Discussion Board Scenario: You work as an analyst in the planning unit of a firm with international operations. From time to time, you might be called to a meeting to discuss certain aspects of international business. As you state your responses to the Discussion Board questions, assume that you are in a formal, management discussion. Your manager has asked that you state your sources when citing facts or important concepts, for good order.
Question 1A: You are in a group meeting regarding an issue facing your firm's wholly owned subsidiary in Argentina, which manufactures component parts for your U.S. assembly operations. The subsidiary has been financed by bank borrowings in the United States. One of the analysts in your planning unit has reported that the Argentina currency, the pesos, might still depreciate by 25% percent against the dollar on the foreign exchange markets over the next year. This is based on the expected inflation in the country. What actions, if any, would you recommend?
Question 1B: Your firm is considering building a $50 million factory in Brazil to produce processed food items. The investment is expected to produce net cash flows of $7.5 million each year for the next 10 years, after which the investment will have to close because of technological obsolescence. Scrap values will be zero. The cost of capital will be 3 percent if financing is arranged through the Eurobond market. However, you have an option to finance the project by borrowing funds from a Brazilian bank at 6 percent. Analysts tell you that due to high inflation in Brazil, the Brazilian Real is expected to depreciate against the US dollar. Analysts also rate the probability of serious political unrest occurring in Brazil within the next 10 years as high. How would you incorporate these factors into your evaluation of the investment opportunity? What would you recommend the firm do?
Question 1C: Read the articles below and feel free to refer to related articles and respond to the questions below.
http://blogs.wsj.com/deals/2011/05/11/dealpolitik-lesson-from-microsoftskype-congress-must-fix-corporate-tax-law/ (Links to an external site.)
http://thinkprogress.org/economy/2011/05/13/165902/microsoft-skype-tax-havens/ (Links to an external site.)
Do you think it is ethical for companies like Microsoft to continue to hold cash overseas in order to avoid paying U.S. corporate income taxes? Is this practice always in the best interests of the company's shareholders? What do you think are the opportunity costs of holding tens of billions of dollars of cash in foreign locations? What potential benefits might accrue to Microsoft shareholders if it returned some of that cash to the United States?