Exam 3 Flashcards
What are the two sources of working capital?
Intra-Corporate & Parent Loan
An intra-corporate source of fund increases?
equity stock of the subsidiary
Most multi-national companies prefer what type of working capital?
Parental Loan
The reasons why parental loans are most favorable are because
interest is tax deductible while dividends are not. Less control by the host government over interest than dividend payment. Parent would not let subsidiary go bankrupt because they have too much loan from them.
What are the disadvantages of a loan?
Increased debt rate
What is a more complex parental loan to the subsidiaries should they want to deal with future political risk?
Fronting Loan
A fronting loan involves
the parent depositing money with the 3rd party, which in turn loans the money to the subsidiary.
Another way to use internal source of funds is the leads in
accounts payable or lags in accounts receivable.
What is a transfer price?
It is the use of internal source fund to provide working capital by manipulation.
When a subsidiary needs additional working capital, the parent company can reduce prices of goods provided by the parent to the subsidiary.
Transfer Price
What are the disadvantages of transfer price?
Conflict between the MNC and the host country; dual sets of accounting books to see actual subsidiary’s performance and end up conflicting with own interests (pay less income tax to local govt. but end up paying more tariffs on increased prices.)
A subsidiary can also borrow from an International Market such but may require what?
The parent company’s guarantee on the loan.
What is the most preferred method of borrowing working capital of multi-national companies?
Borrowing from local banks
The reasons why borrowing from local banks is the best?
Borrowing without the parent’s guarantee for limited liability in case of bankruptcy, hedge against political risk, and inflation
Is the degree to which a firm’s financial statements are influenced by exchange rate fluctuation.
Translation Exposure
Does not cause any changes in real cash flow only paper gains and losses due to wide inflation variations. Also called Accounting Exposure
Translation Exposure
Is the degree to which a firm’s actual cash flow is influenced by exchange rate fluctuations.
Transaction Exposure
What are some strategies to reduce transaction exposure?
Forward Contacts, Future Contracts or options to lock in specific rates regardless of spot rate.
Is the degree to which a firm’s value (stock price) is influenced by long-term and fundamental exchange rate fluctuations.
Economic Exposure
What are some strategies to deal with economic exposure?
Diversify the market to disperse the risk from one currency flotation and entry mode diversification is another option.
Is the process of making an investment decision when there is a limited amount of capital.
Capital Budgeting
What is the most widely used methods to do capital budgeting?
Net Present Value
In order to make a Net Present Value calculation more accurately, what factors must be incorporated
Exchange Rates, Local Inflation, Taxes, Rate of Discount of Future Cash Inflows and Political Risk
What type of payment method do buyers love because the goods are shipped out first and then the customer pays later?
Open Account
What type of payment method do sellers love where the customers pay first?
Cash Advance
An unconditional order of payment made by the exporter to the importer or an official payment request.
Draft
A certain amount of risk still remains when settling with a draft because under draft,
the payments are still contingent upon the buyer’s willingness and ability to pay.
The most important instrument used to reduce the risk of non-payment is
Letter of Credit
What are some strategies to eliminate Translation Exposure?
Do Nothing
The majority of International Trade is settled in terms of
Irrevocable Letters of Credit
Which type of LOC is used to eliminate the risk of importer’s bank bankruptcy?
Confirmed LOC
A document against payment (D/P), requires that payments be made immediately to take the shipping documents when presented.
Sight Draft
Document against acceptance (D/A), requires only acceptance in order to take the shipping documents.
Time Draft
By endorsing the buyer legally promises to pay at a later time frequently used when exporter and importer trust each other.
Time Draft
A payment guarantee made by importer’s bank at the moment of presenting proper documents.
Letter of Credit
What are the two steps in international financial reporting?
Translation & Consolidation
Most MNC prefer to use which type of translation method?
Current Method
The current method of translation is preferred because
paper gain or loss would appear on the balance sheet rather than on the income statement which can generate a false sense that the company is risky.
According to the FASB the currency by which the major business activity of the foreign subsidiary is conducted is called
Functional Currency
Designed to avoid double taxation and to ensure tax neutrality regardless of income sources?
Tax Credit
Under the tax credit concept for foreign sourced income, the domestic tax liability of US firms on foreign sourced income…
will be reduced by the amount of tax that they have paid to a foreign government.
Originally designed to encourage foreign business activity of the US firms by delaying the collection of US income tax on foreign sourced income until it is remitted back to the US.
Tax Deferral
Are not eligible for tax deferral and are an extension of the parent company?
Branch Office
Are eligible for tax deferral as a separate legal entity?
Subsidiary
Parent companies prefer branch offices in the early stages to take advantage of
losses from domestic tax liability
Parent companies prefer subsidiary once profits are generated so
they can benefit from tax deferral.
Cayman Islands and Bahamas are considered to be
tax havens
The US tax authorities have identified two types of subsidiaries?
non-controlled foreign subsidiary and Controlled
The US partner is a minority stockholder with little room for maneuver tax evasive planning such as manipulating transfer price?
Non-controlled Subsidiary
US Partner would be a majority stockholder and can do whatever they want including tax evasion.
