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International Finance Case Study
Order Instructions:
Please comment/answer the following two questions.
1. What might have been some of the reasons Apple chose to raise debt capital in 2015 by issuing bonds denominated in Swiss Francs.?
2. Several large foreign corporations, such as Toyota, Siemens, and British Petroleum, list shares in U.S. stock exchanges. What are the main costs and benefits for these corporations to raise equity capital in the U.S.?
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The reasons why Apple chose to raise debt capital in 2015 by issuing bonds denominated in Swiss Francs
In 2015, the yields on European bonds hit a record low. Among the most affected were Germany and Switzerland. Given this situation, Apple Inc. took the opportunity to seek funding for capital processes that were due that year. These were mostly stock buybacks and payment of dividend due (United States Securities and Exchange Commission, 2015). In addition, Apple Inc. is among the crop of few companies with an AA1 credit rating. This implies that the firm is very attractive to investors in both the US capital markets, as well as the various international markets.
The main costs and benefits for foreign corporations to raise equity capital in the U.S.
Unlike in the past, multinationals are increasingly adopting to raising funding in capital markets abroad rather than at home. This is largely owing to the increasing rate of globalization, and the various benefits drawn by the firms. Among the benefits of global companies such as Toyota, Siemens, and British Petroleum raising capital in the US include a better standard of governance in the US capital markets…..
International Finance Case Study
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Multinational Enterprise
Order Instructions:
Please comment/answer the following two questions:
1. What are the main reasons that the cost of capital for a MNE tend to be lower than a domestic counterpart domiciled in the same country? 2. Describe a situation/reasons where the cost of capital for a purely domestic firm might be actually lower than for a MNE that is headquartered in the same country.
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Multinational Enterprise
Reasons why the cost of capital for an MNE tend to be lower than a domestic counterpart domiciled in the same country
A multinational enterprise operating in the global and international markets will tend to have a lower cost of capital. There are a number of scenarios and reasons for this phenomenon. A first is that the MNE has access to a wide array of capital markets, and hence a choice of more sources of funding (Moffett, Stonehill, & Eiteman, 2015, p. 292). Within these sources, there is a high probability of finding capital at a lower cost than is available in their home country.
A second reason is that the portfolio of securities available to a firm with operations in one country is only appealing to a small circle of investors within that state. On the other hand, an MNE has a portfolio of securities that appeal to both local and international investors (2015, p. 293).
A situation and/or reasons where the cost of capital for a purely domestic firm might be actually lower than for an MNE that is headquartered in the same country.
In some countries, the capital markets are well developed. Such scenarios are primarily in the economies where there is a high dependence on manufacturing……
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How did the Euro play a role in the budget crisis?
What’s the current status of Greece’s budgets?
Greece Budget Crisis
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Greece Budget Crisis
Factors leading to the budget crisis in Greece
Greece, among other European countries, suffered among the worst debt crises in about a century. While measures are slowly being put in place to reverse the effects of the debt crises, various lessons ought to be learned from the experience. In line with this agenda, the following is a description of some of the major factors that led to the occurrence of the debt crisis in Greece.
A widening budgetary deficit
Towards the close of the 20th century, Greece ranked among the highly developing nations. During this period, the debt levels of the country were fairly constant and manageable. However, at the start of the 21st century, the nation’s debt levels were steadily rising at alarming levels. This led to rising levels of deficit such that the country’s GDP could not cope up. This kept growing, with a reported figure of the debt level comprising 15.4% of the Greece’s domestic product (Kouretas & Vlamis, 2010, p. 394). This continuous increase in the deficit of the country is among the major factors that led to the crisis in Greece.
Absence of consolidated financial and economic reporting
The strengthening of economies and trade relations were the reasons for the formation of the Eurozone and the EU. As such, one would expect a strict level of standards with respect to reporting of economic and financial issues. However, the case on the ground was different, as each country carried on with individual standards. Therefore, when there were rising issues over the economic performance of some member states, there was nobody warranted to control the reporting of the issues nor provide fiscal discipline measures (Manessiotis, 2011, pp. 12 – 14). This led to lack of augmented reports between regimes, as well as the widespread misreporting of figures in Greece to cover up the real situation.
