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

P1 + D2) / (P1)Return = $74.87% -19.25.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) $131.16 7.00 + 0 / $62. Average shareholder return for the period : Return = (P2 .38 $0.65%2000 (January 3) $116.00 $0.00 .16 54.78% -62.000 --.63% a.00Return = 7.72 $0.16 -17.91%2003 (January 2) $ 53.54% 54.39% Problem # 1.56 $0.Multinational Business Finance 10th Edition Problem # 1.1.P1 + D2) / (P1)Return = $74.400 .00 / $62.131999 (January 4) $141.33% -17.04 $0.00 .4: Dual Classes of Common Stock.58% b.22%2001 (January 2) $ 43.$ 62. Total shareholder return if Microsoft had paid a constant dividend: Return = (P2 .16 -62.16 -19.00 = $14.000Paid-in common stock: 4 million B-shares 400 1 ** 400Total long-term capital 1.00 = $14.53% 7.$ 62.65%2002 (January 2) $ 67.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 *1.00Return = 7.3: Microsoft's dividend.25.00 + 0 / $62.00 / $62.

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.Notes: *100 x 10 = 1.16% 23.00% b.00% b) Opportunity would continue to control the voting rights of SolPart.5: Corporate Governance: Minority Shareholder ControlSolution: Distribution of profits versus distribution of voting rights and power.12%Total Shares 100.00 $400.000 / 1.6% of the voting shares in Brasil Telecom. What proportion of voting rights is represented by A-shares? A-share total votes / Total Votes = 1.000 $40.84% 48.00% 0.00 $10.00% Problem # 1. Problem # 1.32 (62%).000Rate of exchange: Pharm-USA shares per Pharm-Italy share = 5.00% 38.52% 19.000 $20.48% of the voting shares in Brasil Telecom Participacoes.000 $1.12%Combined Opportunity 58.00 $200. Thuspportunity is able to use its control of holding companies to control BrasilTelecom.48% 42.32 (34%)Combined Telecom Italia & Pension Funds 41.000 vote ** 400 x 1 = 400 votes a.000. . What proportion of the total long-term capital has been raised by A-shares? A-shares / Total long-term capital = 100 / 1.00% 28.00%Pension Funds32% of Techold Particpacoes shares 3.which in turn owns 93.16% 51.000.00%68% of Techold Particpacoes shares 7.00% 100.000.00 $10.000.52% 57.88%(0. 0.48% 42. which in turncontinues to own 58.32 (11%).000.000.000 $1.000 = 10.84% 10.6: Price/Earnings Ratios and AcquisitionsSolution: CompanyP/ERatioNumberof sharesMarketvaluepershare Earnings EPSTotalMarketValue Pharm-Italy 2010.00% 100.88%Opportunity100% of Timepart Particpacoes shares 51.000 a.000Pharm-USA 4010.500.43% c.00% 38. and 0.400 = 71. a) Investor GroupSolpart ParticpacoesVotingSharesPreferredSharesTotalShares Telecom Italia 38.

000 $ 20.How many shares would Pharm-USA have outstanding after the acquisitionof Pharm-Italy? $10.29 e. what would be.23% Problem # 1.00 to $51.000 $20.000 + 5. Pharm-USA pays:10 million / 2 x (1 + 10% premium) = b.000 = 15.000Pharm-USA 40 10.00)= .000.000 d. so it pays an additional 10% over market.71 Percentage loss to original Pharm-USA shareholders = ($38. So. What is the new market value of a share of Pharm-USA? New market value / Total shares outstanding= $800.7: Solution: CompanyP/EratioNumberof sharesMarketvalueper share Earnings EPSTotalMarketValue Pharm-Italy 20 10.3. But. they are only worth one-half the value per share of Pharm-USA's $40 per share.000 = $800.000 c.500.500.500.03% g.000.000.000.00) / ($40. P/E x Consolidated earnings = 40 x $20.61.000 /15.000 x 30 = $600.000 = $51.000.000 shares = $1.000.000. 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. Assume that the market takes a negative view of the acquisition and lowersPharm-USA's P/E ratio to 30.000 Corporate Governance: Overstating Earnings . So. on a straight exchange.71 .000.000.$40.61 f.00 $5. 1Pharm-USA share is worth 2 Pharm-Italy shares.000.Percentage increase = 29.00 $10. What would be the consolidated earnings of the combined Pharm-USA andPharm-Italy? Pharm-Italy earnings + Pharm-USA earnings = $20.000 $1. What is the new earnings per share of Pharm-USA? $20.000.000Because Pharm-Italy shares are worth $20 per share.500.000 / 15.00 $200. Assuming the market continues to capitalize Pharm-USA's earnings at a P/Eratio of 40.00$200.000.000. How much did Pharm-USA's stock price increase? Share price rose from $40. Pharm-USA also needs to paya premium for gaining control of Pharm-Italy.000 $1.000.000New market price per share = total market value / shares outstanding = $38.

