Week 6 - MNC Capital Budgeting and Tax Considerations

Question 1

What is the basic formula used to calculate the value of a multinational corporation? (2)

Answer 1

Value = E[(Ct+i)j x (ERj) t+i] / (1+r£)^t+i
- C - Cash flow from each subsidiary
- ER - exchange rate
- r£ - required rate of return in the parent currency
- j - number of subsidiaries
- T - time horizon

Question 2

What are they key factors considered in international capital budgeting? (10)

Answer 2

• Cash Flows (Revenues, Costs)
• Initial Outlay
• Maturity Period
• Salvage Value
• Depreciation
• Taxes (local and foreign)
• Exchange Rates
• Required RoR
• Restrictions to Capital Outflows
• Value of Growth Options

Question 3

What is the main challenge when considering subsidiary v parent perspectives in capital budgeting?

Answer 3

Differences in after-tax cash inflows for the parent and the subsidiary

Question 4

What factors can cause differences in the perspective of the subsidiary and parent in capital budgeting? (4)

Answer 4

• Tax differentials (tax rates on remitted funds)
• Regulations that restrict remittances from the subsidiary to the parent
• Excessive remittances (high administrative fees charged by the parent)
• Exchange rate movements that affect the value of remitted funds

Question 5

Why might a subsidiary not view a project as profitable, even if it appears profitable from the parents perspective?

Answer 5

If the parent charges high administrative fees to the subsidiary or if there are restrictive regulations on remittances, the subsidiary may not experience the same level of profitability as the parent

Question 6

What is the role of remitting subsidiary earnings to the parent? (2)

Answer 6

• Remitting subsidiary earnings involves transferring profits from the subsidiary back to the parent company
• These can be impacted by taxes, exchange rates and local regulations

Question 7

What is the challenge of corporate tax systems in capital budgeting? (2)

Answer 7

• The complexity and frequent changes in tax laws
• makes it difficult to predict future tax liabilities and to optimise tax strategies for MNC operations

Question 8

How do MNCs minimise tax liabilites? (3)

Answer 8

• Tax optimisation
• Utilising tax havens
• Capitalising on differences in tax rates between countries

Question 9

What is the use of tax havens by the super-rich and MNCs? (2)

Answer 9

• Reduces tax liabilities
• Havens offer low/zero taxes, making them attractive for financial optimisation

Question 10

What is the impact of tax havens on the profitability of foreign firms compared to local firms? (2)

Answer 10

• Foreign firms operating in tax havens often report higher profitability compares to local firms
• They benefit from lower tax rates and financial strategies that reduce tax liabilities

Question 11

How does the corporate income tax rate influence the profitability of foreign firms in tax havens? (2)

Answer 11

• Tend to have a higher profits-to-wages ratio compared to local firms
• Able to reduce tax expenses through strategic use of tax havens