Disagreements among EU countries
During the period when Greece needed help and intervention from other EU member states, there were rampant political differences. The attempts by some nations to raise concern over the deteriorating issue found more criticism as to the legality of bailouts by the European Union (Kouretas & Vlamis, 2010, p. 396). The time taken to solve such disputed was crucial and could have saved the looming crisis. In addition, once the debt and economic crises spread to other nations in the Eurozone and the Balkans, there was more disagreement on which regions to aid first.
Deflation of the worsening situation
As observed, a major factor behind the Greek debt crises was the lack of swift action to mitigate the impending crisis. As an internal measure, Greece decided to deflate the figures in various reports of the situation. As an example, the debt levels had to be revised upwards from estimates of 6.5% and reported figures of 12.7% to 15.4% of the GDP in 2009 (Kouretas & Vlamis, 2010, p. 394). The attempted cover-up of the situation only made matter worse as it did not provide the need to fast-track an attempt at a solution.
The role of the Euro in the budget crisis
In an attempt to bail itself out of an impending crisis, Greece sought to acquire private and public debt to stabilize the economy. The increasing private debt within the Eurozone escalated the issue, with the dismal performance of the Euro owing to the global economic crisis in 2008 (New York Times, 2016)…..
Greece Budget Crisis
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Corporation Tax Liability
Aim:
The aim of this task is for you to demonstrate your ability to advise a company on its corporation tax liability and on some tax planning measures it might take to reduce that liability.
Scenario:
Your supervisor, Tom Scott has sent you;
a memo and predicted financial figures for Capricorn Ltd and
an email about an in-house training session which he is running next week.
He has asked you to prepare a PowerPoint presentation for him to use at a meeting with Capricorn next week together with a calculation of the company’s trading profit/loss. He has also asked you to prepare a few PowerPoint slides for him to use at the firm’s in-house tax training refresher.
Task:
(The task requires you to calculate a company´s liability to corporation tax and prepare two short PowerPoint presentations on the use of losses and the application of rollover relief respectively).
Corporation Tax Liability
Instructions:
Your tasks are:
To calculate Capricorn’s trading loss and chargeable gain based on the projected figures provided for the Financial Year 2017.
The calculation should follow Steps 1 and 2 of the template (see below).
However, keep the trading loss and chargeable gain figures separate as you will consider how to treat the loss in the second part of this task.
This calculation should be prepared in a separate document and accompany your presentations prepared in accordance with paragraphs 2) and 3) below.
To prepare a presentation to the directors of Capricorn Ltd explaining the ways
in which the projected loss which the company may make this year could be set off against the company’s previous, current or future income and/or gains.
The presentation should consist of between 6-7 PowerPoint slides; (Topic: Presentation to Capricorn Ltd On Corporation Tax – Treatment of Trading Losses)
The presentation should be structured as follows:
Slide 1: Title slide (with date and time)
Slide 2: The options available
A slide for each option explaining how the relief works
A slide showing how the relief works for Capricorn Ltd using
the figures you have calculated.
The slides should be accompanied by brief explanatory notes (typed into the ‘Notes’ section) which your supervisor could use when making the presentation.
To prepare a presentation for your supervisor to use at the training session next week to explain when and how roll-over relief on replacement of business assets may be used by a company to reduce its liability to corporation tax.
The presentation should consist of between 6-7 PowerPoint slides; (Topic: Training Session; Corporation Tax: Operation and Use of Rollover Relief)
The presentation should be structured as follows:
Slide 1: Title slide (with date and time)
Slide 2: The elements of the relief
A slide explaining each element
Example with figures
Comparison of a company’s liability with or without relief.
In preparing this presentation you will need to refer to s.152-156 TCGA 1992 which are attached below.
Corporation Tax Liability
Charlesʼ Lawyers
Memorandum
From: Tom Scott
To: You
Date: 21. November 2017
Client: Capricorn Ltd., 9 Weston Development Park, Stoke ST 60 5YT
Capricorn Limited is a newish client. The MD, Jason Singe, consulted us last year for advice on terms and conditions for internet trading via e-bay. Basically the company was formed about five years ago and it imports wood from sustainable sources to make rustic garden furniture. Until last year this was sold only through independent local garden centres but the poor summer last year, coupled with fears about reduced consumer spending, caused the company to look for new sources of customers, hence selling through e-bay.
