International Business Finance PDF

International Business Finance Professor Fadi Massamiri (M) Lecturer, Department of Finance Fowler College of Business San Diego State University  Part 1 Global Financial Environment Ch.1: Multinational Financial Management: Opportunities and...

International Business Finance Professor Fadi Massamiri (M) Lecturer, Department of Finance Fowler College of Business San Diego State University  Part 1 Global Financial Environment Ch.1: Multinational Financial Management: Opportunities and Challenges Icons located in the bottom right hand corner - explained Live presentation of slide is done. Information students need to know that will not be covered in class. FYI Extra information, students are not only responsible for these slides. Slide not presented in class. Learning Objectives 1. Explore the global financial marketplace—players and playing field 2.Consider how the theory of comparative advantage applies to multinational business 3.Examine how international financial management differs from domestic financial management 4. Discover the steps and stages of the globalization process  Central U.S. Federal Banks People’s Bank of Reserve China European Central Etc. Bank Banks Institution Global Financial Commercial s banks Marketplace IMF Investment The World Bank is a result of banks Development Etc. Government Banks Agreements Reference rate of Interest for Debt Loans/Deposit Equity Securities s Securities Bonds $ Sec Overnight Fin Rate Mortgag (SOFR) Stoc es Prior to LIB £ Overnight Index Avg Derivativ 2021 - OR (SONIA) ks es € Short-Term Rate Key Players/Institutions International Monetary Fund (IMF) The World Bank Group World Trade organization (WTO) Regional/Free trade agreements Organization for Economic Cooperation and Development (OECD) Bank for International Settlements (BIS) International Trade Administration (ITA) Other players – Governments – Individual investors – Institutional investors – Sovereign wealth funds – government-run investment pools – Hedge funds – Private equity funds Key Players/Institutions International Monetary Fund (IMF) – Member organization whose goal is to ensure the stability of the international monetary and financial system through surveillance and technical assistance. The World Bank Group – Partnering with Governments. » The International Bank for Reconstruction and Development (IBRD) assists middle- income and creditworthy poorer countries. » The International Development Association (IDA) focuses on the world’s poorest countries. – Partnering with the Private Sector » Focuses on strengthening the private sector in developing nations. Through these institutions the WBG provides financing, technical assistance, political risk insurance, and settlement of disputes to private enterprises, including financial institutions. » The International Finance Corporation (IFC) » The Multilateral Investment Guarantee Agency (MIGA) » The International Centre for Settlement of Investment Disputes (ICSID) Key Players/Institutions World Trade organization (WTO) – Deals with the rules of trade between nations. – Ensures trade is smooth, predictable and as free as possible. – Mediates trade disputes. Regional/Free trade agreements – General Agreement on Tariffs and Grade (GATT) – North American Free Trade Agreement (NAFTA) – European Union (EU) – Association of Southeast Asian Nations (ASEAN) Key Players/Institutions Organization for Economic Cooperation and Development (OECD) – Examines, devised and coordinates policies across 34 relatively wealthy nations to foster sustainable economic growth and employment, rising standards of living and financial stability Bank for International Settlements (BIS) – Fosters international monetary and financial cooperation – central banks’ central bank. International Trade Administration (ITA) – Strengthens the competitiveness of U.S. industry, promotes trade and investment, and ensures fair trade through the rigorous enforcement of our trade laws and agreements. – ITA works to improve the global business environment and helps