International Financial ManagementBekaert 2eSolutionsCh15Word下载.docx

International Financial ManagementBekaert 2eSolutionsCh15Word下载.docx

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1.Cananinvestmentprojectofaforeignsubsidiarythathasapositivenetpresentvaluewhenevaluatedasastand-alonefirmeverberejectedbytheparentcorporation?

Assumethattheparentacceptsallprojectswithpositiveadjustednetpresentvalues.

Answer:

Yes,weknowthatcountriesimposewithholdingtaxesonthedividendsthatarerepatriatedfromsubsidiariestoparentcorporations.Thesetaxeslowerthevalueoftheprojecttotheparent.Theparentmustalsobeawareofthepossibilityoffutureproblemsaccessingtheforeignexchangemarketfromthesubsidiary’scountry.Ingeneral,politicalriskcouldbedifferentforasubsidiaryofamultinationalcorporationversusalocalstand-alonefirm.

2.Howdolicensingagreements,royalties,andoverheadallocationfeesaffectthevalueofaforeignproject?

Licensingagreements,royalties,andoverheadallocationfeesaretruecoststothesubsidiaryortothestand-alonefirmthatwouldbeoperatingintheforeigncountryproducingandsellingtheproductsofthemultinationalcorporation.Thus,licensingagreements,royalties,andoverheadallocationfeesreducetheincomeintheforeigncountry.Nevertheless,thesecashflowsprovideprofittotheparentcorporation.Licensingagreementsandroyaltiesprovidepureprofittotheparentasnocostsareincurred,andoverheadfeesprovidenetprofitastheycovercostsincurredbytheparent.Thus,thesecashflowsarequitevaluabletotheparent.

3.Whydoesanadjustednetpresentvalueanalysistreatthepresentvalueoffinancialsideeffectsasaseparateitem?

Isn’tinterestexpensealegitimatecostofdoingbusiness?

Theadjustednetpresentvalueapproachtocapitalbudgetingstartsbyvaluingthefreecashflowstotheall-equitycashfirm.Itthenaddsothersourcesofvalueassociatedwithhowthefirmisfinanced.Asintheweightedaveragecostofcapital（WACC）approachinChapter16,thenumeratorcashflowsarethefreecashflowstotheallequityfirm.IncontrasttoWACCanalysis,whichdiscountsthesecashflowswithadiscountratethatisaweightedaverageoftheafter-taxrequiredreturnonthedebtandtherateofreturnontheleveredequity,theANPVanalysisusestherateofreturnontheunleveredassetstogettheall-equityvalue.Studentssometimesthinkthatthedeductibilityofinterestasabusinessexpenseisthereforemissing,andtheywanttoreducetheall-equityfreecashflowsbytheafter-taxinterestpayments.ThismissesthefactthatthevalueoftheinteresttaxshieldsisbeingaddedasaseparatesourceofvalueinANPV,whereasitisincludedinWACC.Also,itmissesthefactthatwhentheequityholdersleverthefirm,theygettheprincipalonthedebtupfrontanddon’thavetoputasmuchequityintothefirmforitsinvestments.Thepresentvalueofthefuturecashoutflowsforinterestpaymentsandrepaymentofprincipalequaltheinitialvalueoftheprincipal,inwhichcaseitisonlythetaxshieldthatneedstobevalued.ANPVdoesthisseparately.

4.Whatismeantbythenetpresentvalueofthefinancialsideeffectsofaproject?

Generally,theseeffectsarisefromthecostsofissuingsecurities,thetaxesortaxdeductionsassociatedwiththetypeoffinancinginstrumentused（includingthetaxdeductibilityoftheinterestpaidonthedebt）,thecostsoffinancialdistress,andtheavailabilityofsubsidizedfinancingfromgovernments.

5.Whyisitcostlytoissuesecurities?

Theinvestmentbankerswhohandletheissuingofsecuritieseithertothepublicortoprivateinvestorsarefinancialintermediaries,andtheymustbecompensatedfortheuseoftheirscarceresources.Thiscompensationincludesamonetaryfee,butitalsooftenincludesanunderwritingdiscount,orspread.Theunderwritingdiscountbetweenwhatthecorporationreceivesfromissuingthesecuritiesandwhatthepublicpaysforthesecuritiesisoftenalargepartofthecompensationoftheinvestmentbankthatunderwritestheissue.

6.Whatisaninteresttaxshield?

Howdoyoucalculateitsvalue?

Theinteresttaxshieldonadebtisthevalueoftheabilitytodeductinterestasabusinessexpense.Therefore,atapointintimeitisequaltothecorporatetaxratetimestheamountofinterest,

.Thistaxdeductionisdiscountedatthestateddebtrate,whichisthemarketdebtrateassociatedwiththatdebt.Thus,thediscountedpresentvalueofaperpetualinteresttaxshieldis

7.Whatisaninterestsubsidy?

