Deck 18: Multinational Cash Management

Question 1

Which of the following statements about transfer pricing is true?

A) The lower the transfer price, the larger the gross profits of the transferring division relative to the receiving division.
B) Very high markup policy used in the transfer pricing to a subsidiary makes the adjusted present value (APV) of that subsidiary's capital expenditure appear more attractive.
C) Very low markup policy used in the transfer pricing to a subsidiary makes the adjusted present value (APV) of that subsidiary's capital expenditure appear less attractive.
D) The higher the transfer price, the larger the gross profits of the transferring division relative to the receiving division.

Answer 1

D

Question 2

If foreign exchange transactions cost ABC 0.45 percent,what savings results from netting?

A) S$684
B) S$765
C) S$1,449
D) S$1,823

Answer 2

B
Explanation: Savings for the planning period = S$170,000 × 0.0045 = S$765Brean - Chapter 18 #13

Question 3

When a country enforces exchange controls the profits of a subsidiary in that country are referred to as:

A) stuck funds.
B) locked profits.
C) blocked funds.
D) lost funds.

Answer 3

C

Question 4

The prices at which goods are sold by one division to another are called:

A) internal prices.
B) transfer prices.
C) intra-firm prices.
D) translation prices.

Question 5

Which of the factors affect the optimal transfer pricing?

A) Import duties.
B) Differential income tax rates.
C) The existence of block funds.
D) All of these factors affect the optimal transfer pricing.

Question 6

Calculate the increase in annual after-tax profits if the higher transfer price of $1,250 per unit is used.

A) $250,000
B) $500,000
C) $1,000,000
D) $1,250,000

Question 7

The following information is available for Company ABC.
(All amounts provided are in US dollars)
$\begin{array}{lll}&\text { Manufacturing Affiliate } & \text { Sales Affiliate } \\&\text { (Canada, income tax rate: } & \text { (United States, income } \\&40 \% \text { ) } & \text { tax rate: } 30 \% \text { ) }\\\text { Sales } & \_\_\_& \$ 10,000 \\\text { Cost of goods sold } & 5,000 &\_\_\_ \\\text { Operating expenses } & 1,000 & \$ 1,000\\ \text { Taxable income}\\ \text { Income taxes}\\ \text {Net income }\\\end{array}$

-If the transfer price is $8,000,what is the net income in Canada?

A) $800
B) $1,200
C) $2,000
D) $2,400

Question 8

Efficient cash management techniques can:

A) reduce the investment in cash balances and foreign exchange transaction expenses.
B) provide for enhanced return from the investment of excess cash.
C) result in borrowing at lowest rate when a temporary cash shortage exists.
D) All of these.

Question 9

Which of the following is not a basic method used by the internal revenue service (IRS)to establish an arm's-length price for tangible goods?

A) Comparable controlled price.
B) Comparable uncontrolled price.
C) Resale price.
D) Cost-plus approach.

Question 10

Which of the following statements about multilateral netting system are correct?
(i)- each affiliate nets all its inter-affiliate receipts against all its disbursements.
(ii)- it transfers or receives a balance,depending on whether it is a net payer or receiver.
(iii)- the net funds to be received by the affiliates will equal the net disbursements to be made by the affiliates.
(iv)- only two foreign exchange transactions are necessary since the affiliates' net receipts will always be equal to zero.
(v)- only two foreign exchange transactions are necessary since the affiliates' net disbursements will always be equal to zero.

A) Only (i) and (ii)
B) Only (i), (ii), and (iii)
C) Only (i), (ii), (iii), and (iv)
D) Only (i), (ii), (iii), and (v)

Question 11

The following information is available for Company ABC.
(All amounts provided are in US dollars)
$\begin{array}{lll}&\text { Manufacturing Affiliate } & \text { Sales Affiliate } \\&\text { (Canada, income tax rate: } & \text { (United States, income } \\&40 \% \text { ) } & \text { tax rate: } 30 \% \text { ) }\\\text { Sales } & \_\_\_& \$ 10,000 \\\text { Cost of goods sold } & 5,000 &\_\_\_ \\\text { Operating expenses } & 1,000 & \$ 1,000\\ \text { Taxable income}\\ \text { Income taxes}\\ \text {Net income }\\\end{array}$

-If the transfer price is $8,000,what is the income tax paid in the United States?

