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Multinational Business Finance 10th Edition Chapter # 1 Financial Goals & Corporate Governance

Solution Manual

Problem # 1.1: Shareholder returns.

Solution:

What are the shareholder's returns? Assumptions Value Part (a)

Value Part (b) Share price, P1 $ ---- $ 1.00 16.00 $ 16.00Share price, P2 $ 18.00 $ 18.00Dividend paid, D2 $

a. If the company paid no dividend (plugging zero in for the dividend): Return = (P2 - P1 + D2) / (P1)Return = $18.00 - $ 16.00 / $16.00 = $2.00 / $16.00Return = 12.50% b. Total shareholder return, including dividends, is: Return = (P2 - P1 + D2) / (P1)Return = (P2 - P1 + D2) / (P1)Return = $18.00 - $ 16.00 + $1.00 / $16.00 = $2.00 / $16.00Return = 18.75% Problem # 1.2: Shareholder choices.Solution:

Assumptions Value Share price, P1 $ 62.00Share price, P2 $ 74.00Dividend paid, D2 $ 2.25Return = (P2 - P1 + D2) / (P1)Return = $74.00 - $ 62.00 + 2.25 / $62.00 = $14.25.00 / $62.00Return = 22.98%The share's expected return of 22.98% far exceeds the required return by Mr. Fong of 12%. He should therefore make the investment

Multinational Business Finance 10th Edition Problem # 1.3: Microsoft's dividend.Solution:

Solution Manual

What would the return have been on Microsoft shares if it had paid a constantdividend in the recent past? AssumptionsClosingSharePriceIf DividendPaidShareholderReturn(withoutDividend )ShareholderReturn(withDividend) 1998 (January 2) $131.131999 (January 4) $141.00 $0.16 7.53% 7.65%2000 (January 3) $116.56 $0.16 -17.33% -17.22%2001 (January 2) $ 43.38 $0.16 -62.78% -62.65%2002 (January 2) $ 67.04 $0.16 54.54% 54.91%2003 (January 2) $ 53.72 $0.16 -19.87% -19.63% a. Average shareholder return for the period : Return = (P2 - P1 + D2) / (P1)Return = $74.00 - $ 62.00 + 0 / $62.00 = $14.25.00 / $62.00Return = 7.58% b. Total shareholder return if Microsoft had paid a constant dividend: Return = (P2 - P1 + D2) / (P1)Return = $74.00 - $ 62.00 + 0 / $62.00 = $14.25.00 / $62.00Return = 7.39% Problem # 1.4: Dual Classes of Common Stock.Solution:

What are the implications for the distribution of voting rights and dividenddistributions for Powlitz? Powlitz ManufacturingLocalCurrency(millions)VotespershareTotalVotes Long-term debt 200 0 0Retained earnings 300 0 0Paid-in common stock: 1 million Ashares 100 10 *1,000Paid-in common stock: 4 million B-shares 400 1 ** 400Total long-term capital 1,000 --- 1,400

Notes: *100 x 10 = 1,000 vote ** 400 x 1 = 400 votes a. What proportion of the total long-term capital has been raised by A-shares? A-shares / Total long-term capital = 100 / 1,000 = 10.00% b. What proportion of voting rights is represented by A-shares? A-share total votes / Total Votes = 1,000 / 1,400 = 71.43% c. What proportion of the dividends should the A-shares receive? A-shares in local currency / Total equity shares in local currency= 100 / (100 + 400) = 20.00% Problem # 1.5: Corporate Governance: Minority Shareholder ControlSolution:

Distribution of profits versus distribution of voting rights and power. a) Investor GroupSolpart ParticpacoesVotingSharesPreferredSharesTotalShares Telecom Italia 38.00% 38.00% 38.00%Pension Funds32% of Techold Particpacoes shares 3.52% 19.84% 10.88%(0.32 (11%); 0.32 (62%); and 0.32 (34%)Combined Telecom Italia & Pension Funds 41.52% 57.84% 48.88%Opportunity100% of Timepart Particpacoes shares 51.00% 0.00% 28.00%68% of Techold Particpacoes shares 7.48% 42.16% 23.12%Combined Opportunity 58.48% 42.16% 51.12%Total Shares 100.00% 100.00% 100.00% b) Opportunity would continue to control the voting rights of SolPart, which in turncontinues to own 58.48% of the voting shares in Brasil Telecom Participacoes,which in turn owns 93.6% of the voting shares in Brasil Telecom. Thuspportunity is able to use its control of holding companies to control BrasilTelecom. Problem # 1.6: Price/Earnings Ratios and AcquisitionsSolution:

CompanyP/ERatioNumberof sharesMarketvaluepershare Earnings EPSTotalMarketValue Pharm-Italy 2010,000,000 $20.00 $10,000,000 $1.00 $200,000,000Pharm-USA 4010,000,000 $40.00 $10,000,000 $1.00 $400,000,000Rate of exchange: Pharm-USA shares per Pharm-Italy share = 5,500,000 a.

