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International Financial Management Essay

2499 words - 10 pages

Dear fellow shareholders,
What a year. Despite many challenges faced by the company, we have been successful in maintaining our position as the leading cell phone manufacturer in the world. The company’s subsidiaries in China, Japan, Israel and France face many economic challenges ahead. The challenges faced and the steps taken to solve those challenges, have been explained in the report.

We start by mentioning next year’s inflation rate and then forecasting the spot rate one year from today. This will give us an idea about how the various concerned currencies are relatively moving to one another. The effects of these movements are explained country wise later in the report.

The ...view middle of the document...

40% against the Renminbi, -1.85% against the Shekel, -1.68% against the Euro and 0.19% against the Yen. This is due to the different inflation rates in different countries, along with the different states of the economies. All this is going to have effect on the operations of the company.

The working cost of capital (WACC) for the parent and all subsidiaries is shown below. The interest rates vary according to the year in which the debt was taken.

Japan
Debt: ¥ 250,000,000 10 year bond
Interest rate (2011): 3.4%[6]
Flotation cost: ¥ 17,000,000
Equity: ¥ 1,000,000,000 common stock
Tax rate: 35.64%[8]
Interest: ¥ 8,500,000
Floatation cost: ¥ 1,700,000
Pre-tax cost of debt: 0.0408
After-tax cost of debt [kd¥(1-T)]: 0.0262
ke¥: 0.03 + 0.8[0.1 - 0.03] = 0.086
wd¥: 0.2
we¥: 0.8
WACC: [0.2 * 0.0262] + [0.8 * 0.086] = 0.07404
Debt to equity ratio: 0.25

Israel
Debt: Shekel 230,000,000 5 year bond
Interest rate (2010): 3.6%[6]
Flotation cost: Shekel 7,000,000
Equity: Shekel 198,000,000 common stock
Tax rate: 26.50%[8]
Interest: Shekel 8,280,000
Floatation cost: Shekel 1,400,000
Pre-tax cost of debt: 0.0420
After-tax cost of debt [kdShekel(1-T)]: 0.03087
keShekel: 0.03 + 1.5[0.1 - 0.03] = 0.135
wdShekel: 0.53
weShekel: 0.47
WACC: [0.53 * 0.03087] + [0.47 * 0.135] = 0.0798
Debt to equity ratio: 1.16

France
Debt: € 150,000,000 10 year bond
Interest rate (2014): 1.41%[7]
Flotation cost: € 900,000
Equity: € 100,000,000 common stock
Tax rate: 33.33%[8]
Interest: € 2,115,000
Floatation cost: € 90,000
Pre-tax cost of debt: 0.0147
After-tax cost of debt [kd€ (1-T)]: 0.009
ke€: 0.03 + 1[0.1 - 0.03] = 0.1
wd€: 0.6
we€: 0.4
WACC: [0.6 * 0.009] + [0.4 * 0.1] = 0.0454
Debt to equity ratio: 1.5

China
Debt: rmb 215,456,987 4 year bond
Interest rate (2012): 3.9%[6]
Flotation cost: rmb 1,900,000
Equity: rmb 120,000,000 common stock
Tax rate: 25%[8]
Interest: rmb 8,402,823
Floatation cost: rmb 475,000
Pre-tax cost of debt: 0.0412
After-tax cost of debt [kdrmb (1-T)]: 0.0309
kermb: 0.03 + 1[0.1 - 0.03] = 0.1
wdrmb: 0.64
wermb: 0.36
WACC: [0.64 * 0.0309] + [0.36 * 0.1] = 0.0557
Debt to equity ratio: 1.79

U.S.A
Debt: $ 198,765,432 5 year bond
Interest rate (2010): 2%[6]
Flotation cost: $ 500,000
Equity: $ 151,000,000 common stock
Tax rate: 40%[8]
Interest: $ 3,975,309
Floatation cost: $ 100,000
Pre-tax cost of debt: 0.0205
After-tax cost of debt [kd$ (1-T)]: 0.0123
ke$: 0.03 + 1.2[0.1 - 0.03] = 0.114
wd$: 0.56
we$: 0.44
WACC: [0.56 * 0.0123] + [0.44 * 0.114] = 0.0570
Debt to equity ratio: 1.31

The flowchart of the general activities of the company is shown below.

To protect the company and its subsidiaries from transaction and operating exposure, we have set up a re-invoicing center[11] in Dubai. As Dubai does not impose any corporate tax[9], it is an ideal location to set up a re-invoicing center. The subsidiary in Israel invoices the re-invoicing center in Shekel, while the...

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