Unfortunately, despite this, the poor economic climate has taken its toll. Jason has sent me Capricorn’s projected sales and expenditure figures for this year and they are attached to this Memo. I have had a quick look at the figures and whilst I have not done the calculation, it looks clear that there will be a trading loss. Jason has told me that last year the profit made was £250,000 and corporation tax paid for the Financial Year 2016 was 20%, was £50,000.
In an attempt to generate cash the company sold its premises in June 2017 and moved into rented premises. The relevant figures are given on the attached sheet. Capricorn hopes to be able to buy new premises again once the financial picture improves, but the board have delayed making any decision on this for the time being.
Jason and his two fellow board members are coming in next week to seek general advice on the financial situation. They feel the company is well placed to trade through its difficulties and the initial figures for the internet sales have been promising. However they are still very concerned at the prospect of making a loss.
As part of our advice to them we clearly need to look at the company’s tax situation and I think it would be useful for us to be able to do a short presentation for the directors on how losses are treated for tax purposes.
I know you are on holiday next week and one of your fellow lawyers from our Business Support and Restructuring Department will attend the meeting with me. However before you go on holiday, I should like you to prepare:
A calculation showing Capricorn’s trading profit/loss and its chargeable gain for the Financial Year 2017 on the basis of the projected figures attached; and
Using the figures from your calculation, a presentation of between 6 and 7 PowerPoint slides which deals with how losses can be used to obtain repayments of corporation tax or to reduce current or future corporation tax liability.
It is very important that the presentation should be relevant to Capricorn’s situation and explain any tax reductions or rebates that may apply. As you will be unable to attend the meeting please make sure that each slide is accompanied by an explanatory note which I can use when making the presentation to the client.
Corporation Tax Liability
Capricorn Limited
Projected figures for Financial Year 2017 £
Sales 1,845,000
Expenses:
Stock 900,000
Salaries 600,000
General overheads 298,000
Insurance 18,000
Advertising 12,090
Rent paid (since June 2017) 15,000
Purchase of new machinery: £20,000
Value of existing pool of machinery: £400,000
Sales of premises in June 2017
Sale proceeds 360,000
Less cost of disposal 21,000
Acquisition Cost (January 2010) 250,000
Incidental costs of acquisition 4,000
Indexation factor for a disposal in June 2017:
from January 2010: 0.215
Corporation Tax Liability
E-mail:
From: Tom Scott
Sent: 21. November 2017
To: You
URGENT
Subject: Tax Training
As you are preparing some slides on Corporation tax losses for the presentation to Capricorn next week I would also like you to prepare a few additional slides for our in-house Training Session next week which it is my turn to do (again!).
As part of the session, I thought I would do a five minute refresher on how roll-over relief can be used by corporate clients.
Could you please let me have 6 to 7 slides which cover this topic. As you know, I always feel it is a good idea to be able to illustrate the theory with an example from practice. Perhaps you could use the example from the work we did for Amtex Ltd recently, when we advised them on the operation of the relief when they sold their old warehouse and decided to buy new offices.
To save you getting the file out, we calculated that the chargeable gain which Amtex made when they sold the warehouse in May 2016 was £650,000 and the purchase price for their new offices was £1,100,000
Corporation Tax Liability
Appendix:
KEY FACTS for Corporation Tax for Financial Year 2017 (FY 2017) which runs from 1. April 2017 to 31. March 2018
Rate of Tax 19%
Capital allowances
Annual Investment Allowance for is £200,000
Writing Down Allowances:
18% on ‘main pool’ of expenditure on plant and machinery
8% on ‘special rate pool’ of expenditure on integral features and long-life assets
Corporation Tax Liability
TEMPLATE FOR CORPORATION TAX CALCULATIONS:
STEP 1: CALCULATE INCOME PROFITS
Add up Income from various sources: £
Land
Investments
Trading Income:
Chargeable receipt
Less
Deductible expenditure Less
Capital allowances
= Trading profit (or loss)
STEP 2: CALCULATE CHARGEABLE GAINS
Stage 1: Identify the chargeable disposal
Stage 2: Calculate the gain or loss
Stage 3: Apply any reliefs
Stage 4: Aggregate remaining gains/losses
STEP 3: CALCULATE TOTAL PROFITS
APPLY RELIEFS AVAILABLE AGAINST TOTAL PROFITS
Main examples:
Carry-across/carry-back relief for a trading loss Terminal carry back relief for a trading loss Qualifying donations to charity
STEP 4: CALCULATE THE TAX AT THE APPROPRIATE RATE
Rate of Tax 19%
Corporation Tax Example:
Wendle Joinery Limited (‘the company’) makes wooden doors, architrave and skirting boards for the domestic market. In the accounting period ending 31 March 2018, the company has a turnover of £8,500,000, deductible expenditure of £7,200,000 and it claims £450,000 in capital allowances.
