Parent cash flows often depend on the form of

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Chapter 13 / Exercise PE13-8A
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Parent cash flows often depend on the form of financing. Thus, cash flows cannot be clearly separated from financing decisions, as is done in domestic capital budgeting. Remittance of funds to the parent must be explicitly recognized because of differing tax systems, legal and political constraints on the
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Chapter 13 / Exercise PE13-8A
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movement of funds, local business norms, and differences in how financial markets and institutions function. When a foreign project is analyzed from the project’s point of view, risk analysis focuses on the use of sensitivities, as well as consideration of foreign exchange and political risks associated with the project’s execution over time. When a foreign project is analyzed from the parent’s point of view, the additional risk that stems from its “foreign” location can be measured in at least two ways, adjusting the discount rates or adjusting the cash flows. Real option analysis is a different way of thinking about investment values. At its core, it is a cross between decision-tree analysis and pure option-based valuation. It allows us to evaluate the option to defer, the option to abandon, the option to alter size or capacity, and the option to start up or shut down a project. Project finance is used widely today in the development of large-scale infrastructure projects in many emerging markets. Although each individual project has unique characteristics, most are highly leveraged transactions, with debt making up more than 60% of the total financing. The process of acquiring an enterprise anywhere in the world has three common elements: (1) identification and valuation of the target; (2) completion of the ownership change transaction (the tender); and (3) the management of the post-acquisition transition. Cross-border mergers, acquisitions, and strategic alliances, all face similar challenges: They must value the target enterprise on the basis of its projected performance in its market. This process of enterprise valuation combines elements of strategy, management, and finance. MINI-CASE Elan and Royalty Pharma 5 We lived a long time with Elan (ELN). We always appreciated its science and scientists, and, at times, we hated its former management, or whoever caused it to turn from ascending towards becoming a citadel of sciences, especially neurosciences, into an almost bankrupt firm with less everything valuable in it than what was necessary for its survival. What saved it at the time was the emergence of Tysabri, for multiple sclerosis, which we knew it was second to none in treatment of relapsing remitting multiple sclerosis. We were certain that this drug, like Aaron’s cane, would swallow up all magicians’ staffs.
—“Biogen Idec Pays Elan $3.25 Billion for Tysabri: Do We Leave, Or Stay?,” Seeking Alpha , February 6, 2013.

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