How many shares would Pharm-USA have outstanding after the acquisitionof Pharm-Italy? $10,000,000 + 5,500,000 = 15,500,000Because Pharm-Italy shares are worth $20 per share, they are only worth one-half the value per share of Pharm-USA's $40 per share. So, on a straight exchange, 1Pharm-USA share is worth 2 Pharm-Italy shares. But, Pharm-USA also needs to paya premium for gaining control of Pharm-Italy, so it pays an additional 10% over market. So, Pharm-USA pays:10 million / 2 x (1 + 10% premium) = b. What would be the consolidated earnings of the combined Pharm-USA andPharm-Italy? Pharm-Italy earnings + Pharm-USA earnings = $20,000,000 c. Assuming the market continues to capitalize Pharm-USA's earnings at a P/Eratio of 40, what would be;

P/E x Consolidated earnings = 40 x $20,000,000 = $800,000,000 d. What is the new earnings per share of Pharm-USA? $20,000,000 / 15,500,000 shares = $1.29 e. What is the new market value of a share of Pharm-USA? New market value / Total shares outstanding= $800,000,000 /15,500,000 = $51.61 f. How much did Pharm-USA's stock price increase? Share price rose from $40.00 to $51.61.Percentage increase = 29.03% g. Assume that the market takes a negative view of the acquisition and lowersPharm-USA's P/E ratio to 30. What would be the new market price per shareof stock? What would be its percentage loss? New market value = Total earnings x P/E = $20,000,000 x 30 = $600,000,000New market price per share = total market value / shares outstanding = $38.71 Percentage loss to original Pharm-USA shareholders = ($38.71 - $40.00) / ($40.00)= - 3.23% Problem # 1.7: Solution: CompanyP/EratioNumberof sharesMarketvalueper share Earnings EPSTotalMarketValue Pharm-Italy 20 10,000,000 $ 20.00 $10,000,000 $1.00 $200,000,000Pharm-USA 40 10,000,000 $20.00 $5,000,000 $1.00$200,000,000 Corporate Governance: Overstating Earnings

If earnings were lowered to $5 million from the previously reported $10 million,could Pharm-USA still do the deal? To do the deal, Pharm-Italy's shareholders need to be paid their market value plus a10% premium = $220,000,000At new market rates for Pharm-USA, this would require the offer of ($220 million/$20per share) = 11,000,000.00 SharesThese 11 million shares would exceed Pharm-USA's existing shares outstanding,effectively giving Pharm-Italy control. Therefore the acquisition would probably nottake place. Problem # 1.8: Carlton Corporation's Consolidated ResultsSolution:S.No.1 2 1 x 2 = 3Amount TaxrateCorporateIncome taxes US Parent Company (US$) 4,500.00 35% $ 1,575.00Brazilian Subsidiary (reais, R$) 6,250.00 25% R$ 1,562.50German Subsidiary (Euros, ) 4,500.00 40% 1,800.00Chinese Subsidiary (Renminbi, Rmb) 2,500.00 30% Rmb 750.00 Business Performance (000s)US ParentCompany(US$)BrazilianSubsidiary(reais, R$)GermanSubsidiary(euros, )ChineseSubsidiary(renminbi,Rmb) Earnings before taxes, EBT( local currency)4,500.006,250.004,500.002,500.00Less: Corporate income taxes(1,575.00)(1,562.50)(1,800.00)(750.00)Net profits of individualsubsidiary2,925.004,687.502,700.001,750.00Average exchange rate for theperiod (foreign currency / $) ------3.50000.926008.5000Net profits of individualsubsidiary (US$) $ 2,925.00 $ 1,339.29 $ 2,915.77 $ 205.88

IM Science, KUST, Solution Manual of MBF 10 t th Edition Prepared By Wasim Uddin Orakzai 14 a. Consolidated earnings pershare (EPS) $ 11.36

b. Proportion of total profitsoriginating by country 39.6% 18.1% 39.5% 2.8% c. Proportion of total profitsoriginating from outside theUS.

60.4% Problem # 1.9: Carlton's EPS Sensitivity to Exchange RatesSolution:S.No.1 2 1 x 2 = 3Amount TaxrateCorporateIncome taxes US Parent Company (US$) 4,500.00 35% $ 1,575.00Brazilian Subsidiary (reais, R$) 6,250.00 25% R$ 1,562.50German Subsidiary (Euros, ) 4,500.00 40% 1,800.00Chinese Subsidiary (Renminbi,Rmb) 2,500.00 30% Rmb 750.00 Business Performance (000s)US ParentCompany(US$)BrazilianSubsidiary(reais, R$)GermanSubsidiary(euros, )ChineseSubsidiary(renminbi,Rmb) Earnings before taxes, EBT(local currency) 4,500.00 6,250.004,500.00 2,500.00Less: Corporate income taxes(1,575.00)(1,562.50)(1,800.00)(750.00)Net profits of individualsubsidiary2,925.004,687.502,700.001,750.00Avg exchange rate for the ------ 4.5000 8.

