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Chapter 5: Q12DQ (page 680)

What are the differences between a parallel loan and a fronting loan?

Short Answer

Expert verified

A parallel loan is a four-party agreement among two parent companies in different countries obtains money in their own currency and lend the money to the other local subsidiary. On the other hand, a fronting loan is an overseas subsidiary in which one parent company, an intermediary, and usually a large international bank goes through the financial system.

Step by step solution

01

Loan

A loan is the amount of money that is borrowed and expected to be paid in the future with specified interest.

02

Difference between parallel loan and fronting loan

Basis

Parallel loan

Fronting loan

Meaning

An agreement between two parent companies located in two different countries whose subsidiary companies are located in each other鈥檚 country. In this case, both the parent companies take a loan of an equivalent amount in local currency and provide it to each other鈥檚 subsidiary companies. It is known as a parallel loan.

A fronting loan can be defined as the loan granted to the foreign subsidiary by the parent company through the involvement of a financial intermediary.

Foreign fund

Such an agreement does not require any movement he foreign funds.

Such loan requirement movement of foreign funds.

Financial institution

Such a loan does not require any involvement of the financial institution.

A financial institution such as a bank is involved in this loan process.

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Most popular questions from this chapter

The Jeter Corporation is considering acquiring the A-Rod Corporation.

The data for the two companies are as follows:

A-Rod Corp. Jeter Corp.

Total earnings ......................................................... \(1,000,000 \)4,000,000

Number of shares of stock outstanding ................. 400,000 2,000,000

Earnings per share ................................................. \(2.50 \)2.00

Price-earnings ratio (P/E) ....................................... 12 15

Market price per share ........................................... \(30 \)30

a.The Jeter Corp. is going to give A-Rod Corp. a 60 percent premium over

A-Rod鈥檚 current market value. What price will it pay?

b.At the price computed in part a,what is the total market value of A-Rod

Corp.? (Use the number of A-Rod Corp. shares times price.)

c.At the price computed in part a,what is the P/E ratio Jeter Corp. is assigning

A-Rod Corp?

d.How many shares must Jeter Corp. issue to buy the A-Rod Corp. at the

total value computed in part b?(Keep in mind that Jeter Corp.鈥檚 price per

share is $30.)

e.Given the answer to part d,how many shares will Jeter Corp. have after the

merger?

f.Add together the total earnings of both corporations and divide by the

total shares computed in part e.What are the new postmerger earnings per

share?

g.Why has Jeter Corp.鈥檚 earnings per share gone down?

h.How can Jeter Corp. hope to overcome this dilution?

Why do management and stockholders often have divergent viewpoints about the desirability of a takeover?

Chicago Savings Corp. is planning to make an offer for Ernie鈥檚 Bank & Trust. The stock of Ernie鈥檚 Bank & Trust is currently selling for \(44 a share.

a.If the tender offer is planned at a premium of 50 percent over market price, what will be the value offered per share for Ernie鈥檚 Bank & Trust?

b.Suppose before the offer is actually announced, the stock price of Ernie鈥檚 Bank & Trust goes to \)60 because of strong merger rumors. If you buy the stock at that price and the merger goes through (at the price computed in part a), what will be your percentage gain?

c.Because there is always the possibility that the merger could be called off after it is announced, you also want to consider your percentage loss if that happens. Assume you buy the stock at \(60 and it falls back to its original value after the merger cancellation, what will be your percentage loss?

d. If there is an 80 percent probability that the merger will go through when you buy the stock at \)60, and only a 20 percent chance that it will be called off, does this appear to be a good investment? Compute the expected value of the return on the investment.

What is a typical merger premium paid in a merger or acquisition? What effect does this premium have on the market value of the merger candidate, and when are most of this movement likely to take place?

What is LIBOR? How does it compare to the U.S. prime rate?
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