The company had been operating from two locations but, in September 2017, the company sold the smaller of the two sites, having consolidated all its operations on its main site. The sale of the smaller site realised a chargeable gain of £300,000 (for which no reliefs are available).
The company makes a donation of £20,000 every year to the Woodland Trust (a registered charity).
Corporation Tax Liability
Using the template (see above), calculate the company´s liability to corporation tax for the accounting period ending 31. March 2018.
EXAMPLE – ANSWER:
Step 1: Calculate income profits
From the facts of the example, the company only has once source of income, being its trading income. This is calculated using the formula:
£
Chargeable receipts 8,500,000
Less
Deductible expenditure 7,200,000
Less
Capital allowances (450,000)
Trading profit 850,000
STEP 2: Calculate chargeable gains
The facts state that these are £300,000.
STEP 3: Calculate total profits
Apply reliefs available against total profits
Total profits are calculated by adding together the income profits and chargeable gains:
Income profits 850,000
Chargeable gains 300,000
Total profits 1,150,000
From total profits can be deducted the qualifying donation to charity to leave taxable profits:
Total profits 1,150,000
Less
Charity donation (20,000)
Taxable profits 1,130,000
STEP 4: Calculate the tax at the appropriate rate(s)
1,130,000 x 19% = 214,700
Corporation Tax payable: £214,700.
Taxation of Chargeable Gains Act 1992
Part V
Transfer of Business Assets
Corporation Tax Liability
Chapter I
General Provisions
Replacementofbusinessassets
152 Roll-over relief
(1) If the consideration which a person carrying on a trade obtains for the disposal of, or of his interest in, assets (“the old assets”) used, and used only, for the purposes of the trade throughout the period of ownership is applied by him in acquiring other assets, or an interest in other assets (“the new assets”) which on the acquisition are taken into use, and used only, for the purposes of the trade, and the old assets and new assets are within the classes of assets listed in section 155, then the person carrying on the trade shall, on making a claim as respects the consideration which has been so applied, be treated for the purposes of this Act —
(a) as if the consideration for the disposal of, or of the interest in, the old assets were (if otherwise of a greater amount or value) of such amount as would secure that on the disposal neither a gain nor a loss accrues to him, and
(b) as if the amount or value of the consideration for the acquisition of, or of the interest in, the new assets were reduced by the excess of the amount or value of the actual consideration for the disposal of, or of the interest in, the old assets over the amount of the consideration which he is treated as receiving under paragraph (a) above,
but neither paragraph (a) nor paragraph (b) above shall affect the treatment for the purposes of this Act of the other party to the transaction involving the old assets, or of the other party to the transaction involving the new assets.
(2) Where subsection (1)(a) above applies to exclude a gain which, in consequence of Schedule 2, is not all chargeable gain, the amount of the reduction to be made under subsection (1)(b) above shall be the amount of the chargeable gain, and not the whole amount of the gain.
(3) Subject to subsection (4) below, this section shall only apply if the acquisition of, or of the interest in, the new assets takes place, or an unconditional contract for the acquisition is entered into, in the period beginning 12 months before and ending 3 years after the disposal of, or of the interest in, the old assets, or at such earlier or later time as the Board may by notice allow.
(4) Where an unconditional contract for the acquisition is so entered into, this section may be applied on a provisional basis without waiting to ascertain whether the new assets, or the interest in the new assets, is acquired in pursuance of the contract, and, when that fact is ascertained, all necessary adjustments shall be made by making [or amending] assessments or by repayment or discharge of tax, and shall be so made notwithstanding any limitation on the time within which assessments [or amendments] may be made.
(5) This section shall not apply unless the acquisition of, or of the interest in, the new assets was made for the purpose of their use in the trade, and not wholly or partly for the purpose of realising a gain from the disposal of, or of the interest in, the new assets.
