Chapter 18
International Managerial Finance
„
Solutions to Problems
P18-1
LG 1: Tax Credits
Intermediate
MNC’s receipt of dividends can be calculated as follows:
Subsidiary income before local taxes
Foreign income tax at 33%
Dividend available to be declared
Foreign dividend withholding tax at 9%
MNC’s receipt of dividends
$250,000
82,500
$167,500
15,075
$152,425
(a) If tax credits are allowed, then the so-called “grossing up” procedure will be applied:
Additional MNC income
U.S. tax liability at 34%
Total foreign taxes paid (credit)
($82,500 + $15,075)
U.S. taxes due
Net funds available to the MNC
(b) If no tax credits are permitted, then:
$250,000
$85,000
(97,575)
MNC’s receipt of dividends
U.S. tax liability ($152,425 × 0.34)
Net funds available to the MNC
P18-2. LG 3: Translation of Financial Statements
Intermediate
Cash
Inventory
Plant and Equipment (net)
Total
Debt
Paid-in capital
Retained earnings
Total
Balance Sheet
12/31/06
U.S.$
26.67
200.00
106.67
333.34
160.00
133.33
40.00
333.33**
(97,575)
0
$152,425
$152,425
51,825
$100,600
12/31/07
U.S.$*
28.17
211.27
112.68
352.12
169.01
140.85
42.25
352.11**
Income Statement
12/31/06
U.S.$
20,000.00
19,833.33
166.67
Sales
Cost of goods sold
Operating profits
*
**
12/31/07
U.S.$
21,126.76
20,950.70
176.06
At 6% appreciation, the new exchange rate becomes 1.42 €/U.S.$
Differences in totals result from rounding.
P18-3. LG 5: Euromarket Investment and Fund Raising
Challenge
The effective rates of interest can be obtained by adjusting the nominal rates by the forecast
percent revaluation in each case:
Effective rates
Euromarket
Domestic
US$
MP
¥
5.0%
4.5%
8.0%
7.6%
7.2%
6.7%
Following the assumption outlined in the problem, the best sources of investment and borrowing
are the following:
$80 million excess is to be invested in the MP Mexican
$60 million to be raised in the US$ Euromarket.
P18-4. Ethics Problem
Intermediate
Yes, because the company may lose out in numerous contract bid opportunities. The management
team must explain that it is “ethics first” when doing business, and that the objective is to
maximize shareholder wealth subject to ethical constraints. Hopefully, over time, stockholders
will get on board with this philosophy—although most will likely be supportive from the outset.