CHP 5 Int Operations and International Investment Apprasal (B)

International operations and international
investment appraisal
Skills required
• Forecast project in any specific currency and determines
the project’s NPV
• Assess the impact of a project upon a firm’s exposure to
translation. Transaction and economic risk
• Costs and benefits of sources of finance within the
international equity and bond market
EECB 423 JEJ V.1.1 1

International operations and
Delivered by: Dr Wong Pik Har

wongph@tarc.edu.my

Forecasting foreign exchange rates
(1  hc )
S1  S 0 x
(1  hb )
S1 = expected future spot rate
S0 = spot rate
hb = inflation rate for base currency Ex. Kaplan pg 190,192
hc = inflation rate for counter currency
EECB 423
Foreign projects and investment appraisal
Steps
Identifying relevant cash flows
Calculate a project’s corporate tax liability inclusive tax relief
on capital expenditure
Dealing with inflation and distinguishing money and real cash
flows
Double taxation
Remittance restrictions
Forecasting future spot rates (inflation/interest rates)

International operations and international investment
appraisal
Foreign projects and investment appraisal Kaplan pg 196
Taxation
Home country may have a tax rate that is 1) lower than, 2) the
same as 3) higher than the overseas country.
UK tax US tax Action
a) 33% < 40% No further UK tax to pay on $ profit.

Tax @ 40% in US
b) 33% = 33% No further UK tax to pay on $ profit.
Tax @ 33% in US
c) 33% > 25% 25% in US and 8% (33-25) in UK

appraisal
Transfer pricing (note: home country/ head office)
It is the price charged by a company when supplying goods or
services to an overseas subsidiary
Manipulating the transfer price to minimise the global taxation
cost
Company A- tax @50% Company B-tax @ 20%
Low transfer price
High transfer price

appraisal

Remittance restrictions
Occurs where an overseas government places a limit on the
funds that can be repatriated back to the holding company
The actual amount received by the parent company is the
relevant flow for NPV purposes
Ex.Kaplan pg 197, 199
EECB 423 7
appraisal
NPV analysis for foreign projects
Steps
1 Estimate the project cash flow
2 Convert the flows to home currency – ex rates
3 Add any home country cash flows
4 Discount net cash flows using cost of capital
5 NPV home country Ex Kaplan pg 203

Financing foreign projects
Own free cash flow
Raise by the parents
Raise by the subsidiary
Raise in a third currency

Short-term and long term finance
Eurocurrency loans – loan given by a bank to a company
denominated in a currency of a country other than where they
are based. (eg UK company obtains US$ loan/ Eurodollar loan
from a UK bank)
Syndicated loans –due to the size of the loan, it is a loan made
up of international lenders
Euronotes – promissory notes which promise to pay the holder
a fixed sum of money on a specific date. Eurobond market acts
as both a primary and secondary market. Can be short or
medium term
EECB 423 JEJ V.1.1 10

Short-term and long term finance
Eurobonds – long term (3-20 years)
Issued and sold internationally
Denominated in a single currency
Fixed or floating interest rate bond
Ex Kaplan pg 210
EECB 423 JEJ V.1.1 11

Dividend policy in MNC
How much to distribute
Should be based on investor preference for cash dividend now or capital
gains in the future
MNC has more than one dividend policy to consider
Dividend to external shareholders
Dividend between group companies
Stable dividend policy, but rising dividend/share
Constant payout ratio seldom used by MNC, due to fluctuation in dividend
Residual approach – fluctuation –bad news
Ex Kaplan pg 210
EECB 423 JEJ V.1.1 12

Dividend capacity= FCFE
= Operating Net free cash flow – capital exp +/-disposal/acq + new capital raised
Capital reconstruction programme
New debt issue
New equity issue
Share repurchase – potential increase cash flow
Transfer pricing
Pay lower taxes
Repatriate of fund from foreign subsidiary to HO
Enable foreign subsidiary to match
Basis accepted by customs market price, full cost
Ex Kaplan pg 210
EECB 423 JEJ V.1.1 13
Tax haven
Low tax
Bank secrecy, strict privacy law eg Cayman Island, Luxemboury
Little production takes place
Many co registers there using internal lending so that profits are taken in tax haven and costs in high tax countries
Anti-dumping legislation
Dumping is the practice of selling goods/services in an oversea market at a price lower or cost in the home market
Objective is putting competitors out of business
Many governments take actions to protect domestic industries by preventing MNC companies from transferring goods
cheaply into their countries
Ethical issues in transferring pricing
Social responsibility – reducing custom duties and taxes
Bypassing a country’s financial regulation via remittance of dividend
Not operating as a responsible citizen
Bad publicity
EECB 423 JEJ V.1.1 Ex Kaplan pg 210 14

CHP 5 Int Operations and International Investment Apprasal (B)

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International operations and international

EECB 423 JEJ V.1.1 1

Delivered by: Dr Wong Pik Har

EECB 423 JEJ V.1.1 2

hc = inflation rate for counter currency

EECB 423 JEJ V.1.1 4

a) 33% < 40% No further UK tax to pay on $ profit.

c) 33% > 25% 25% in US and 8% (33-25) in UK

Low transfer price

High transfer price

EECB 423 JEJ V.1.1 6

Foreign projects and investment appraisal

Ex.Kaplan pg 197, 199

2 Convert the flows to home currency – ex rates

3 Add any home country cash flows

4 Discount net cash flows using cost of capital

5 NPV home country Ex Kaplan pg 203

EECB 423 JEJ V.1.1 8

EECB 423 JEJ V.1.1 9

EECB 423 JEJ V.1.1 10

EECB 423 JEJ V.1.1 11

EECB 423 JEJ V.1.1 12

EECB 423 JEJ V.1.1 Ex Kaplan pg 210 14

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