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Chapter 5: Q16DQ (page 680)

Comment on any dilemmas that multinational firms and their affiliates may face regarding debt ratio limits and dividend payouts.

Short Answer

Expert verified

The debt ratio in many foreign countries is higher than that used by U.S. firms. This results in the dilemma of making the financial decision for foreign affiliates of the American firms.

Step by step solution

01

Definition of Financial ratios

The different comparisons made between the different line items of the financial statement to determine the financial status of the business entity are known as financial ratios.

02

Dilemmas regarding debt ratio limits

A foreign affiliate of an American firm faces a dilemma in its financing decision:

  • Should it follow the parent firm鈥檚 norms or that of the host county?
  • Who must decide this?
  • Will it be decided at the corporate headquarters in the United States or by the foreign affiliates?
03

Dilemmas regarding Dividend policy

Whether the dividend policy of the foreign subsidiary must be controlled by the parent company or the foreign company can control its dividend policy independently?

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Most popular questions from this chapter

The Clark Corporation desires to expand. It is considering a cash purchase of Kent Enterprises for \(3 million. Kent has a \)700,000 tax loss carryforward that could be used immediately by the Clark Corporation, which is paying taxes at the rate of 30 percent. Kent will provide $420,000 per year in cash flow (aftertax income plus depreciation) for the next 20 years. If the Clark Corporation has a cost of capital of 13 percent, should the merger be undertaken?

Assume the following financial data for Rembrandt Paint Co. and Picasso Art Supplies:

Rembrandt

Paint Co.

Picasso Art

Supplies

Total earnings ........................................................... \(1,200,000 \)3,600,000

Number of shares of stock outstanding ................... 600,000 2,400,000

Earnings per share ................................................... \(2.00 \)1.50

Price-earnings ratio (P/E) ......................................... 243 323

Market price per share.............................................. \(48 \)48

a.If all the shares of Rembrandt Paint Co. are exchanged for those of Picasso

Art Supplies on a share-for-share basis, what will post merger earnings

per share be for Picasso Art Supplies? Use an approach similar to that in

Table 20-3.

b.Explain why the earnings per share of Picasso Art Supplies changed.

c.Can we necessarily assume that Picasso Art Supplies is better off after the

merger?

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?

The postmerger P/E ratio can move in a direction opposite to that of the immediate postmerger earnings per share. Explain why this could happen

Assume the following financial data for the Noble Corporation and Barnes

Enterprises:

Noble

Corporation

Barnes

Enterprises

Total earnings ......................................................... \(1,820,000 \)5,620,000

Number of shares of stock outstanding ................. 650,000 2,810,000

Earnings per share ................................................. \(2.80 \)2.00

Price-earnings ratio (P/E) ....................................... 203 283

Market price per share............................................ \(56 \)56

a.If all the shares of the Noble Corporation are exchanged for those of Barnes

Enterprises on a share-for-share basis, what will postmerger earnings per share

be for Barnes Enterprises? Use an approach similar to that in Table 20-3.

b.Explain why the earnings per share of Barnes Enterprises changed.

c.Can we necessarily assume that Barnes Enterprises is better off after the

merger?
See all solutions

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