A) $300.
B) $400.
C) $700.
D) $1,000.

Question 12

"Unbundling fund transfers" from an MNC and to its affiliates refers to the following activity:

A) instead of lumping all costs into a single transfer price, for the MNC (parent firm) to recognize the cost of the physical good and each service separately that it provides to its affiliates.
B) in addition to charging for the cost of the physical good, for the parent firm to charge for technical training of the affiliates' staff, cost of worldwide advertising, royalty, licensing fee, and technology, whenever applicable.
C) used for removing blocked funds from a host country that is enforcing foreign exchange restrictions.
D) All of these.

Question 13

The following information is available for Company ABC.
(All amounts provided are in US dollars)
$\begin{array}{lll}&\text { Manufacturing Affiliate } & \text { Sales Affiliate } \\&\text { (Canada, income tax rate: } & \text { (United States, income } \\&40 \% \text { ) } & \text { tax rate: } 30 \% \text { ) }\\\text { Sales } & \_\_\_& \$ 10,000 \\\text { Cost of goods sold } & 5,000 &\_\_\_ \\\text { Operating expenses } & 1,000 & \$ 1,000\\ \text { Taxable income}\\ \text { Income taxes}\\ \text {Net income }\\\end{array}$

-The United States decides to block funds leaving the country.What is the optimum transfer price?

A) $6,000.
B) $7,000.
C) $9,000.
D) $10,000.

Question 14

The following information is available for Company ABC.
(All amounts provided are in US dollars)
$\begin{array}{lll}&\text { Manufacturing Affiliate } & \text { Sales Affiliate } \\&\text { (Canada, income tax rate: } & \text { (United States, income } \\&40 \% \text { ) } & \text { tax rate: } 30 \% \text { ) }\\\text { Sales } & \_\_\_& \$ 10,000 \\\text { Cost of goods sold } & 5,000 &\_\_\_ \\\text { Operating expenses } & 1,000 & \$ 1,000\\ \text { Taxable income}\\ \text { Income taxes}\\ \text {Net income }\\\end{array}$

-Assume that the US and Canadian governments impose no restrictions on transfer pricing.What transfer price should Company ABC charge?

A) $5,000.
B) $6,000.
C) $7,000.
D) $10,000.

Question 15

The following information is available for Company ABC.
(All amounts provided are in US dollars)
$\begin{array}{lll}&\text { Manufacturing Affiliate } & \text { Sales Affiliate } \\&\text { (Canada, income tax rate: } & \text { (United States, income } \\&40 \% \text { ) } & \text { tax rate: } 30 \% \text { ) }\\\text { Sales } & \_\_\_& \$ 10,000 \\\text { Cost of goods sold } & 5,000 &\_\_\_ \\\text { Operating expenses } & 1,000 & \$ 1,000\\ \text { Taxable income}\\ \text { Income taxes}\\ \text {Net income }\\\end{array}$

-If Canada changes its corporate income tax to 35%,does the optimum transfer price change?

A) Yes, it increases.
B) Yes, it decreases.
C) No, it doesn't change.
D) Need more information.

Question 16

Which of the following statements in not true about a centralized cash depository?

A) All cash is remitted to the central cash pool.
B) Excess cash is remitted to the central cash pool.
C) The central cash manager arranges to cover shortages of cash.
D) It facilitates fund mobilization.

