I capital budgeting Aa Aa One of the important components of multinational capit

Question

I capital budgeting Aa Aa One of the important components of multinational capital budgeting is to analyze the cash flows generated from subsidiary companies. Foreign governments have certain motivations to restrict the repatriation of earnings of multinational firms to the parent company. This implies that not all earnings and profits generated at the subsid ary can be used by the parent company to pay dividends or to reinvest. Thus, from the perspective of the parent company, the relevant cash flows for the parent company in the foreign investment analysis are the cash flows that: O The subsidiary sends back to the parent company O The foreign govenment repatriates O The subsidiary firm pays to the foreign government as taxes Consider this case: Sebrele Enterprises Inc. is a U.S. firm evaluating a project in Australia. You have the foilowing information about the project The project requires an investment of AUS915,000 today and is expected to generate cash flows The of AU$1,300,000 at the end of each of the next two years. The current exchange rate of the U.S. dollar against the Australian dollar is $0.7795 per Australian dollar (AUS) The one-year forward exchange rate is $o.8088 / AUS, and the two-year forward exchange rate is $0.8234/ AUS. The frm's weighted average cost of capital (WACC) is 8.5%, and the project is of average risk. . INS 5 8

Explanation / Answer

Answer:

a) The subsidiary sends back to parent company

This because the cash sent by the subsidiary to the parent is only avilable to parent for its dividend decisions and reinvestment decisions.

b)

c) Option - B And C are the correct answer.

Partner with local companies to get local financing and Structure the operation of subsidiary,.

A B A*B Years Cashflows (in AUD) Conversion rate Cashflows (in$) Discount factor @ 8.5% Discounted $ Cashflows 0 -915000 $0.7795/AUD -713242.5 1 -713242.50 1 1300000 $0.8088/AUD 1051440 0.9217 969069.12 2 1300000 $0.8234/AUD 1070420 0.8495 909273.93 NPV = $ 1165100.55

Related Questions

Navigate

• Browse (All)
• Browse I
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.