IM Science, KUST, Solution Manual of MBF 10 t th Edition Prepared By Wasim Uddin Orakzai 15period (fc/$) 0.92600 5000Net profits of individualsubsidiary (US$) $2,925.00 $1,041.67 $2,915.77 $205.88Consolidated profits (totalacross units) $ 7,088.32Total diluted sharesoutstanding (000s)650.00Baseline EPS $11.36 a . If Brazilian real falls to R$4.50/$: EPS = $ 10.91EPS has fallen 4 percent from baseline = Business Performance (000s)US ParentCompany(US$)BrazilianSubsidiary(reais, R$)GermanSubsidiary(euros, )ChineseSubsidiary(renminbi,Rmb) Earnings before taxes, EBT(local currency) 4,500.00 5,800.00 4,500.00 2,500.00Less: Corporate income taxes(1,575.00)(1,562.50)(1,800.00)(750.00)Net profits of individualsubsidiary2,925.00 4,350.00 - 4.0%

2,700.001,750.00Avg exchange rate for theperiod (fc/$) ------ 4.50000.926008.5000Net profits of individualsubsidiary (US$) $2,925.00 $966.67 $2,915.77 $205.88Consolidated profits (totalacross units) $ 7,013.32Total diluted sharesoutstanding (000s)650.00Baseline EPS $11.36 b. If Brazilian real falls to R$4.50/$: EPS = $ 10.79EPS has fallen 4 percent from baseline = - 5.0%

Problem # 1.10: Carlton's Earnings & Global TaxationSolution:S.No.1 2 1 x 2 = 3 4 3 4 = 5Amount TaxrateCorporateIncome taxesExchangeRateCorporateIncometaxes in $ US Parent Company(US$) 4,500.00 35% $ 1,575.00 ----- $1,575.00Brazilian Subsidiary(reais, R$) 6,250.00 25% R$ 1,562.50 R$3.5000 /$ $ 446.43German Subsidiary(Euros, ) 4,500.00 40% 1,800.00 0.92600 /$ $1,943.84Chinese Subsidiary(Renminbi, Rmb) 2,500.00 30% Rmb 750.00 Rmb 8.5000 $ 88.24 Business Performance (000s)US ParentCompany(US$)BrazilianSubsidiary(reais, R$)GermanSubsidiary(euros, )ChineseSubsidiary(renminbi,Rmb) Earnings before taxes, EBT(local currency) 4,500.00 6,250.004,500.00 2,500.00Less: Corporate income taxes(1,575.00)(1,562.50)(1,800.00)(750.00)Net profits of individualsubsidiary2,925.004,687.502,700.001,750.00Average exchange rate for theperiod (foreign currency / $) ------ 3.5000 0.92600 8.5000Net profits of individualsubsidiary (US$) $2,925.00 $1,339.29 $ 2,915.77 $205.88Consolidated profits (totalacross units) $ 7,385.93Total diluted sharesoutstanding (000s)650.00Baseline EPS $11.36Tax payments by country in $1,575.00 $ 446.43 $ 1,943.84 $ 88.24 US dollars a. Total global tax bill, US$ = $1,575.00 + $ 446.43 + $ 1,943.84 + $ 88.24Total global tax bill, US$ = $ 4,053.51 Part b.Business Performance(000s)US ParentCompany(US$)BrazilianSubsidiary(reais, R$)GermanSubsidiary(euros, )ChineseSubsidiary(renminbi,Rmb) EBT by country, US$ $ 4,500.00 $1,785.71 $4,859.61 $ 294.12Consolidated EBT $11,439.44Total Global tax bill in $ $ 4,053.51Carlton's Effective tax rate 35.43% Calculation Notes: Consolidated EBT = $ 4,500.00 + $1,785.71 + $4,859.61 + $ 294.12Consolidated EBT = $11,439.44 Total global tax bill, US$ =

$ 4,053.51 => $ 4,053.51 $11,939.44 = 35.43% c. What would be the impact on Carlton's EPS and global effective tax rate if Germany instituted tax cut to 28% and German subsidiary earnings rose to 5million euros? After plugging in the new values, EPS = $ 12.86Effective tax rate = 30.20% S.No.1 2 1 x 2 = 3 4 3 4 = 5Amount TaxrateCorporateIncome taxesExchangeRateCorporateIncometaxes in $ US Parent Company(US$) 4,500.00 35% $ 1,575.00 ----- $1,575.00Brazilian Subsidiary(reais, R$) 6,250.00 25% R$ 1,562.50 R$3.5000 /$ $ 446.43German Subsidiary(Euros, ) 4,500.00 28% 1,260.00 0.92600 /$ $ 1,360.69

Chinese Subsidiary(Renminbi, Rmb) 2,500.00 30% Rmb 750.00 Rmb 8.5000 $ 88.24Total global tax bill, US$ = $1,575.00 + $ 446.43 + $ 1,360.69 + $ 88.24Total global tax bill, US$ = $ 3,470.39 Consolidated EBT = $ 4,500.00 + $1,785.71 + $ 4,911.53 + $ 294.12Consolidated EBT = $11,491. 36

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