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Chapter 5: Q7DQ (page 679)

What factors would influence a U.S. business firm to go overseas?

Short Answer

Expert verified

The factors are purchasing power parity, interest rate, the balance of paymentsandgovernment policies.

Step by step solution

01

Meaning of Business Firms

Business firms are organisations or corporations of people who come together to carry out activities to earn revenue.

02

Step 2:Factors

The factors that will influence a US business firm to go overseas are as follows:

  1. Purchasing power parity: The difference between the purchasing power of different countries also influences the decision.
  2. Interest Rates: Foreign exchange rates are influenced by the interest rate as it is one of the economic variables; this will influence the decisions to go overseas.
  3. Balance of payments: The balance of payments shows the economic transactions of the nation
  4. Government Policies: The government controls the nation's central bank, which influences the foreign exchange rate. It might influence the decision of US business firms to go overseas.

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Most popular questions from this chapter

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 Office Automation Corporation is considering a foreign investment. The initial cash outlay will be \(10 million. The current foreign exchange rate is 2 ugans 5 \)1. Thus the investment in foreign currency will be 20 million ugans. The assets have a useful life of five years and no expected salvage value. The firm uses a straight-line method of depreciation. Sales are expected to be 20 million ugans and operating cash expenses 10 million ugans every year for five years. The foreign income tax rate is 25 percent. The foreign subsidiary will repatriate all aftertax profits to Office Automation in the form of dividends. Furthermore, the depreciation cash flows (equal to each year’s depreciation) will be repatriated during the same year they accrue to the foreign subsidiary. The applicable cost of capital that reflects the riskiness of the cash flows is 16 percent. The U.S. tax rate is 40 percent of foreign earnings before taxes.

  1. Should the Office Automation Corporation undertake the investment if the foreign exchange rate is expected to remain constant during the five year period?
  2. Should Office Automation undertake the investment if the foreign exchange rate is expected to be as follows?

Year 0 .......................... \(152.0ugans

Year 1 .......................... \)152.2ugans

Year 2 .......................... \(152.4ugans

Year 3 .......................... \)152.7ugans

Year 4 .......................... \(152.9ugans

Year 5 .......................... \)1 5 3.2 ugans

Suggest some ways in which firms have tried to avoid being part of a target takeover

What procedures would you recommend for a multinational company in studying exposure to political risk? What actual strategies can be used to guard against such risk?

Why do management and stockholders often have divergent viewpoints about the desirability of a takeover?

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