Fin 535 paper

International Investments. U.S.-based MNCs commonly HYPERLINK http//www.scribd.com/doc/109553382/417-1 o Click to Continue by websave investin foreign securities. a. Assume that the dollar is presently weak and is expected to strengthen over time. How will these expectations affect the tendency of U.S. investors to HYPERLINK http//www.scribd.com/doc/109553382/417-1 o Click to Continue by websave investin foreign securities ANSWER It can be suggested that if the dollar is strong, we get more shares for the same amount of dollars than before. so the good choice of us is when dollar is weak and is expected to strengthen then investments will increase when dollars strengthens. b. Explain how low U.S. interest rates can affect the tendency of U.S.-based MNCs to invest abroad. ANSWER The level of economic activity will be higher when the interest rate is low, which is same as HYPERLINK http//www.scribd.com/doc/109553382/417-1 o Click to Continue by websave fundare available at lower interest rates. so depends on this situation, the investors may prefer to invest in Us firms which have more chances of growth. c. In general terms, what is the attraction of foreign investments to U.S. investors ANSWER The main attraction is potentially higher returns. The international stock scan outperforms U.S. stocks, and international bonds can outperform U.S.bonds. However, there is no guarantee that the returns on international investments will be so favorable. Some investors may also pursue international investments to diversify their investment portfolio, which can possibly reduce risk. 14. Impact of Government Policies on Trade Governments of many countries enact policies that can have a major impact on international trade flows. a. Explain how governments might give their local firms a competitive advantage in the international trade arena. ANSWER. The classic political solution is protectionism. By limiting foreign competition, either through tariffs or quotas, companies and workers limit the ability of foreign goods to restrain domestic price increases. The government can also subsidize domestic firms in competing against foreign firms. These subsidies allow domestic firms and unions to perpetuate uneconomic work rules, wages, and productions processes. or since government intervention for the purpose of protecting home industries usually results in less competitive national companies. There is often strong domestic pressure to provide such protection. Yet research shows that a governments major role in international business may well be that of world trade negotiator. Many companies do business in other countries, but they have not developed the needed international perspective. This requires attention in three areas experience, focus, and attitude. One way to create an international perspective is to hire individuals with international experience. A second way is to emphasize the importance of international activities. A third way is to change the attitudes that many managers have toward their work. The changing demographics of the global The U.S. share of world output has declined dramatically in the past 30 years, and a much more balanced picture is now developing among industrialized countries. Looking ahead into the next century, the share of world output of what are now referred to as developing countries is expected to greatly surpass that of the current industrialized countries. b. Why might different tax laws on corporate income across countries allow firms from some countries to have an competitive advantage in the international trade arena ANSWER. In an efficient market, attempts to increase the value of a firm by purely financial measures or accounting manipulations are unlikely to succeed unless there are capital market imperfections or asymmetries in tax regulations. The net result of these research findings has been to focus attention on those areas and circumstances in which financial decisions and financial managers can have a measurable impact. The key areas are capital budgeting, working capital management, and tax management. The circumstances to be aware of include capital market imperfections, caused primarily by government regulations, and asymmetries in the tax treatment of different types and sources of revenues and costs. As such, the role of the financial manager is to search for and take advantage of capital market imperfections and tax asymmetries to increase after-tax profits and lower the cost of capital. As noted in the chapter, the value of good financial management is enhanced in the international arena because of the much greater likelihood of market imperfections and multiple tax rates. In addition, the greater complexity of international operations is likely to increase the payoffs from a knowledgeable and sophisticated approach to internationalizing the traditional areas of financial management. c. If a country imposes lower corporate income tax rates, does that provide an unfair advantage The statutory corporate tax rate is the rate that is imposed on taxable income of corporations, which is equal to corporate receipts less deductions for labor costs, materials, and depreciation of capital assets. In contrast, the effective corporate tax rate (ETR) measures the taxes a corporation pays as a percentage of its economic profit. Taxable income is less than economic profit when firms can exempt some income from tax, write off the cost of assets faster than their actual decline in value, or claim tax credits for certain business purchases. When taxable income is less than economic profit, a firms effective tax rate is less than its statutory rate. A third tax measure is the marginal effective tax rate (METR) on new investment, which assesses how much the corporate tax reduces the rate of return on new investment and is consequently the best measure of how taxes affect a firms incentive to invest. Or Corporate tax or company tax refers to a tax imposed on entities that are taxed at the entity level in a particular jurisdiction. Such taxes may include income or other taxes. The tax systems of most countries impose anincome tax at the entity level on certain type(s) of entities (company orcorporation). Many systems additionally tax owners or members of those entities on dividend or other distributions by the entity to the members. The tax generally is imposed on nettaxable income. Net taxable income for corporate tax is generally financial statement income with modifications, and may be defined in great detail within the system. The rate of tax varies by jurisdiction. The tax may have an alternative base, such as assets, payroll, or income computed in an alternative manner. 15. 15. China - U.S. Balance of Trade. There is an ongoing debate between the U.S. and China regarding whether the Chinese Yuans value should be revalued upward. The cost of labor in China is substantially lower than that in the U.S. a. Would the U.S. balance of trade deficit in China be eliminated if the yuan was revalued upward by 20 Or by 40 Or by 80 ANSWER This is an open question without a perfect answer. Yet, it should at least make students realize that a small increase in the value of the yuan is not going to make Chinese products more expensive than U.S. products in labor-intensive industries, given that Chinese wages may be less than one-tenth of U.S. wages in these industries. b. If the yuan was revalued to the extent that it substantially reduced the U.S. demand for Chinese products, would this shift the U.S. demand toward the U.S. or toward other countries where wage rates are relatively low In other words, would the correction of the U.S. balance of trade deficit have a major impact on U.S. productivity and jobs ANSWER. To the extent that there are decent substitute products in other low wage countries, it seems likely that U.S. consumers would just shift their demand toward the products in these countries. 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