500. Therefore the acquisition would probably nottake place.Rmb) Earnings before taxes. )ChineseSubsidiary(renminbi.800.562.50German Subsidiary (Euros.000At new market rates for Pharm-USA.00 SharesThese 11 million shares would exceed Pharm-USA's existing shares outstanding.77 $ 205.915. this would require the offer of ($220 million/$20per share) = 11.926008.562. Proportion of total profitsoriginating from outside theUS.004.00 25% R$ 1.6% 18.001.687. R$)GermanSubsidiary(euros. KUST.700.50)(1.8% c.1% 39.250. ) 4.925.500.500.500. .002.No.00 Business Performance (000s)US ParentCompany(US$)BrazilianSubsidiary(reais. Proportion of total profitsoriginating by country 39.502.29 $ 2.00 30% Rmb 750. Solution Manual of MBF 10 t th Edition Prepared By Wasim Uddin Orakzai 14 a.00)(1.000.250.8: Carlton Corporation's Consolidated ResultsSolution:S.00 35% $ 1.If earnings were lowered to $5 million from the previously reported $10 million.00 40% 1.006. Pharm-Italy's shareholders need to be paid their market value plus a10% premium = $220.000.500.36 b.000.5000Net profits of individualsubsidiary (US$) $ 2.00)Net profits of individualsubsidiary2.00Brazilian Subsidiary (reais.750.800.1 2 1 x 2 = 3Amount TaxrateCorporateIncome taxes US Parent Company (US$) 4.00 $ 1.50000.5% 2. Rmb) 2.339.00Chinese Subsidiary (Renminbi.88 IM Science.925.00)(750.500.00Less: Corporate income taxes(1. Problem # 1. EBT( local currency)4. R$) 6.00Average exchange rate for theperiod (foreign currency / $) ------3.effectively giving Pharm-Italy control.575.575. Consolidated earnings pershare (EPS) $ 11.004.could Pharm-USA still do the deal? To do the deal.

915.500.500.925.Rmb) Earnings before taxes.00)Net profits of individualsubsidiary2.800.50)(1.500.00 25% R$ 1.9: Carlton's EPS Sensitivity to Exchange RatesSolution:S.1 2 1 x 2 = 3Amount TaxrateCorporateIncome taxes US Parent Company (US$) 4.60.00 4.00 40% 1. If Brazilian real falls to R$4.800.36 a .562.925.575.50/$: EPS = $ 10.001.687.00 30% Rmb 750.004.250.00)(1.00 35% $ 1.700.50)(1.00)(1.00 5.4% Problem # 1.500.088.88Consolidated profits (totalacross units) $ 7.Rmb) Earnings before taxes.00 $1.00Less: Corporate income taxes(1.500.Rmb) 2.00Chinese Subsidiary (Renminbi. R$)GermanSubsidiary(euros.00Less: Corporate income taxes(1.575.00 2.50German Subsidiary (Euros.800. ) 4. )ChineseSubsidiary(renminbi.92600 5000Net profits of individualsubsidiary (US$) $2.00Brazilian Subsidiary (reais.00 4.00 2.500.502.00Avg exchange rate for the -----. R$)GermanSubsidiary(euros.00 .562. )ChineseSubsidiary(renminbi.500.91EPS has fallen 4 percent from baseline = Business Performance (000s)US ParentCompany(US$)BrazilianSubsidiary(reais.750.5000 8.925. EBT(local currency) 4.00 Business Performance (000s)US ParentCompany(US$)BrazilianSubsidiary(reais.004.67 $2.800. R$) 6.4.00 6.00)(750.32Total diluted sharesoutstanding (000s)650.575.500.No.250.00)Net profits of individualsubsidiary2.4.350.0% .041. Solution Manual of MBF 10 t th Edition Prepared By Wasim Uddin Orakzai 15period (fc/$) 0. EBT(local currency) 4.00)(750.00Baseline EPS $11.77 $205. KUST.500. IM Science.562.

