Assignment 4 - FIN535: Week (9) - Assignment: Long Term...

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FIN535: Week (9) – Assignment: Long Term Asset and Liability Management December 4, 2010 Binal Khetani Strayer University FIN535 Assignment 4: Long Term Asset and Liability Management Introduction The operations of MNCs are financed by its cost of capital. Hence the finance managers of the companies work very hard in order to reduce these costs and maximize the value of the company’s operations in the foreign market. Creditors often give preferential treatments to MNCs who borrow substantial amount of capital as opposed to a domestic firm. This is because MNCs have access to international as well as national capital markets thus exposing them to exchange rate risk. Any firm’s cost of capital is affected by its probability of going bankrupt. If they exhibit less variability, then it will reduce the probability of bankruptcy as well as the cost of capital. Cash flows of any firm is affected by various factors such as changes in government tax laws, exchange rate fluctuations, changes in business rules and regulations, changes in allocations of funds for company’s operations etc. MNCs conduct capital budgeting in order to derive NPV based in the equity investments and estimated cash flows. The acceptance of any foreign project is based on the decision a managers takes while completing their analysis. The estimated NPV of a project influences an MNCs willingness to pursue that project because it involves a huge amount of risk since the NPV is strictly dependant on the project’s capital structure. Capital structure influences the taxes and the exchange rates which in turn affects the cash flows of the firm. MNCs can choose various financing alternatives in order to best avoid the risk of exchange rate fluctuations. An MNC can also revise its capital structure due to the changes in the economic and the political conditions if the country. This is often done in order to reduce their tax withholdings on remitted earnings by its subsidiaries.
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FIN535 Assignment 4: Long Term Asset and Liability Management
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FIN535 Assignment 4: Long Term Asset and Liability Management ASSESSMENT 4 Long-Term Asset and Liability Management Gandor Company is a U.S. firm that is considering a joint venture with a Chinese firm to produce and sell DVDs. Gandor will invest $12 million in this project, which will help to finance the Chinese firm’s production. For each of the first three years, 50 percent of the total profits will be distributed to the Chinese firm, while the remaining 50 percent will be converted to dollars to be sent to the U.S. The Chinese government intends to impose a 20 percent income tax on the profits distributed to Gandor. The Chinese government has guaranteed that the after-tax profits (denominated in yuan, the Chinese currency) can be converted to U.S. dollars at an exchange rate of CHY1 = $.20 per unit and sent to Gandor Company each year. At the present time, no withholding tax is imposed on profits sent to the U.S. as a result of joint ventures in China.
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