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1. What if funds are blocked? How does this affect the parent company? 2. From the perspective of the subsidiary, what if the subsidiary provided the funds? 3. How does the source of capital affect the subsidiary and the parent company? 4. What source(s) of capital would minimize the cost of capital to the subsidiary?

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A US manufacturing organization is planning to extend operations into Canada. I am needing help conducting a sensitivity analysis, based on the following "what if" scenarios:

1. What if funds are blocked? How does this affect the parent company?
2. From the perspective of the subsidiary, what if the subsidiary provided the funds?
3. How does the source of capital affect the subsidiary and the parent company?
4. What source(s) of capital would minimize the cost of capital to the subsidiary?

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There is no data supplied so I am to use assumed data for the analysis but the data must be supported so the justifications for the results can be clearly seen. Also, no specific formula is required but the changes in outcome given varying scenarios and assumptions must be made clear.

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Solution Preview

A US manufacturing organization is planning to extend operations into Canada. I am needing help conducting a sensitivity analysis, based on the following "what if" scenarios:

1. What if funds are blocked? How does this affect the parent company?

Subsidiaries of MNCs typically send funds back to their parents to repay intercompany loans, remit dividends, and pay for supplies and other administrative services. When host governments experience a foreign exchange shortage, they may block the transfer of funds back to the parent.
Thus it will adversely affect the parent company. This is because it will not get any funds from its Canadian subsidiary. Suppose the Parent company has invested $2 mn and the Subsidiary wants to repatriate back to it. It will not be able to do this is funds are blocked. The Parent company will be deprived of this cash inflow. Thus Parent's cash inflow will be less by $2mn.

2. From the perspective of the subsidiary, what if the subsidiary provided the funds?
If subsidiary provided the funds then it may not have that grave impact as if the funds are provided by the Parent company. Suppose the subsidiary has made profits of $1mn and want to send to the Parent company as dividend then it will not be able to do this is funds are blocked. The Parent company will be deprived of this cash inflow. Thus Parent's cash inflow will be less by $1mn.

3. How does the source of capital affect the subsidiary and the parent company?

Source of capital affects the WACC of the business of the subsidiary company. WACC means weighted average cost of capital. Here The basic principles applicable to an international investment decision are similar to a domestic investment decision. The incremental cash flow of the investment should be discounted at an opportunity cost of capital appropriate to the risk of the investment. The investment should be accepted if the net present value is positive.

International Risk and Source of Capital
One factor that distinguishes the international investment decisions from the domestic investment decisions is that cash flows are earned in foreign currency. This fact should be considered while estimating the incremental cash flows. Moreover Firms must constantly assess the business environments of the countries they are already operating in as well as the ones they are considering investing in. This WACC should be adjusted by the country risk.

Problem in calculation of Beta and calculating cost of equity

Beta of a foreign investment can be calculated ...

Solution Summary

The expert determines what happens if funds are blocked. Your tutorial is 1,545 words plus two references.

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