Question 17

ABC Trading Company of Singapore purchases spices in bulk from around the world, packages them into consumer size quantities and sells them through sales affiliates in Hong Kong and the Unites States. For a recent month, the following payments matrix of inter-affiliate cash flows, stated in Singapore dollars, was forecasted.
ABC Trading Company Payments Matrix (SS000)
Disbursements by:
$\begin{array}{ccc}&\text { Singapore } & \text { Hong Kong } & \text { U.S. } \\\hline \text { Receipts by: }\\ \text {Singapore }&- &80 &110\\ \text {Hong Kong }&16 & -- & 44 \\ \text {U.S. }&22 & 50 & --\end{array}$

-Calculate,in Singapore dollars,the amount that the inter-affiliate foreign exchange transaction will be reduced by with multilateral netting.

A) S$152,000
B) S$170,000
C) S$322,000
D) S$405,000

Question 18

In reference to establishing "transfer prices" between the affiliates of an MNC,which of the following relates to the "resale" price approach?

A) Comparable uncontrolled price between unrelated firms.
B) The price at which the good is resold by the distribution affiliate is reduced by an amount to cover overhead costs and a reasonable profit.
C) Assumes that the manufacturing cost is readily available.
D) Is based on financial and economic models and econometric techniques.

Question 19

Assuming that the inter-affiliate cash flows are uncorrelated with one another,calculate the standard deviation of the portfolio of cash held by the centralized depository for the following affiliate members: (Round your final answer to nearest whole dollar) $$\begin{array} { l c c } \text { Affiliate } & \begin{array} { c } \text { Expected } \\\text { Transactions }\end{array} & \begin{array} { c } \text { Standard } \\\text { Deviation }\end{array} \\\hline \text { U.S. } & \$ 100,000 & \$ 40,000 \\\text { Canada } & \$ 150,000 & \$ 60,000 \\\text { Mexico } & \$ 175,000 & \$ 30,000 \\\text { Chile } & \$ 200,000 & \$ 70,000\end{array}$$

A) 60,000
B) 88,122
C) 104,881
D) 120,103

Question 20

Assume that Y pays a tax deductible tariff of 7 percent on imported merchandise.Calculate the increase in annual after-tax profits if the higher transfer price of $1,250 per unit is used. (Round intermediate values to nearest whole percentage.)

A) $50,000
B) $100,000
C) $125,000
D) $250,000

Question 21

Soleil Inc.has an affiliate in Brazil and one in South Africa.The entire production of the South Africa affiliate is sold to the affiliate in Brazil which sells the final product to customers.The Brazilian affiliate has sales of 1000 and overhead costs of 100.The cost of goods sold in South Africa is 500 and overhead amounts to 300.The income tax rates are 40 percent in Brazil and 20 percent in South Africa.Assume that neither South Africa nor Brazil put any restrictions on the transfer price.What is the optimal transfer price?
What are the total taxes paid?

Question 22

Asian Antiques of Bangkok,Thailand,buys antiques in Asia and sells them via sales affiliates in the United Kingdom and the Unites States.The following payments matrix of inter-affiliate cash flows,stated in Thailand is forecasted for next month.

Question 23

Which of the following helps to reduce the optimal size of the precautionary cash balances?

A) Transfer pricing.
B) Centralized cash depositary.
C) Differential income tax rates.
D) None of these.

Question 24

Using the national airlines of the host country that has enforced exchange rate controls is an example of:

A) direct negotiation.
B) export creation.
C) blocked funds.
D) creative thinking.

Question 25

Soleil Inc.has an affiliate in France and one in Singapore.The entire production of the French affiliate is sold to the affiliate in Singapore which sells the final product to customers.The Singaporean affiliate has sales of 300 and overhead costs of 20.The cost of goods sold in France is 150.The income tax rates are 40 percent in France and 20 percent in Singapore.Assume that neither Singapore nor France put any restrictions on the transfer price.What is the optimal transfer price?
What are the total taxes paid?

Question 26

Explain why governments regulate transfer prices for international transactions.What are the major rules that are applied?

Question 27

Unexpected Funds blockage is a:

A) credit risk.
B) unavoidable risk.
C) unlikely risk.
D) political risk.

Question 28

If inter-affiliate cash flows are uncorrelated with one another,what is the standard deviation of the portfolio of cash held by the centralized depository for the following affiliate members: