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Chapter 5: Q16DQ (page 680)

Comment on any dilemmas that multinational firms and their affiliates may face regarding debt ratio limits and dividend payouts.

Short Answer

Expert verified

The debt ratio in many foreign countries is higher than that used by U.S. firms. This results in the dilemma of making the financial decision for foreign affiliates of the American firms.

Step by step solution

01

Definition of Financial ratios

The different comparisons made between the different line items of the financial statement to determine the financial status of the business entity are known as financial ratios.

02

Dilemmas regarding debt ratio limits

A foreign affiliate of an American firm faces a dilemma in its financing decision:

  • Should it follow the parent firm’s norms or that of the host county?
  • Who must decide this?
  • Will it be decided at the corporate headquarters in the United States or by the foreign affiliates?
03

Dilemmas regarding Dividend policy

Whether the dividend policy of the foreign subsidiary must be controlled by the parent company or the foreign company can control its dividend policy independently?

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Most popular questions from this chapter

The Wall Street Journal reported the following spot and forward rates for the Swiss franc (\(/SF):

Spot .................................................... \)0.8202

30-day forward ................................... \(0.8244

90-day forward ................................... \)0.8295

180-day forward ................................. \(0.8343

a. Was the Swiss franc selling at a discount or premium in the forward market?

b. What was the 30-day forward premium (or discount)?

c. What was the 90-day forward premium (or discount)?

d. Suppose you executed a 90-day forward contract to exchange 100,000 Swiss francs into U.S. dollars. How many dollars would you get 90 days hence?

e. Assume a Swiss bank entered into a 180-day forward contract with Bankers Trust to buy \)100,000. How many francs will the Swiss bank deliver in six months to get the U.S. dollars?

Explain the functions of the following agencies:

Overseas Private Investment Corporation (OPIC)

Export- Import Bank (Exim bank)

Foreign Credit Insurance Association (FCIA)

International Finance Corporation (IFC)

The Jeter Corporation is considering acquiring the A-Rod Corporation.

The data for the two companies are as follows:

A-Rod Corp. Jeter Corp.

Total earnings ......................................................... \(1,000,000 \)4,000,000

Number of shares of stock outstanding ................. 400,000 2,000,000

Earnings per share ................................................. \(2.50 \)2.00

Price-earnings ratio (P/E) ....................................... 12 15

Market price per share ........................................... \(30 \)30

a.The Jeter Corp. is going to give A-Rod Corp. a 60 percent premium over

A-Rod’s current market value. What price will it pay?

b.At the price computed in part a,what is the total market value of A-Rod

Corp.? (Use the number of A-Rod Corp. shares times price.)

c.At the price computed in part a,what is the P/E ratio Jeter Corp. is assigning

A-Rod Corp?

d.How many shares must Jeter Corp. issue to buy the A-Rod Corp. at the

total value computed in part b?(Keep in mind that Jeter Corp.’s price per

share is $30.)

e.Given the answer to part d,how many shares will Jeter Corp. have after the

merger?

f.Add together the total earnings of both corporations and divide by the

total shares computed in part e.What are the new postmerger earnings per

share?

g.Why has Jeter Corp.’s earnings per share gone down?

h.How can Jeter Corp. hope to overcome this dilution?

Name three industries in which mergers have been prominent

The Hollings Corporation is considering a two-step buyout of the Norton Corporation. The latter firm has 2.5 million shares outstanding and its stock price is currently \(40 per share. In the two-step buyout, Hollings will offer to buy 51 percent of Norton’s shares outstanding for \)62 per share in cash and the balance in a second offer of 840,000 convertible preferred stock shares. Each share of preferred stock would be valued at 40 percent over the current value of Norton’s common stock. Mr. Green, a newcomer to the management team at Hollings, suggests that only one offer for all Norton’s shares be made at $59.25 per share. Compare the total costs of the two alternatives. Which is better in terms of minimizing costs?
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