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CH14sguide - 14 ChapterObjectives 1 To list and discuss the...

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Chapter Objectives 1. To list and discuss the internal sources of funds for financing foreign investment. 2. To identify the principal instruments used by banks to service a multinational company's request for a loan. 3. To discuss both the Edge Act & Agreement Corporations and international banking facilities. 4. To explain why strategic alliances and project finance can be good sources of financing foreign investment. 5. To describe the types and roles of development banks. Chapter Outline I. Internal Sources of Funds A. Equity Contributions i. Every new foreign subsidiary must receive some funds in the form of equity to satisfy both authorities in the host country and outside creditors about its solvency. ii. Sometimes, MNCs use an equity investment for their own foreign subsidiary. 1. This gives the foreign subsidiary an increased capital base to support additional loans. iii. Equity contributions of cash are used for the following: Financing Foreign Investment      183 14 Financing Foreign Investment
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1. To acquire going concerns. 2. To buy out local minority interests. 3. To set up new foreign subsidiaries. 4. To expand existing subsidiaries. iv. Common stockholders have residual claims on earnings and assets in the event of liquidation. 1. This makes an equity investment not very flexible for the investors, but most acceptable to the host country and outside creditors. v. Dividends are the profit remittances derived from equity investments. 1. They are typically subject to local income taxes and withholding taxes. B. Direct Loans i. MNCs may provide investment funds through intracompany loans. 1. The intracompany loan usually contains a specified repayment period for the loan principal. 2. The intracompany loans usually earn interest income that is taxed relatively lightly. ii. Parent loans are more popular than equity contribution for the following reasons: 1. Parent loans give a parent company greater flexibility in repatriating funds from its foreign subsidiary. 2. The tax rate is typically lower than the rate on dividends, making the tax burden lower. 3. MNCs can provide credit to their subsidiaries not only by making loans, but also by delaying the collection of accounts receivable. C. Parent Guarantees i. When foreign subsidiaries have difficulty borrowing money, a parent may affix its own guarantees. ii. There are four type of parent guarantees: 1. The parent may sign a purchase agreement under which it commits itself to buy its subsidiary’s note from the lender in the event of the subsidiary’s default. 2. The lender may be protected on only a part of the specific loan agreement. 3. Another type of guarantee is limited to a single loan agreement between a lender and the subsidiary. 4. The strongest type requires that the lender be protected on all loans to the subsidiary without limits on amount or time.
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