risk of the investment compared to the market and therefore the premium required
E(rm) - expected average return on the market (rm)
(E(rm)-Rf) = equity risk premium