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Chapter 5: Q12DQ (page 680)

What are the differences between a parallel loan and a fronting loan?

Short Answer

Expert verified

A parallel loan is a four-party agreement among two parent companies in different countries obtains money in their own currency and lend the money to the other local subsidiary. On the other hand, a fronting loan is an overseas subsidiary in which one parent company, an intermediary, and usually a large international bank goes through the financial system.

Step by step solution

01

Loan

A loan is the amount of money that is borrowed and expected to be paid in the future with specified interest.

02

Difference between parallel loan and fronting loan

Basis

Parallel loan

Fronting loan

Meaning

An agreement between two parent companies located in two different countries whose subsidiary companies are located in each other’s country. In this case, both the parent companies take a loan of an equivalent amount in local currency and provide it to each other’s subsidiary companies. It is known as a parallel loan.

A fronting loan can be defined as the loan granted to the foreign subsidiary by the parent company through the involvement of a financial intermediary.

Foreign fund

Such an agreement does not require any movement he foreign funds.

Such loan requirement movement of foreign funds.

Financial institution

Such a loan does not require any involvement of the financial institution.

A financial institution such as a bank is involved in this loan process.

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Most popular questions from this chapter

Assume that Western Exploration Corp. is considering the acquisition of Ogden Drilling Company. The latter has a \(470,000 tax loss carryforward. Projected earnings for the Western Exploration Corp. are as follows: 20X1 20X2 20X3 Total Values Before-tax income ................................. \)185,000 \(250,000 \)370,000 \(805,000 Taxes (35%) ........................................... 64,750 87,500 129,500 281,750 Income available to stockholders .......... \)120,250 \(162,500 \)240,500 $523,250. How much will the total taxes of Western Exploration Corp. be reduced as a result of the tax loss carryforward? b. How much will the total income available to stockholders be for the three years if the acquisition occurs? Use the same format as that in the text.

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A Peruvian investor buys 150 shares of a U.S. stock for \(7,500 (\)50 per share). Over a year, the stock goes up by \(4 per share.

  1. If there is a 10 percent gain in the value of the dollar versus the Peruvian nuevo sol, what will be the total percentage return to the Peruvian investor? First, determine the new dollar value of the investment and multiply this figure by 1.10. Divide this answer by \)7,500 and get a percentage value, and then subtract 100 percent to get the percentage return.
  2. Instead assume that the stock increases by $7, but that the dollar decreases by 10 percent versus the nuevo sol. What will be the total percentage return to the Peruvian investor? Use 0.90 in place of 1.10 in this case.

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a.Compute the coefficient of variation for the Knight Corporation before and after the merger (consult Chapter 13 to review statistical concepts if necessary).

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