Question Tag: Financing

Search 500 + past questions and counting.
Professional Bodies Filter
Program Filters
Subject Filters
More
Tags Filter
More
Check Box – Levels
Series Filter
More
Topics Filter
More
  • 8 Marks

AFM – Nov 2017 – L3 – Q5b – Dividend policy in multinationals and transfer pricing

Discusses the factors that affect dividend repatriation policies in multinational companies.

The amount of dividends subsidiaries pay to the parent company depends on the parent company’s dividend policies. Dividend repatriation represents significant flow for parent companies and contributes to dividend payments.

Required:
Discuss FOUR factors that affect dividend repatriation policies of Multinational Companies. (8 marks)

The following are four factors that affect dividend repatriation policies of multinational companies:

  1. Tax Implications:
    One of the key factors influencing dividend repatriation is the tax regime in both the host country (where the subsidiary is located) and the parent company’s country. Subsidiaries in countries with lower corporate tax rates may prefer to retain earnings, as repatriating dividends to the parent company could result in higher tax liabilities. Additionally, parent companies may delay repatriation to minimize tax exposure or benefit from tax deferral opportunities.
  2. Financing Needs:
    The parent company’s cash flow requirements play a critical role in determining the amount and timing of dividends repatriated. If the parent company requires funds for domestic operations, investment opportunities, or to meet dividend commitments to its own shareholders, it may instruct subsidiaries to repatriate earnings. Conversely, subsidiaries may retain earnings to reinvest in local operations if the parent company’s financing needs are minimal.
  3. Exchange Rate Risks:
    Multinational companies face the risk of unfavorable exchange rate movements when repatriating dividends. If the currency in the subsidiary’s country is depreciating against the parent company’s home currency, the timing of repatriation can affect the amount of funds transferred. To manage this risk, parent companies may strategically time dividend repatriation to maximize returns and avoid losses from currency depreciation.
  4. Regulatory and Political Considerations:
    Government regulations in the subsidiary’s country may impose restrictions or controls on capital flows, limiting the amount of profits that can be repatriated. Political risks, such as expropriation or sudden changes in economic policy, may also discourage the repatriation of dividends. In some cases, subsidiaries are required to maintain a portion of their profits within the host country to comply with local regulations or to mitigate political risks.
  • 6 Marks

AFM – Nov 2017 – L3 – Q1b – Sources of finance and cost of capital

Analyzing financing alternatives for working capital of GH¢100,000 through bank loan, promissory notes, and cash discount.

Abbot Ltd needs to increase its working capital by GH¢100,000. It has decided that there are essentially three alternatives of financing available. They are:

i) Borrow from a bank at 8%. This alternative would necessitate maintaining a 25% compensation balance.

ii) Issue promissory notes at 7.5%. The cost of placing the issue would be GH¢500 each six months.

iii) Forego cash discount, granted on the basis of 3/10, net 30.

The firm prefers the flexibility of bank financing, and has provided an additional cost of this flexibility to be 1%.

Required: Assess which alternative financing method should be selected.

The costs of the three alternatives are:

 

 

  • 12 Marks

AFM – Nov 2018 – L3 – Q2a – International investment and financing decisions

Evaluate an international mining investment opportunity in South Africa using NPV approach for financial feasibility.

Rock Minerals Ltd (Rock) is a minerals mining company based in Ghana. Rock is considering an investment opportunity in South Africa, which involves developing and operating a gold mine and later transferring the mine to the South African government.

Last year, the directors commissioned a special committee to assess investments and regulatory requirements relating to the project. Based on the committee’s report, the directors estimate that it will take two years to develop the mine. Development of the mine entails an immediate outlay of ZAR1.2 million in regulatory requirement expenditures, an investment of ZAR20 million in plants and equipment in the first year, and ZAR15 million for development expenditure in the second year. The directors also estimate that Rock will invest ZAR2 million in net working capital at the beginning of the third year. The investment in net working capital is expected to be increased to ZAR3 million at the beginning of the fifth year.

Commercial production and sales are expected to begin in the third year. Below are estimated operating cash flows before tax in the first three years of commercial production:

Year Revenue collections (ZAR’ millions) Variable operating costs (ZAR’ millions) Fixed operating costs (ZAR’ millions)
3 100 40 20
4 150 50 25
5 210 80 30

At the end of the fifth year, Rock will transfer ownership and control of the mine to the South African government for an after-tax consideration of ZAR100 million. The special committee also reports that the income tax rate for mining operations is 30%, and capital expenditure in relation to acquisition of property, plant, and equipment, and development expenditure qualifies for capital allowance at the rate of 20% per annum on a straight-line basis. Capital allowance is granted at the end of each year of commercial production. On repatriation of profit, the committee reports that the South African government does not restrict the repatriation of profit, and there are no profit repatriation taxes. Rock would repatriate cash returns as they become available.

Rock plans to finance this project using existing capital. Rock’s after-tax cost of capital is 25% in Ghana. The annual rate of inflation is expected to be 11% in Ghana and 5% in South Africa in the coming years. Currently, the rate of exchange between the Ghanaian cedi (GH¢) and the South African rand (ZAR) is GH¢0.3822 = ZAR1.

Required:
Evaluate the project on financial grounds using the net present value (NPV) approach and recommend whether the investment proposal should be accepted for implementation or not.
(12 marks)

Evaluation of mining project using NPV with no restriction on repatriation
The project’s NPV

Recommendation:
The positive NPV of GH¢34.325 million suggests that the investment should be accepted as it will enhance the value of Rock Minerals Ltd.

Workings:

  1. Capital Allowance: Capital allowance is granted at 20% per annum on ZAR35 million starting from year 3, resulting in ZAR7 million of annual capital allowance.
  2. Exchange Rate Forecasting: Forecasted exchange rates based on purchasing power parity, assuming inflation rates of 11% in Ghana and 5% in South Africa

 

Take control of your business data with insight and in-depth understanding by taking this course. 

Services

Contact Info

  • +233203701923
    +233543919232
  • info@noohrabusiness.com

Get In Touch

Follow us on our social media and get daily updates.

Facebook-f Twitter Linkedin-in Envelope