915.2.926008. US$ = $ 4.575.50000.3.$1.001.77 $205.575.12Consolidated EBT $11.32Total diluted sharesoutstanding (000s)650.10: Carlton's Earnings & Global TaxationSolution:S.50/$: EPS = $ 10.61 $ 294.5000Net profits of individualsubsidiary (US$) $2.700.71 $4.013.00Avg exchange rate for theperiod (fc/$) -----.700.250.24 US dollars a.925.00 35% $ 1.750.43German Subsidiary(Euros.00 $ 446.5.24Total global tax bill.24 Business Performance (000s)US ParentCompany(US$)BrazilianSubsidiary(reais.79EPS has fallen 4 percent from baseline = .00 6.00)(750.500.36Tax payments by country in $1. Total global tax bill.687.50)(1.00)(1.562.12Consolidated EBT = $11.562.0% Problem # 1.925.51 Part b.84 $ 88.92600 /$ $1.00 25% R$ 1.053.88Consolidated profits (totalacross units) $ 7.00 $1.Business Performance(000s)US ParentCompany(US$)BrazilianSubsidiary(reais.5000 /$ $ 446.77 $205.00Less: Corporate income taxes(1. R$)GermanSubsidiary(euros.859. R$) 6.71 + $4.800.500.00Baseline EPS $11.1 2 1 x 2 = 3 4 3 ÷ 4 = 5Amount TaxrateCorporateIncome taxesExchangeRateCorporateIncometaxes in $ US Parent Company(US$) 4.575.001.859.250.800. )ChineseSubsidiary(renminbi.439. )ChineseSubsidiary(renminbi.51Carlton's Effective tax rate 35.500.00Brazilian Subsidiary(reais.500. ) 4.88Consolidated profits (totalacross units) $ 7. EBT(local currency) 4.5000Net profits of individualsubsidiary (US$) $2.00 + $1.93Total diluted sharesoutstanding (000s)650.500.5000 0.943.575.00 + $ 446.67 $2.00Baseline EPS $11.44Total Global tax bill in $ $ 4.915.50 R$3.339.84Chinese Subsidiary(Renminbi.00 $1. US$ = .750.575.00)Net profits of individualsubsidiary2.00 ----. US$ $ 4. R$)GermanSubsidiary(euros.00 30% Rmb 750.500.004.943.No.84 + $ 88.385.004.785.61 + $ 294.00 0.943. US$ = $1.00 Rmb 8.00Average exchange rate for theperiod (foreign currency / $) -----.785. If Brazilian real falls to R$4.502.43 $ 1.053.29 $ 2.43% Calculation Notes: Consolidated EBT = $ 4.4.500.500.5000 $ 88.00 $966.439.Rmb) EBT by country. Rmb) 2.00 2.36 b.92600 8.925.44 Total global tax bill.Rmb) Earnings before taxes.00 40% 1.43 + $ 1.

785.360.00 Rmb 8.00 0.24Total global tax bill.491.00 30% Rmb 750.260.500.5000 $ 88.$ 4.24Total global tax bill.43% c.5000 /$ $ 446.69 + $ 88.51 ÷ $11.575. US$ = $1.360.911.1 2 1 x 2 = 3 4 3 ÷ 4 = 5Amount TaxrateCorporateIncome taxesExchangeRateCorporateIncometaxes in $ US Parent Company(US$) 4. 36 .43German Subsidiary(Euros.500.470.562.939.51 => $ 4.20% S. US$ = $ 3.053. Rmb) 2.43 + $ 1.053.00 25% R$ 1.86Effective tax rate = 30.53 + $ 294.50 R$3. 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.00 + $ 446.00 28% 1.71 + $ 4. EPS = $ 12. ) 4.575.500.92600 /$ $ 1.12Consolidated EBT = $11.250.500.44 = 35. R$) 6.$1.69 Chinese Subsidiary(Renminbi.39 Consolidated EBT = $ 4.00Brazilian Subsidiary(reais.00 + $1.575.00 ----.00 35% $ 1.No.

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