Interestsubsidiesarisewhengovernmentsarewillingtolendtocorporationsatbelowmarketinterestrates.Suchsubsidiesaddvaluetoaproject.Theappropriatediscountrateforaninterestsubsidyisthemarket’srequiredrateofreturnonthedebtofthecorporationbecausethecorporationisjustaslikelytodefaultonasubsidizedloanfromthegovernmentasitisonanormalloanatmarketinterestrates.SupposethatthegovernmentletsacorporationborrowaprincipalofDforoneperiodatasubsidizedinterestrateofrS<

rD,whichisthemarket’srequiredrateofreturnonthecorporation’sdebt.ThecorporationborrowsDinthefirstperiod,anditrepays（1+rS）Dinthesecondperiod.Becausetheactualinterestpaymentisdeductible,thecorporationalsogetsataxdeductionofτrSDinthesecondperiod.Thepresentvalueofthecashflowsofthesubsidizeddebtdiscountedatthemarket’srequiredrateofreturnonthecorporation’sdebtistherefore

Thevalueofaloanatasubsidized,below-market,interestratehastwocomponents:

thepresentvalueoftheinterestsubsidy,whichisthedifferencebetweentheinterestpaidonamarketloanandtheinterestonthesubsidizedloan,plusthepresentvalueoftheactualinteresttaxshield.Inbothcases,thepresentvalueistakenatthemarket’srequiredrateofreturnonthedebt.

8.Whataregrowthoptions?

Provideanexampleofoneinaninternationalcontext.

Agrowthoptionariseswhenafirmundertakesaprojectandobtainsanoptiontodoanotherprojectinthefuture.Theoptiontodothesecondprojectaddsvaluetothefirstproject.Agrowthoptionmightincludeafirm’sabilitytosellanewproductthatissuccessfulinthedomesticmarketintheinternationalmarketplace.Growthoptionsarespecificexamplesofrealoptionsthatalsoincludetheabilityofafirmtoshutdownaplantoramineuntiloperatingconditionsimproveortodelayanimportantoperatingdecisionuntilmoreinformationcanbegathered.Realoptionsarevaluable.

9.WhatisthedifferencebetweenEBITandNOPLAT?

TheacronymEBITisearningsbeforeinterestandtaxes.Itrepresentsthebefore-taxoperatingprofitofthefirm.TheacronymNOPLATisnetoperatingprofitlessadjustedtaxes.ItisfoundbytakingthetaxesoutofEBITthatwouldbepaidbytheall-equityfirm.Itisthereforetheafter-taxoperatingprofitoftheall-equityfirm.

10.Whyisitimportanttounderstandandmanagenetworkingcapital?

Thestockofnetworkingcapitalistheamountofinventory,cash,andaccountsreceivableminusaccountspayablethatthefirmmusthaveonhandtorunitsbusiness.Ifthebusinesscanberunwithalowernetworkingcapital,thisamountofassetscouldbegiventoinvestors.Conversely,increasesinnetworkingcapitaluseafter-taxprofitsthatthefirmcouldotherwiseusetofinancecapitalexpendituresorpaytoinvestors.Assuch,changesinnetworkingcapitalareinvestmentsthatthefirmmakesinitsfutureprofitability.

11.WhatdoesCAPXmean,andwhyisitafirm’sengineofgrowth?

CAPXisanacronymthatisshortforcapitalexpenditures.Theseareinvestmentsthatthefirmismakinginphysicalplantandequipmentthatwillproduceoutputinthefuture.Consequently,ifthefirmwantstogrow,itwillhavetodoCAPX,andinthissense,CAPXisthefirm’sengineofgrowth.

12.WhyisitsometimesassumedthatCAPXequalsdepreciationinthelaterstagesofaproject?

Howdoesexpectedinflationaffectthisassumption?

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Asaprojectmatures,therearenomoreplannedinvestmentsinwhichcasethescaleoftheprojectisfixed.But,thephysicalplantandequipmenthaveaneconomiclifetimeandmustbereplaced.Ifaccountingdepreciationmatcheseconomicdepreciation,settingCAPXequaltodepreciationisappropriate.Youshouldbeawarethataccountingdepreciationoftenfailstomatcheconomicdepreciationbecauseofinflation.Thehighertherateofinflation,themoreseverethisproblemisunlesstheaccountingdepreciationisindexedtoinflationinsomeway.BecauseCAPXwillbespentonrealplantandequipment,thenominalamountofexpendituresmaybesomewhatgreaterthantheamounttheaccountsareallowedtodeductforthebookvalueofdepreciation.

13.Whatistheterminalvalueofaproject?

Howisitcalculated?

Theterminalvalueofaprojectisthepresentdiscountedvalueofallfuturefreecashflowsintheyearsbeyondanexplicitforecastinghorizon.Ifwegenerateexplicitforecastsoffreecashflowsforthenext10years,theterminalvalueisthepresentdiscountedvalueoffreecashflowsinyears11toinfinity.Onetypicallyassumesthatfuturefreecashflowswillgrowattherateg,andthediscountratefortheseperpetualcashflowsisr.Thestartingvalueinyear11is（1+g）higherthantheexpectedfreecashflowsinyear10.Fromtheperpetuityformulaforagrowingcashflow,weknowthat

Aftercalculatingtheterminalvalueinyear10,thatquantitymustthenbediscountedtoyear0bymul