Global Dimensions Bus 187 SB CH20
lessard and lorange recommend that firms use combination _____ to translate the budget and the actual performance figures.
(PP) Budget at projected Actual at Projected
steps involved in the control of subunits within large complex enterprises from first to last:
1) the head office and the subunit management jointly determine the subunit goals for the coming year. 2) throughout the year, the head office monitors subunit performance against the agreed goals. 3) if a subunit fails to achieve its goals, the head office intervenes in the subunit to learn why the shortfall occurred.
Royalties
A percentage of actual sales that a licensee pays to a licensor, usually anywhere from 5 to 15 percent
international accounting standards board ( IASB)
An accounting standard-setting body that issues standards adopted by many countries outside of the United States.
the technique financial managers use to try to quantify the benefits, costs and risks of an investment is known as _______.
Capital budgeting
tax Havens
a tax Haven is a country with an exceptionally low, or even no, income tax. international businesses avoid or differ income taxes by establishing a wholly owned, non-operating subsidiary in the tax haven. the tax Haven subsidiary owns the common stock of the operating foreign subsidiaries. this allows all transfers of funds from foreign operating subsidiaries to parent company to be funneled through the tax Haven subsidiary.
which statement best describes accounting information?
accounting information is the means by which firms communicate their financial positions to Capital providers.
rules for preparing financial statements are known as ____ standards.
accounting standards
one of the gains that a firm can enjoy as a result of adjusting transfer prices to achieve strategic goals is that the firm can reduce the import duties it must pay when a _____ tariff is being used.
ad valorem
tax credit
allows an entity to reduce the taxes paid to the home government by the amount of taxes paid to the foreign government.
the _____ price is the price that would prevail between unrelated firms in a marketing setting.
arm's length
when a firm uses transfer pricing to achieve strategic goals and the transfer price used deviates significantly from the _______ price, the subsidiary's performance may be impacted more from the transfer price than the efforts of the subsidiary's management.
arm's length
Raul's company wants to be able to deposit as much of its cash as it can so it will earn higher interest rates. to do this, it should place the cash _______.
at a centralized depository
at main Street bank, an independent agency comes in once each year to determine if the bank's financial accounts are reliable and conform to the set standards. this independent agency would rely on ______ standards to do this process.
auditing standards
tax treaty
between two countries is an agreement specifying which items of income will be taxed by the authorities of the country where the income is earned. for example, a tax treaty between the United States and Germany May specify that a US firm need not pay in Germany on any earnings from its German subsidiary that are remitted to the United States in the form of dividends.
what process do top managers rely on to compare different investment alternatives within and across country so they can make choices about where the firm should invest its scarce financial resources?
capital budgeting
parent cash flows
cash that actually gets back to parent country after taxation or required cash needed to be given to host country.
rather than allow each subsidiary to hold its own cash balances, a firm may prefer to hold its cash balances at a _____ to earn a higher interest rate than if each subsidiary managed its own cash balances.
centralized depository
when a firm uses a (n) ______ depository, it will hold corporate cash balances in a single depository.
centralized depository
in the united states, parent companies are not taxed on the income of their foreign subsidiary until the parent firm actually receives a dividend. this is an example of the ______.
deferral principle
the most common method by which firms transfer funds from foreign subsidiaries to the parent firm is by ____.
dividend remittances
the _____ rate is the spot exchange rate when the budget and performance are being compared.
ending rate
true or false: lessard and lorange recommend the use of combination IE to determine corporate currency as the potential for distortion is lowest.
false; lessard and Lorange recommend the use of projected spot exchange rate to translate both the budget and performance figures. the potential for distortion is greater with IE.
a parent company is likely to charge a ____ when it supplies professional services to a foreign subsidiary.
fee
a parent company is likely to charge a ______ when it supplies professional services to a foreign subsidiary.
fee
what are the two ways royalties may be levied?
fixed monetary amount per unit of the product and percentage of a subsidiary's gross revenues
what are the two ways royalties may be levied?
fixed monetary amount per unit of the product and percentage of a subsidiary's gross revenues.
which statement is accurate regarding the international accounting standards board (IASB)?
for a new standard to be issued, 75% of the 16 members of the IASB board must agree.
what three factors can impact a subsidiary's dividend policy?
foreign exchange risk, tax regulations, and age of the subsidiary
a _____ is a loan between a parent and one of its subsidiary Channeled through a financial intimidary, usually a large international bank.
fronting loan
a parent firm may use a ____ to loan money to one of its subsidiaries through a financial intermediary such as a large international Bank if the parent firm is trying to circumvent host country restrictions on the remittance of funds.
fronting loan
which three scenarios would prevent cash flows from going to the parent company?
government requires percentage of cash flow to be reinvested in host nation, cash flows are taxed at an unfavorable rate, and cash flows are blocked from repartition by host country government.
when using the discount rate method to address high economic risk in a foreign investment, it should apply _____ discount rate in order to attain a positive net present value.
high
when evaluating manager performance of an international business, the text lists several items that should be allowed for since managers would have no control over them. which three items are included in that list?
interest rates, transfer prices, and tax rates. others include: inflation rates and exchange rates.