U.S. organizations compete at and abroad. Other players – Governments – Individual investors – Institutional investors – Sovereign wealth funds – government-run investment pools – Hedge funds – Private equity funds Eurocurrencies and Eurocurrency Interest Rates Eurocurrencies (External currencies) – Are domestic currencies of one country on deposit in a second country » Eurodollars are USD deposited outside the U.S. » Euroeuros are EUR deposited outside of Eurozone » Euroyens are JPY deposited outside Japan Any convertible currency can exist in “euro” form – A currency that can be exchanged freely for any other currency without government restrictions. Banks in which eurocurrencies are deposited are called Eurobanks. – A Eurobank is a financial intermediary that simultaneously bids for time deposits and makes loans in a currency other than that of its home currency. Eurocurrencies and Eurocurrency Interest Rates The reference rate of interest in the eurocurrency market is (was) the London Interbank Offered Rate (LIBOR) – The deposit rate applicable to interbank loans in London. – Is used as the reference rate for many international interest rate transactions. – Most widely quoted interest rate in the world. – Hit by a scandal after the market crash of 2008. – LIBOR has been phase out and replaced by various other reference rates. LIBOR is being replaced by other benchmarks – In the US: SOFR (Secured Overnight Financing Rate) – In the UK: SONIA (Sterling Overnight Index Average) – In the Eurozone: €STR (Euro Short-Term Rate)  PwC Global – Article “The clock is ticking toward the end of LIBOR – will you be ready?” FYI only Eurocurrencies and Eurocurrency Interest Rates Eurocurrencies and LIBOR rates reflect the “purest” of market-driven currencies and instrument rates. Interest spreads in the eurocurrency market are small for many reasons. – Low lending rates exist because the eurocurrency market is a wholesale market where deposits and loans are made in amounts of $500,000 or more on an unsecured basis. – Borrowers are usually large corporations or government entities that qualify for low rates because of their credit standing and because the transaction size is large. – In addition, overhead assigned to the eurocurrency operation by participating banks is small. Deposit rates are higher in the eurocurrency markets than in most domestic currency markets. – The financial institutions offering eurocurrency activities are not subject to many of the regulations and reserve requirements imposed on traditional domestic banks and banking activities. – With these costs removed, rates are subject to more competitive pressures, deposit rates are higher, and loan rates are lower. – A second major area of cost savings associated with eurocurrency markets is that deposit insurance (such as the Federal Deposit Financial Globalization and Risk Exhibit 1.3 What is Different about International Financial Management? Concept International Each foreign country is unique and not Each country has a known Culture, History Domestic base case always understood by MNE management and Institutions Corporate Foreign countries’ regulations and Regulations and institutions governance institutional practices are all uniquely are well known different Foreign Exchange MNEs face foreign exchange risks Foreign exchange risks from Risk due to their subsidiaries, as well import/ export and foreign as import/export and foreign competition (no subsidiaries) competitors Political MNEs face political risk because Negligible political Risk of their foreign subsidiaries and risks high profile Finance MNEs must modify finance Traditional financial theory Theories theories like capital budgeting applies and the cost of capital because of foreign complexities Financial MNEs utilize modified financial Limited use of financial Instruments instruments such as options, instruments And derivatives forwards, swaps, and letters of because of few Foreign credit exchange and political risks Financial Globalization and Risk Risks must be explored, considered, and managed – International monetary system is under constant scrutiny – Large fiscal deficits can result in negative interest rates – Exchange rates are constantly in flux – Ownership and governance vary dramatically across the world, particularly for the privately held or family-owned business – Global capital markets have become less open and accessible, increasingly complicating financial management with capital flows  Quick Algebra Review: Dividing by a fraction Given variables, A, B and C: B C A = A ÷ C x B Proof by let A = 20, B = 10, example, and C = 5 1 20 0 = 20 ÷ = 10 ÷ 5 2 Alternativ ely, 1 5 1 20 0 = 20 = 20 = 20 ÷ = 10 1 2 ÷ 5 x 0 x 2 Exchange Rates (ER) can be expressed in various forms Joe lives in the US. He is planning a business trip to London. He has a 3,000 USD budget. Bank of America quotes 1.3416 USD/GBP, and Citibank 0.7449 GBP/USD. Should Joe exchange his money at Bank of America or Citibank? Bank of America quotes: Citibank quotes: 1 GBP = 1.3416 USD 0.7449 GBP = 1 USD 1 GBP = 1/0.7449 USD 1 GBP = 1.3425 USD 1) Bank of 3,000 USD ÷ 1.3416 GBP/USD = America: 2,236.14 GBP 2) 3,000 USD ÷ 1.3425 Citibank: GBP/USD = 2,234.64 GBP Exchange Rates (ER) can be expressed in various forms Direct and Indirect quotations A direct quote is the price of one foreign currency (FC) unit, in home currency (HC) units. o 1 FC = #.## HC An indirect quote is the price of one domestic currency (HC) unit, in foreign currency units. o 1 HC = #.## FC For example, in the United States, the home currency is the USD o A direct quote on the GBP is expressed as: 1 GBP = 1.25 USD o An indirect quote on the GBP is expressed as: 1 USD = 0.80 GBP Percentage Change in Spot Rates Let, O  Original, old, beginning, or reference rate N  New, or ending rate The percentage change in the foreign currency spot exchange rate N – N %FC (direct = x 100% – 1 x OO quote) = O 100% O – O %FC (indirect x 100% – 1 x NN quote) = = N 100% P1.2 – Mexico’s Cada Seis Anos In its last devaluation on December 20, 1994, the value of the Mexican peso (Ps) was officially changed from Ps3.00/$ to Ps5.75/$. a) What was the percentage change in the Peso’s value for an American trader? Original rate (O) = Ps 3.00/$ New rate (N) = Ps 5.75/$ Is this a direct or indirect quote? Since the home currency is expressed in foreign currency units (1HC = #.## FC) the quote given is an indirect quote for an American trader. O %FC (indirect quote) – 1 x = N 100% 3.0 %P = – 1 x 5.7 0 s 100% 5 = - 47.83% P1.10 Blundell Biotech Blundell Biotech is a U.S.-based company with operations in a number of foreign countries. Net Income is given in millions. Year Descriptio Japan Britain Europe China Russia U.S. n Net Income ¥1,500 £100.0 €204 CNY168 ₽124 $360 2013 Exchange 97.57¥/$ 1.5646$/£ 1.3286$/€ 6.1484CNY/ 31.86₽/$ 1.00 Rates $ Net Income ¥1,460 £106.4 €208 CNY194 ₽116 $382 2014 Exchange 105.88¥/$ 1.6473$/£ 1.3288$/€ 6.1612CNY/ 38.62₽/$ 1.00 a) What Rateswas Blundell Biotech's consolidated profits $ in U.S. dollars in 2013 and 2014? b) If the same exchange rates, 2014 rates, were used for both years, what was the change in corporate earnings on a "constant currency" basis? c) Using the results of the 'constant currency analysis in part b, is it possible to separate Blundell's growth in earnings between local currency earnings and foreign exchange rate impacts on a consolidated basis? P1.10 Blundell Biotech Year Descriptio Japan Britain Europe China Russia U.S. n Net Income ¥1,500 £100.0 €204 CNY168 ₽124 $360 2013 Exchange 97.57¥/$ 1.5646$/£ 1.3286$/€ 6.1484CNY/ 31.86₽/$ 1.00 Rates $ Net Income ¥1,460 £106.4 €208 CNY194 ₽116 $382 2014 Exchange 105.88¥/$ 1.6473$/£ 1.3288$/€ 6.1612CNY/ 38.62₽/$ 1.00 Rates a) What was Blundell Biotech's consolidated profits$ in U.S. dollars in 2013 and 2014? BB’s Net Income must be converted from local currency to USD Indirect quote example: convert 2013 Japanese sub’s earning from JPY NettoIncome USD = ¥1,500 (USD) $15.37M M Direct = 97.57 2013 British subs earnings quote example: convert from GBP to USD ¥/$ Net Income = = £100.0Mx 1.5646£ (USD) $156.46M $ P1.10 Blundell Biotech Year Descriptio Japan Britain Europe China Russia U.S. n Net Income ¥1,500 £100.0 €204 CNY168 ₽124 $360 2013 Exchange 97.57¥/$ 1.5646$/£ 1.3286$/€ 6.1484CNY/ 31.86₽/$ 1.00 Rates $ Net Income 15.37 156.46 271.03 27.32 3.89 360 ($) Net Income ¥1,460 £106.4 €208 CNY194 ₽116 $382 2014 Exchange 105.88¥/$ 1.6473$/£ 1.3288$/€ 6.1612CNY/ 38.62₽/$ 1.00 Rates $ a) What Netwas Blundell Income Biotech's 13.79 consolidated 175.27 276.39 profits 31.49 in U.S. dollars 3.00 382 in 2013 ($)and 2014? 