Deck 20: Accounting and Finance in International Business

Question 1

What were the benefits to Microsoft's shareholders of using cash held overseas to purchase Skype

Answer 1

Case Overview:
The Company MSF had declared in the May 2011 that it would be purchasing the largest acquisition internet based communication company SKY with a cash deal of $8.5 billion. SKY has been previously purchased by Company EBY in 2005 for $3.1 billion. However, in 2009, Company EBY sold 70% of its stake to a group of partners SLP at $2.75billion. Just 18 months after this Company MSF was ready to purchase SKY for $8.5 billion dollars to integrate communication offerings with their MSF existing products.
The finance for the acquisition deal, MSF used cash from its overseas subsidiaries which have low tax rates. This was a smart move made by the MSF to get reduction from its home Country U. however, it was the same move made by Company EBY in its earlier acquisition where its corporate taxes rates of other countries.
Despite its all-cash deal, company MSF still holds $66 billion dollars in its foreign subsidiaries where this cash would subject to material repatriation tax.
Acquisition by Cash method:
Acquisition by cash is generally a form of payment where the shareholders prefer the deal where the acquirer's need is cash. This method is adopted by shareholders who do not sell the stock to gain an acquisition by any means. By implementing this method, they do not have to be concerned about the future performance of the company.
Benefits of Company MSF shareholders incur because of the SKY Cash deal acquisition are shown below:
The strategic benefits of the shareholders would be as follows:
• To establish a better standard in Internet voice calling and video sharing communication system than its competitors.
• It supports as a major integration application to the existing products of MSF Company.
• Creates a major competition platform for the current operating system, W7 of Company MSF.
• Leverages the networking effects and supports direct line communication for Company MSF.
The monetary benefit of shareholders would be as follows:
• No tax payment on the cash deal of overseas money as it would if it had repatriated the money to its Home Country U.
• It generates more revenue irrespective of the growth of the company in various countries.
• Gain in more permanently reinvested earnings outside the home Country U.
• Higher revenue generation with effective taxing strategy over cash deals from overseas in acquisitions.
• The Zero Interest rate policy has also triggered the use of cash deal acquisition which does not yield any interest and gives partial credit in the company MSF's balance sheet.
• Usage of dividend without paying taxes.

Question 2

Why do the accounting systems of different countries differ Why do these differences matter

Answer 2

The question asks the student to first, consider why different countries use different accounting systems. Second, it asks the student to consider why these differences are important. To begin, we will consider the first part.
Different countries employ different accounting systems because; accounting systems are result of a culture's evolution and needs. Therefore, one culture may demand different accounting information than another. These demands come from investors, banks, or the government itself.
The five specific factors that theorists believe dictate the accounting systems of a country. These are:
• Relationships between business and "providers of capital" (investors, banks, government): Assume that, the government is highly involved in business in a country (i.e. Sweden). This will shift accounting practices in favor of the needs of the government rather than individual investors.
• How the country interacts politically and economically with other countries. For instance, since the U.S. and Canada are closely tied in both of these aspects, these two countries have very similar accounting practices.
• Inflation rates affect how the country adjusts for inflation.
• Country's development level: In general, the more developed a nation, the more complicated its accounting systems.
• The overall culture: This can be discussed in light of the theory of "uncertainty avoidance," which refers to how comfortable a culture is with ambiguity. If a culture has a high tolerance for uncertainty, the accounting system will be simpler.
Now, moving on to the second part of the question, we will consider why these differences matter. These differences are significant, as we move toward a more global economy.
We must work toward creating standardized accounting practices so that we can compare companies and industries no matter how they stand in terms of the five factors above.

Question 3

Accounting and Finance in the International Business
Use the globalEDGE website (globaledge.msu.edu) to complete the following exercises:
The inflation rate of a country can affect financial planning in multinational corporations since the value of receivables in each country can face significant devaluation if the inflation rates are high. Your company has operations in the following countries: Belarus, Costa Rica, Finland, Iceland, Paraguay, Thailand, and Zimbabwe. Use the Country Comparator on the globalEDGE site to rank the risk of devaluation of your company's receivables from highest to lowest, based on the most recent data available for each country. What precautions can your company take in the countries at the top of this list to minimize the risk

Answer 3

not answer

Question 4

Microsoft's effective tax rate on foreign earnings retained overseas appears to be only 4 percent. How is this possible given that the corporate tax rate in most developed nations where Microsoft earns profits from foreign sales are considerably higher

Question 5

Why might an accounting-based control system provide headquarters management with biased information about the performance of a foreign subsidiary How can these biases best be corrected

Question 6

Accounting and Finance in the International Business
Use the globalEDGE website (globaledge.msu.edu) to complete the following exercises:
The top management of your company has requested information on the tax policies of Argentina. Using the country guide for Argentina on Deloitte International Tax and Business Guides -a resource that provides information on the investment climate, operating conditions, and tax systems of major trading countries-prepare a short report summarizing your findings on business taxation in Argentina.

Question 7

Why does Microsoft continue to hold so much cash overseas, rather than returning it to the United States 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

Question 8

You are the CFO of a U.S. firm whose wholly owned subsidiary in Mexico manufactures component parts for your U.S. assembly operations. The subsidiary has been financed by bank borrowings in the United States. One of your analysts told you that the Mexican peso is expected to depreciate by 30 percent against the dollar on the foreign exchange markets over the next year. What actions, if any, should you take

Question 9

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

Question 10

You are the CFO of a Canadian firm that is considering building a $10 million factory in Russia to produce milk. The investment is expected to produce net cash flows of $3 million each year for the next 10 years, after which the investment will have to close down because of technological obsolescence. Scrap values will be zero. The cost of capital will be 6 percent if financing is arranged through the eurobond market. However, you have an option to finance the project by borrowing funds from a Russian bank at 12 percent. Analysts tell you that due to high inflation in Russia, the Russian ruble is expected to depreciate against the Canadian dollar. Analysts also rate the probability of violent revolution occurring in Russia 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