Case Study - BUS 631 International Finance and Banking Case...

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BUS 631 International Finance and Banking Case Study North Star Company, a U.S. based MNC, is considering to establish a subsidiary to capitalize on the removal of Eastern European border restrictions. The subsidiary would manufacture clothing in Germany and target the Eastern European countries for most of its business. Its sales would be invoiced in EUR. It has forecasted net cash flows to the subsidiary as follows: Year Net Cash Flows to Subsidiary 1 EUR 4,000,000 2 5,000,000 3 5,000,000 4 6,000,000 5 8,000,000 6 8,000,000 These cash flows do not include financing costs (interest expenses) on any funds borrowed in Germany. North Star Company also expects to receive EUR15,000,000 after taxes as a result of selling the subsidiary at the end of Year 6. Assume that there will not be any withholding taxes imposed on this amount. The exchange rate of the EUR is forecasted as follows based on three possible scenarios of economic conditions: End of Year Scenario I: Somewhat Stable EUR Scenario II: Weak EUR Scenario III: Strong EUR 1 1.4000 1.3900 1.4200 2 1.4100 1.3600 1.4500 3 1.3800 1.3500 1.4900 4 1.4000 1.3300 1.5400 5 1.4200 1.3300 1.5700 6 1.3800 1.3100 1.6100 The probability of each scenario is shown below: Somewhat Stable EUR Weak EUR Strong EUR Probability 60% 30% 10% Fifty percent of the net cash flows to the subsidiary would be remitted to the parent, while the
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This note was uploaded on 12/02/2011 for the course BUSINESS 0902102028 taught by Professor Issam during the Spring '10 term at Bradford School of Business.

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Case Study - BUS 631 International Finance and Banking Case...

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