2013 Consolidated Earnings = 15.37 + 156.46 + 271.03 + 27.32 + 3.89 + 360.0 = $834.08M 2014 Consolidated Earnings = 13.79 + 175.27 + 276.39 + 31.49 + 3.00 + 382.0 = $881.94M P1.10 Blundell Biotech b. If 2014 exchange rates, were used for both years, what was the change in corporate earnings on a "constant currency" basis? Actual Exchange Rates Year Description Japan Britain Europe China Russia U.S. 2013 Exchange 97.57¥/$ 1.5646$/£ 1.3286$/€ 6.1484CNY/ 31.86₽/$ 1.00 Rates $ 2014 Exchange 105.88¥/$ 1.6473$/£ 1.3288$/€ 6.1612CNY/ 38.62₽/$ 1.00 Rates $ Actual versus Constant Currency Year Description Japan Britain Europe China Russia U.S. 2013 Actual N.I. ¥1,500 £100.0 €204 CNY168 ₽124 $360 2014 (Local ¥1,460 £106.4 €208 CNY194 ₽116 $382 currency) 2013 15.37 156.46 271.03 27.32 3.89 360 Actual N.I. 2014 (USD) 13.79 175.27 276.39 31.49 3.00 382 2013 14.17 164.73 271.08 27.27 3.21 360 CC N.I. 2014 (USD) 13.79 175.27 276.39 31.49 3.00 382 P1.10 Blundell Biotech b. If the same exchange rates, 2014 rates, were used for both years, what was the change in corporate earnings on a "constant currency" basis? Actual – Consolidated USD(M) Earnings Year Japan Britain Europe China Russia U.S. Consolidated Earnings 2013 15.37 156.46 271.03 27.32 3.89 360.00 834.08 2014 13.79 175.27 276.39 31.49 3.00 382.00 881.94 $ 47.86 % +5.74 Constant Currency – Consolidated USD(M) Earnings Year Japan Britain Europe China Russia U.S. Consolidated Earnings 2013 14.17 164.73 271.08 27.27 3.21 360 840.45 2014 13.79 175.27 276.39 31.49 3.00 382.00 881.94 $ 41.49 % +4.94  Quick Algebra Calculating theReview: effects of multiple percentage changes on a value 1) If the value of my portfolio goes up 10% and then falls 10%, has the value of my portfolio changed? 2) If the value of my portfolio goes up 10% and then goes up another 5%, did my portfolio’s value increase by 15%? Case 1: Let the value of my portfolio be $100,000 After the 10% increase, my portfolio will be worth: $100,000(1 + 10%) = $110,000 After the 10% decrease, my portfolio will be worth: $100,000(1 + 10%) (1 – 10%) = [$110,000](1 – 10%) = $99,000 and NOT $100,000 Case 2: Let the value of my portfolio be $100,000 After first 10% increase, my portfolio will be worth: $100,000(1 + 10%)  Quick Algebra Review: Derivation of formula used to separate growth in earnings between local currency earnings and foreign exchange rate changes on a constant currency basis Let TE  Total Earnings using actual exchange rates , %TE  Percentage Change in Total Earnings using actual exchange rates %TEcc  Percentage Change in Total Earnings on a constant currency basis %FXrates change The total percentage Percentage dueChange to twoinconsecutive Foreign Exchange Rates percentage changes are related as follows: TE(1 + %TE) = TE(1 + %TEcc)(1 + %FXrates) We can separate net growth in earnings from changes due foreign exchange by solving for %FXrates: TE(1 + = TE(1 + + %TE) %TEcc)(1 %FXrates) (1 + %TE) = (1 + %TEcc) %FXrates) (1 + = (1 +(1 + %TE) %FXrates) (1 + %TEcc) (1 + %FXrat = – FYI %TE) (1 only es + %TEcc) 1 P1.10 Blundell Biotech c) Using the results of the 'constant currency analysis in part b, is it possible to separate Blundell's growth in earnings between local currency earnings and foreign exchange rates changes on a consolidated basis? (1 + % Actual consolidated %FX – earnings) (1 + %CC = consolidated Earnings) 1 (1 + = – 5.74%) (1 + 1 4.94%) = 0.76% So, foreign exchange rates changes lifted 2014 local currency earnings by 0.76% 1.3 – The Theory of Comparative Advantage Assumes – free trade; perfect competition; no