Controlled Subsidiary
The two types of controlled subsidiary are?
Active and Passive
The Controlled Subsidiary type that tax deferral is applied to is
Active
The most preferred and mostly used method to assess potential market demand in target countries is
Cross-National Analysis
This method assumes that the demand for your product is a function of certain variables such as national income.
Cross-National Analysis
This potential demand method is appropriate when you have a previous record of sales in the country (historical data) and want to forecast the future demand.
Time Series Analysis
The potential demand method uses the underlying assumption that income is the single most important variable that will influence demand.
Elasticity
Bread and Milk have
Low elasticity
Cars and furniture have
High elasticity
This potential demand method found that demand of a certain type of product displays almost identical patterns across nations.
Regional Leads and Lags Method
Regional Leads and Lags Method will have a difference between actual sales and potential demand. What type of analysis is to be performed?
GAP Analysis
Companies have 3 different product policies
Standardized (Nike), Localized (Campbell Soup), and Adaptation a hybrid of the other two (Pizza Hut, Coke, Cars).
Companies have two pricing decisions
Uniform and Differentiated Pricing
MNC that have strong brand name and consumers will buy their products with little resistance ex: McDonald’s use what type of pricing
Uniform
Transportion costs and unrecognized brand name can force companies to use this type of pricing method
Differentiated
What are the three objectives of pricing?
Marketing Holding, Market Skimming, Market Penetration
Where there is only one component of cost, the variable cost to cover the pricing consideration and used in what market?
Marginal Cost Pricing, Market Penetration
Marketing promotion where the product is presented directly to the customer through direct sales or door to door selling.
Push
Marketing promotion where the product is presented through point of purchase with TV ads, magazines, etc.
Pull
For sparsely populated regions the ____ approach may be too expensive.
Push
For densely populated regions the ____ approach may be the best.
Push
For sparsely populated regions the ____ approach may be best.
Pull
This is a special brand name effect “made in effect”
Country of Origin Effect
Internal Channel is a relatively passive form of channel located and operated in the
Home Country
Export Agent, Export House, Resident Foreign Buyer and Export Association are all forms of what type of (place) distribution channel?
Internal Channel
External Channel operates in the
Target Country
Import Agent, Foreign Distributor, Branch and Subsidiary are all what type of place channel?
External Channel
This management style should be formal with close and tough supervision and authoritative leadership is favored.
Theory X
This management style should follow broad guidelines and maintain financial supervision with democratic leadership.
Theory Y
This organizational structure can ensure local flexibility and responsiveness but can impede coordination and uniformity among regions.
Worldwide area Structure
This organizational structure can ensure a better framework for pursing global optimality in implementing strategies, but it is weak in local flexibility and responsiveness.
WorldWide Product Division
This organizational structure is designed based on two dimensions: Product Division and Geographic Regions
Global Matrix Structure
Many manufacturing firms begin their global expansion as
Exporters
Entry mode advantages: avoid costly FDI, and centralize manufacturing to achieve economies of scale and a learning curve?
Export
Entry mode disadvantages: may not use cheap labor, not in the best position to monitor consumer feedback, high transportation costs, and various forms of tarrif, non-tariff trade barriers?
Export
Under this mode, considered to be ongoing barter, both parties establish open accounts and continue to exchange the goods with each other within the range of the originally stipulated amount.
Clearing Arrangement (Counter-Trade)
Under this mode, both parties involved in signing two parallel buy/sell contracts that stipulates the amount of goods and services to be exchanged in different time frames. Ex: Agricultural products in the future
Counter Purchase
Under this mode, requires a lengthy amount of time for final settlement because payment will be made gradually as the other party produces goods in the future. EX: country builds a fertilizer plant and the developing country pays back in terms of the fertilizer produced.
Buy-Back, or Compensation Arrangement
Under this mode, is by providing any commensurate return or business right by one party for the goods and services rendered by another party to compensate for the value originally provided. Ex: exclusive rights, natural resources extracting rights.
Off set
Under this mode, grants the right to use intangible property for a specific period in return of a royalty fees.
Licensing
One of the most important tools for outsourcing?
Contract Manufacturing
Where a company makes a contract with a foreign firm to buy their products and then sells them under its own brand name and through its own marketing channels?
OEM (Original Equipment Manufacturer)
The contractor agrees to build a large facility such as a utility plant or infrastructure for a foreign client, including training of operating personnel. ex: chemical pharmaceutical, petroleum.
Turnkey Projects
Where a firm builds plants or facilities such as a utility plant or fertilizer plan in other countries at its own expense and in return they will have the right to operate and do business for a certain period of time.
BOT (Buy, Operate, Transfer)
Under this mode, one party provides another party with managerial expertise for a specific period of time in return of a lump-sum amount or a fee in proportion to sales volume
Management Contract
One of the oldest forms of international business under which foreign firms agree to explore and develop natural resources at their own risk and expenses. Prevalent in oil, mining and other natural resource extracting industries. Share the output with the host govt.
Extract Agreement
This mode of business has been one of the most popular forms of strategic alliance.
International Joint Venture