(6) If, over the period of ownership or any substantial part of the period of ownership, part of a building or structure is, and part is not, used for the purposes of a trade, this section shall apply as if the part so used, with any land occupied for purposes ancillary to the occupation and use of that part of the building or structure, were a separate asset, and subject to any necessary apportionments of consideration for an acquisition or disposal of, or of an interest in, the building or structure and other land.
(7) If the old assets were not used for the purposes of the trade throughout the period of ownership this section shall apply as if a part of the asset representing its use for the purposes of the trade having regard to the time and extent to which it was, and was not, used for those purposes, were a separate asset which had been wholly used for the purposes of the trade, and this subsection shall apply in relation to that part subject to any necessary apportionment of consideration for an acquisition or disposal of, or of the interest in, the asset.
(8) This section shall apply in relation to a person who, either successively or at the same time, carries on 2 or more trades as if both or all of them were a single trade.
(9) In this section “period of ownership” does not include any period before 31st March 1982.
(10) The provisions of this Act fixing the amount of the consideration deemed to be given for the acquisition or disposal of assets shall be applied before this section is applied.
(11) Without prejudice to section 52(4), where consideration is given for the acquisition or disposal of assets some or part of which are assets in relation to which a claim under this section applies, and some or part of which are not, the consideration shall be apportioned in such manner as is just and reasonable.
Corporation Tax Liability
153 Assets only partly replaced
(1) Section 152(1) shall not apply if part only of the amount or value of the consideration for the disposal of, or of the interest in, the old assets is applied as described in that subsection, but if all of the amount or value of the consideration except for a part which is less than the amount of the gain (whether all chargeable gain or not) accruing on the disposal of, or of the interest in, the old assets is so applied, then the person carrying on the trade, on making a claim as respects the consideration which has been so applied, shall be treated for the purposes of this Act—
(a) as if the amount of the gain so accruing were reduced to the amount of the said part (and, if not all chargeable gain, with a proportionate reduction in the amount of the chargeable gain), and
(b) as if the amount or value of the consideration for the acquisition of, or of the interest in, the new assets were reduced by the amount by which the gain is reduced (or as the case may be the amount by which the chargeable gain is proportionately reduced) under paragraph
(a) of this subsection,
but neither paragraph (a) nor paragraph (b) above shall affect the treatment for the purposes of this Act of the other party to the transaction involving the old assets, or of the other party to the transaction involving the new assets.
(2) Subsections (3) to (11) of 152 shall apply as if this section formed part of that section.
Corporation Tax Liability
[153A Provisional application of sections 152 and 153]
[(1) This section applies where a person carrying on a trade who for a consideration disposes of, or of his interest in, any assets (“the old assets”) declares, in his return for the chargeable period in which the disposal takes place —
(a) that the whole or any specified part of the consideration will be applied in the acquisition of, or of an interest in, other assets (“the new assets”) which on the acquisition will be taken into use, and used only, for the purposes of the trade;
(b) that the acquisition will take place as mentioned in subsection (3) of section 152; and
(c) that the new assets will be within the classes listed in section 155.
(2) Until the declaration ceases to have effect, section 152 or, as the case may be, section 153 shall apply as if the acquisition had taken place and the person had made a claim under that section.
(3) The declaration shall cease to have effect as follows—
(a) if and to the extent that it is withdrawn before the relevant day, or is superseded before that day by a valid claim made under section 152 or 153, on the day on which it is so withdrawn or superseded; and
(b) if and to the extent that it is not so withdrawn or superseded, on the relevant day.
(4) On the declaration ceasing to have effect in whole or in part, all necessary adjustments—
(a) shall be made by making or amending assessments or by repayment or discharge of tax; and
(b) shall be so made notwithstanding any limitation on the time within which assessments or amendments may be made.
(5) In this section “the relevant day” means—
(a) in relation to capital gains tax, the third anniversary of the 31st January next following the year of assessment in which the disposal of, or of the interest in, the old assets took place;
(b) in relation to corporation tax, the fourth anniversary of the last day of the accounting period in which that disposal took place.
(6) Subsections (6), (8), (10) and (11) of section 152 shall apply for the purposes of this section as they apply for the purposes of that section.]