uncertainty; costless information; and no government interference Is about maximizing output given – Efficiencies of a country’s factors of production: land, labor, capital, technology just to name a few Benefits of specialization are realized through international trade, depending on – Terms of the trade – Quantities traded Neither Country is worse off than before trade, and typically both are better off economically, perhaps unequally Some workers and investors will benefit, others will not So, is trade good? – Yes, if the trading partners can agree on the terms, and they are beneficial enough to make the trade worth the effort – Even better, if displaced workers can be re-trained – Remember, not everyone will benefit. Limitations of Comparative Advantage Governments Interfere for Economic and Political Reasons. Comparative advantage shifts over time. The Classical Comparative Advantage model does not address: – The effect of uncertainty and information costs. – The role of differentiated products in imperfectly competitive markets. – Economies of scale. Globalization and International Trade What Is International Trade? – Exchange of goods and services between countries. – A driver of international capital flows. – Is subject to government control. – Has grown tremendously since 1960. According to the IMF: – “driven by comparative advantage” – “living standards in both countries increase” – “makes the world better off” – “not every individual or company is better off” Globalization and International Trade What Is International Trade? – Exchange of goods and services between countries. – A driver of international capital flows. – Is subject to government control. – Has grown tremendously since 1960. According to the IMF: – “driven by comparative advantage” – “living standards in both countries increase” – “makes the world better off” – “not every individual or company is better off” Globalization and International Trade Why Go International? – Strategic motives drive the decision to invest abroad and become a MNE and can be summarized under the following categories: » Market seekers » Raw material seekers » Production efficiency seekers » Knowledge seekers » Political safety seekers – Take advantage of Market Imperfections » MNEs strive to take advantage of imperfections in national markets for products, factors of production, and financial assets. » Imperfections in the market for products translate into market opportunities for MNEs. » Large international firms are better able to exploit such competitive factors as economies of scale, managerial and technological expertise, product differentiation, and financial strength than their local competitors. Ch. 01 – The 5 Step Globalization (p15- Process Greate 18) r Foreign Presen ce Phase 1: Successful domestic operations Phase 2: International trade 1. Import/Export 2. Foreign sales and service offices 3. Contract production abroad using a licensing agreement Phase 3: Multinational phase 4. Joint venture, part ownership of a foreign subsidiary 5. Wholly Owned Subsidiary abroad Ch. 01 – The 5 Step Globalization Process 1. Import/Expor + Lowest risk approach, – Risks losing compared to FDI, JVs, tetc. markets to imitators and + Lowest political risk global – Working competitors thru a + Lowest cost Distributor or Reseller approach – Lack direct operational + Explore new markets control (cost, price quality) + Test firm products – Lack direct feedback from the final customer abroad – Losing markets to + Increase foreign imitators and global market knowledge competitors Ch. 01 – The 5 Step Globalization Process 2. Open Foreign Sales and Service Offices + Physical presence in the – No longer the low foreign country cost approach + Begin to add local – Must add staff abroad talent and expertise – Final local sale prices + Deeper market are based on home understanding country price plus transportation + Greater control over – Greater A/R operations, sales, and exposure service – Impact of higher costs on competitive position Ch. 01 – The 5 Step Globalization Process 