L5

Question 1

Cash on comps BS

Answer 1

Cash & Cash equiv= (Liabilities + equity) - (NCA + INVEN + TR)

Question 2

Changes in liquidity happens

Answer 2

Due to rises and fall with the change of Financial & Business Activities

Question 3

Cash Collections

Answer 3

Financing- Issue:
* LT debt
* equity
* ST debt- line of credit

Business:
* sell FA
* Sell invest for cash
* collect cash from receiveables

Question 4

Cash Distrbutions

Answer 4

Financing- repay/repurchase:
* LT debt
* shares + pay dividends
* ST loans

Business
* pay suppliers
* buy inven for cash
* buy FA

Question 5

Cash Management difficulties

Answer 5

in case of parent has multiple foreign subs
1. exch apprec or deprec to another
2. interest rates in countries
3. amount of exch risk managers willing to accept
4. forecast of future ST cash needs

Question 6

Centralize Cash management in MNC

Answer 6

Need to do due to information asymmetry
leads to
1. moral hazard
2. Adverse selection

makes it so people need to hold cash

Question 6

other issues with in international cash management

Answer 6

• Gover restictions on transfer of funds
• taxes that depend on the type of fund transfer
• trans cost in fx
• problems maintaining the liquidity of all foreign affiliates

Question 7

Benefits of holding Cash

Answer 7

1. Transaction demand for money- firm knows that some expend will happen in future
2. precautionary demand for money- firm needs to buy something due to an unanticipated change in enviroment
3. can reduce trans cost by centralizing the management of ST casg balance of its foreign affiliates

Question 7

Cash Management in MNC

Answer 7

incurs in op cost , centralizing can help reduce this. 2 assumps need to do this
1. precautionary demand for cash for each foreign sub is a random variable due to uncertainty about future- follows normal dist
2. when precautionary demand in uncorrelated the central cash management office requires a cash bala lower than what required from each foreign sub

Question 8

Cost of Holding Cash

Answer 8

1. opportunity cost
2. agency cost
3. transaction cost- as it is moved regularlly

Question 8

Multilateral netting system

Answer 8

Cetralized helps coordinate between foreign subs of a MNC
done by firm or 3rd party
cost saving tool in MNC cash management

Question 9

Reg on transfer pricing

Answer 9

• international auth more aware of this
• most countries have floowed the OECD taxation agreements: arm length

tp should equal the prices that would have been agreed upon between 2 independent firms from comparable transactions in compareable circumstance

Question 10

if not arm length for tax reasons

Answer 10

comparability analysis
1. transactions between 2 assoicated comps (controlled)
2. with comparable transaction between 2 independent orgs (uncontrollled)

see if recaculating tax liaiblity is needed

not suitable in all circumstances