Corporation Tax Liability
154 [not supplied]
155 Relevant classes of assets
The classes of assets for the purposes of section 152(1) are as follows.
Class 1
Assets within heads A and B below.
Head A
1. Any building or part of a building and any permanent or semi-permanent structure in the nature of a building, occupied (as well as used) only for the purposes of the trade.
2. Any land occupied (as well as used) only for the purposes of the trade. Head A has effect subject to section 156.
Head B
Fixed plant or machinery which does not form part of a building or of a permanent or semi- permanent structure in the nature of a building.
Class 2
Ships, aircraft and hovercraft (“hovercraft” having the same meaning as in the Hovercraft Act 1968).
Class 3
Satellites, space stations and spacecraft (including launch vehicles).
Class 4
Goodwill.
Corporation Tax Liability
[Classes 5-8 omitted]
156 Assets of Class 1
(1) This section has effect as respects head A of Class 1 in section 155.
(2) Head A shall not apply where the trade is a trade—
(a) of dealing in or developing land, or
(b) of providing services for the occupier of land in which the person carrying on the trade has an estate or interest.
(3) Where the trade is a trade of dealing in or developing land, but a profit on the sale of any land held for the purposes of the trade would not form part of the trading profits, then, as regards that land, the trade shall be treated for the purposes of subsection (2)(a) above as if it were not a trade of dealing in or developing land.
[(4) Where [section 19 of ITTOIA 2005] [or section 42 of CTA 2009] applies (tied premises: receipts and expenses treated as those of trade) the trader shall be treated, to the extent that the conditions in subsection (1) of that section are met in relation to premises, as occupying as well as using the premises for the purposes of the trade.]
Corporation Tax Liability
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Financial Management Quiz
The exchange rate is 0.967 Swiss francs per U.S. dollar. How many U.S. dollars are needed to purchase 1 Swiss franc?
The exchange rate is 1.1491 Swiss francs per U.S. dollar. How many U.S. dollars are needed to purchase 9,899 Swiss francs?
Suppose one U.S. dollar can purchase 135 yen today. If the yen depreciates by 10% tomorrow, how many yen could one U.S. dollar buy tomorrow?
Suppose the exchange rate between U.S. dollars and Swiss francs is SF 0.9645 = $1.00, and the exchange rate between the U.S. dollar and the euro is $1.00 = 1.1934 euros. What is the cross-rate of euros to Swiss francs (Euro/SF)?
Suppose the exchange rate between U.S. dollars and Swiss francs is SF 1.1716 = $1.00, and the exchange rate between the U.S. dollar and the euro is $1.00 = 1.149 euros. What is the cross-rate of Swiss francs to euros (SF/Euro)?
You can exchange $1 for either C$1.209 or ¥114.09. What is the cross rate between the Japanese yen and the Canadian dollar? That is, solve for ¥ per C$.
In New York, you can exchange $1 for €0.8026 or £0.6149. Suppose that, in Berlin, £1 costs €1.1814. How much profit can you earn on $40,116 using triangle arbitrage?
Your friend from Germany has decided to come and visit you in the United States. You estimate the cost of her trip at $6,752. What is the cost to her in euros if the U.S. dollar equivalent of the euro is 1.2031?
You just returned from a trip to Venezuela and have 6,696 bolivares fuertes in your pocket. How many dollars will you receive when you exchange this money if the U.S. dollar equivalent of the bolivares fuertes is 0.1507?
Financial Management Quiz
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The OLI Paradigm
Order Instructions:
Using the OLI paradigm, discuss the probable explanations for Ford’s decision to invest in factories in Mexico to manufacture cars that are sold in the U.S.
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International Finance: The OLI Paradigm
The OLI paradigm bases its focus on the ability of the firm to operate efficiently in the international markets. This stems from a number of focus areas where the company has a competitive advantage that is transferrable across markets. Such focus areas include ownership advantages, where they have a competitive advantage in the home market, location advantage, where the firm is attracted by various characteristics and locations in the international market, and internationalization advantages where the firm seeks to take control of the value chain in its industry.
Taking the case of the Ford Motor Company, their decision to invest in factories in Mexico to manufacture vehicles sold in the US is explained using the OLI paradigm discussed above. For a start, the Ford Motor Company has a competitive advantage at home, and it seeks to export this as a growth strategy to areas where they may not be the dominant player……
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