3. Contract production abroad, Licensing + agreement Avoid large commitment of – License fees are funds lower than FDI profits – Possible loss of + Product costs are now local quality control + Final local sales prices are – Establishing based on local costs possible + More efficient competitors operations in foreign – Technological country improvements + Contract based exit by the licensee which then enter your strategy home market + Lower political risk – Possible loss of FDI than FDI or JVs opportunity at a later date – Less control over intellectual property Ch. 01 – The 5 Step Globalization Process 4. Part ownership of a foreign subsidiary - Joint venture + Partner has better – Not as common as understanding of local 100% owned customs, mores and foreign subs institutions of government – Increased political + Partners contacts, risk if wrong reputation, key technology partner is chosen – Governance issues, + Access to capable control of finance, mid-level management pricing/transfer pricing + Some countries do not – General control and allow 100% foreign ownership disclosure issues + Enhanced public image with partial ownership Ch. 01 – The 5 Step Globalization Process 5. Wholly Owned Subsidiary in a foreign country + Full global integration – May be labeled as a with the parent firm foreign exploiter + Intercompany transfers – High level of political across foreign countries risk + Management control – Tougher to exit + Most profitable – Increased when successful costs/investment Benefits of Globalization Globalization can be valuable. There is some evidence that workers in developed countries have not benefited. Globalization destroys some jobs and creates others. Some believe that government must intervene to better spread the newly created wealth by helping those that have been displaced by globalization. Investment in Retraining is key. P1.11 – Peng Plasma Pricing Manufactures and sells the PT 350 cutting torch at a fixed RMB(CNY) price of 18,000. RMB costs fell from 16,000(2007) to 14,200(2011). Costs started to rise in 2012. The Chinese Cost government Margi Pric Margin was continuously Avg ER the revaluing Pric RMB vs  USD Year (RM to 2014. from 2007 n e % (RMB/US e %Pric B) (RMB (RM D) (US e ) B) D) (USD ) 2007 16,000 2,000 18,000 11.1% 7.61 2,365 0 2008 15,400 18,000 6.95 2009 14,800 18,000 6.83 2010 14,700 18,000 6.77 2011 14,200 18,000 6.46 2012 14,400 18,000 6.31 2013 14,600 18,000 6.15 a. What has been the impact of Peng's pricing strategy on the USD 2014 14,800 18,000 6.16 price? How would you expect their U.S. dollar-based customers to have reacted to this? P1.11 – Peng Plasma Pricing Cost Margi Pric Margin Avg ER Pric  Year (RM n e % (RMB/US e %Pric B) (RMB (RM D) (US e ) B) D) (USD ) 2007 16,000 2,000 18,000 11.1% 7.61 2,365 0 2008 15,400 2,600 18,000 14.4% 6.95 2,590 9.5% Sample calculations for 2009 2008: Margin (RMB) = Price – Cost = 18,000 – 2,60 15,400 = 0 Margin x = x = % = Pric 2,600 Margin e 100% 18,00 100% 14.4% Price PriceRM 0 18,000 =B = = 2,590 (USD) 6.95 RMB RMB/US USD ER D RMB/USD ( P2008 – 2,590 −  = x 100% 9.5 x 100% 2,365 %PriceUSD P200 % = 2,365 = P2007 7) P1.11 – Peng Plasma Pricing Margi Year Cost (RMB) Price (RMB) Margin % Avg ER (RMB/USD) Price (USD) % Price (USD) n (RMB ) 2007 16,000 2,000 18,000 11.1% 7.61 2,365 0 2008 15,400 2,600 18,000 14.4% 6.95 2,590 9.50% 2009 14,800 3,200 18,000 17.8% 6.83 2,635 1.76% 2010 14,700 3,300 18,000 18.3% 6.77 2,659 0.89% 2011 14,200 3,800 18,000 21.1% 6.46 2,786 4.80% 2012 14,400 3,600 18,000 20.0% 6.31 2,853 2.38% 2013 14,600 3,400 18,000 18.9% 6.15 2,927 2.60% 2014 14,800 3,200 18,000 17.8% 6.16 2,922 -0.16% a. What has been the impact of Peng's pricing strategy on the USD price? How would you expect their U.S. dollar-based customers to have reacted to this? +23.5 4% P1.11 – Peng Plasma Pricing Cost Margi Pric Margin Avg ER Pric  Year (RMB n e % (RMB/US e %Pric ) (RMB (RMB D) (US e ) ) D) (USD) 2007 16,000 2,000 18,000 11.1% 7.61 2,365 0 2008 15,400 2,600 18,000 14.4% 6.95 2,590 9.50% 2009 14,800 3,200 18,000 17.8% 6.83 2,635 1.76% 2010 14,700 3,300 18,000 18.3% 6.77 2,659 0.89% 2011 14,200 3,800 18,000 21.1% 6.46 2,786 4.80% 2012 14,400 3,600 18,000 20.0% 6.31 2,853 2.38% 2013 14,600 3,400 18,000 18.9% 6.15 2,927 2.60% 2014 14,800 3,200 18,000 17.8% 6.16 2,922 -0.16% b. What has been the impact on Peng's margins from this pricing strategy? +21.1 % +17.8 % +11.1 % P1.13 – NexusTech Industries’ Consolidated Earnings Business Performance U.S. Parent Brazilian Sub German Sub Chinese Sub (000s) (USD) (BRL) (EUR) (CNY) Earnings Before Taxes (EBT) $4,500 R$6,250 €4,500 ¥2,500 Corporate Income Tax (%) 35% 25% 40% 30% Average ER (FC/1USD) 1 1.8 0.7018 7.75 Total diluted shares 650 outstanding a. What are NexusTech Industries’ after tax consolidated earnings per share? b. What is the proportion of Total Profits, by country? c. What is the proportion of Total Foreign Profits? P1.13 – NexusTech Industries’ Consolidated Earnings Business Performance U.S. Parent Brazilian Sub German Sub Chinese Sub (000s) (USD) (BRL) (EUR) (CNY) Earnings Before Taxes (EBT) $4,500 R$6,250 €4,500 ¥2,500 Corporate Income Tax (%) 35% 25% 40% 30% Corporate Income Tax (amt) $1,575 R$1,562.50 €1,800 ¥750 Net Profit (local currency) $2,925 R$4,687.50 €2,700 ¥1,750 Average ER (FC/1USD) 1 1.8 0.7018 7.75 Net Profits (USD) $2,925 $2,604.17 $3,847.25 $225.81 Consolidated Profits (USD) $9,602.22 Calculate Income tax amount and Net profit (U.S. Parent): Corporate Income Tax (amt) = EBT x Tax Rate = $4,500 x 35% = $1,575 Net Profit in local currency = EBT – Tax amount = $4,500 – $1,575 = $2,925.00 (Net Profit in (R$4,687. = = Net Profit Convert Local Earnings FC) (Brazilian in (USD)to USD ER 50) subsidiary): $2,604.17 = (FC/1USD) 1.8 Calculate Consolidated profits in USD: R$/USD Consolidated Profits in (USD) = $2,925 + $2,604.17 + $3,847.25 + $225.81 = $9,602.22 P1.13 – NexusTech Industries’ Consolidated Earnings Business Performance U.S. Parent Brazilian Sub German Sub Chinese Sub (000s) (USD) (BRL) (EUR) (CNY) Earnings Before Taxes (EBT) $4,500 R$6,250 €4,500 ¥2,500 Corporate Income Tax (%) 35% 25% 40% 30% Corporate Income Tax (amt) $1,575 R$1,562.50 €1,800 ¥750 Net Profit (local currency) $2,925 R$4,687.50 €2,700 ¥1,750 Average ER (FC/1USD) 1 1.8 0.7018 7.75 Net Profits (USD) $2,925 $2,604.17 $3,847.25 $225.81 Consolidated Profits (USD) $9,602.22 Consolidated EPS (650,000 $14.77 shares) Proportion of Total Profits by 30.5% 27.1% 40.1% 2.4% Country Proportion of Total Foreign 69.5% a. What are NexusTech Industries’ after tax consolidated Profits earnings per share? Consolidated Profits $9,602. = Consolidated Earnings per Share Total Diluted Shares = 22 Outstanding $14.77 650 (EPS) = b. What is the proportion of Total Profits, by country? (Net Profit in USD) ($2,925) = = For the Parent Sub (Consolidated ($9,602. 30.5% = Profits) x 22) x c. What is the proportion of Total Foreign Profits? 100% 100% Proportion of Total Foreign Profits = 27.1% + 40.1% + 2.4% = 69.5% P1.17 – NexusTech’s Earnings and Global Taxation Return to the original set of baseline assumptions and answer the following questions regarding NexusTech’s global tax liabilities: a. What is NexusTech’s consolidated global corporate income tax amount in USD? b. What is NexusTech’s effective tax rate? P1.17 – NexusTech’s Earnings and Global Taxation Business Performance U.S. Parent Brazilian Sub German Sub Chinese Sub (000s) (USD) (BRL) (EUR) (CNY) Average ER (FC/1USD) 1 1.8 0.7018 7.75 EBT (local currency) $4,500 R$6,250 €4,500 ¥2,500 EBT (USD) $4,500 $3,472 $6,412 $323 Corporate Income Tax (%) 35% 25% 40% 30% Corporate Income Tax (USD) $1,575 $868 $2,565 $97 a. What is NexusTech’s consolidated global corporate income tax amount in USD? Sample calculations for the Brazilian subsidiary: EBT Local R$6,2 EBT (USD) = = Currency 50 $3,472 ER(FC/1USD) 1.8R$/ = Corporate Income Tax income $= EBT (USD) x = $3,472 x = tax (USD) Tax (%) 25% $868 b. What is NexusTech’s effective tax rate? Effective Tax Consolidated Corp income = tax (USD) Consolidated Rate (%) EBT (USD) $1,575 + $868 + $2,565 $5,104 = = = + $97.6 34.7% $4,500 + $3,472 + $14,70