Fronting Loans
is a loan between a parent and it's subsidiary channeled through a financial intermediary, usually a large international Bank
why do most international businesses require all budgets and performance data within the firm to be expressed in the "corporate currency"?
it allows for easier comparison between subsidiaries and different countries.
what is the best description of a deferral principle?
it dictates that parent companies are not taxed on foreign source income until they actually receive a dividend.
which statement about corporate currency is accurate?
it is normally the home currency of a firm
which statement accurately depicts the harmonization of accounting standards across countries?
it will facilitate the development of global capital markets.
one benefit of holding cash balances at a centralized depository is that the firm can deposit ______ amounts.
larger
which statement accurately reflects how most governments today respond to international business' ability to manipulate transfer prices?
many governments now limit business' ability to do this
a firm's ____ decisions involve minimizing cash balances, reducing transaction costs, and minimizing the corporate tax burden.
money management
with ______ decisions, a firm attempts to manage its global cash resources most efficiently. these decisions involved such tasks as reducing transaction costs, minimizing the corporate tax burden, and minimizing cash balances.
money management
in the typical firm, how many times each year does the control process occur?
once
in the capital budgeting process, project cash flows may not be the same as ____ cash flows if a project is unable to remit all its cash flows to corporate headquarters.
parent cash flows
______ risk is the likelihood that political forces will cause drastic changes in a country's business environment that hurt the profit and other goals of a business enterprise.
political risk
if a firm's profitability has been negatively impacted by drastic changes in a country's business environment due to political forces, The firm has experienced ______ risk.
political risk
what three gains can be achieved by adjusting transfer prices?
reduced import duties, reduced exposure to exchange rate risk, and reduced tax liabilities
the text notes two ways a company can address the economic risk that comes from foreign investments. what are those two ways?
revising future cash flows downward and increasing discount rate when risk is high.
it is common for a parent company to charge its foreign subsidiaries ______ for the technology, patents, or trade names it has transferred to them.
royalties
tax liabilities are minimized for a foreign subsidiary with the use of
royalties
which statement accurately describes the benefits of royalties, fees, and dividends?
royalties and fees have tax advantages over dividends.
which statement accurately describes the benefits of royalties, fees, and dividends?
royalties and fees have tax advantages over dividends. royalties and fees are often tax deductible locally (because they are viewed as an expense), so arranging for payment in royalties and fees will reduce the foreign subsidiary's tax liability.
deferral principle
specifies that parent companies are not taxed on foreign source income until they actually receive a dividend.
harmonization of accounting standards across countries will ______.
stimulate economic growth
a tax _____ allows an entity to reduce the taxes paid to the home government by the amount of taxes paid to the foreign government.
tax credit
if an Enterprise Incorporated in the United States was able to reduce the taxes it paid to the US government as a result of the taxes The firm paid to the German government on the earnings of the firms German subsidiary, the Enterprise would be able to use a tax _____.
tax credit
a tax _____ is an agreement between two countries that specifies what items of income will be taxed by the authorities of the country where the income is earned.
tax treaty
assume that the United States and Germany have an agreement that specifies that a US firm need not pay tax in Germany on any earnings from its German subsidiary that are remitted to the United States in the form of dividends. this agreement would be an example of a (n) _____.
tax treaty
fees are sometimes differentiated into which two types?
technical assistance fees and management fees
how do most governments respond when transfer prices are used to reduce a firm's tax liabilities?
the government feels it is being cheated out of legitimate income.
which organization is responsible for the formulation of new international financial reporting standards?
the international accounting standards board (IASB)
Project cash flows
the project may not be able to remit all its cash flows to the parent for a number of reasons. for example, cash flows may be blocked from repartition by the host country government, they may be taxed at an unfavorable rate, or the host government may require that a certain percentage of the cash flows generated from the project be reinvested within the host nation. while these restrictions don't affect the net present value of the project itself, they do affect the net present value of the project to the parent company because they limit the cash flows that can be remitted to it from the project.
the projected rate
the spot exchange rate forecast for the end of the budget. for example the forward rate.
the ending rate
the spot exchange rate when the budget and performance are being compared.
in the Lessard-Lorange Model, the initial rate is _____.
the spot exchange rate when the budget is adopted.
the initial rate
the spot exchange rate when the budget is adopted.
the Lessard-Lorange Model
three exchange rates that can be used to translate foreign currencies into the corporate currency in setting budgets and in subsequent tracking of performance. the three rates are: initial rate, projected rate, and ending rate.
choose the three ways a firm uses accounting information.
to make decisions about future resource allocations, to communicate their financial position to the providers of capital, and to assess the value of their investments.
a company will gain greater benefits from a centralized depository located in a major financial center. what are three major financial centers mentioned in the text?
tokyo, london, and New York
each time Taylor's company changes the Euros received from its European subsidiary into U.S. dollars, it has to pay a fee. this fee is an example of a ___ cost.
transaction
the costs of exchange from converting cash from one currency to another are called ____ costs.
transaction costs
Kendra's company has a plant in Thailand that supplies motor parts to another one of the company's plans in Indonesia. what would be used to price the motor parts shipped to the subsidiary?
transfer price
the _____ is the price at which goods and services are moved between subsidiary companies of a corporation.
transfer price
when a company engages in unbundling, it is ____.
transferring funds across borders
true or false: most accountants agree that it is legitimate to compare the performance of subsidiaries against each other on the basis of return on investment.
true; accountants argued that although it is a legitimate way to compare subsidiaries it may not be appropriate to use these for comparing and evaluating managers.
True or False: the cost of capital is typically lower in the global Capital market than in many domestic capital markets.
true; since the global Capital market is larger and more liquid than the domestic Capital markets of individual Nations, the global Capital market typically has a lower cost of capital.
true or false: firms are increasingly turning to the global Capital market to finance their investments since the global Capital market offers a lower cost of capital than the domestic Capital market.
true; since the global Capital market is larger and more liquid than the domestic Capital markets of individual nations, the global Capital market typically has a lower cost of capital.
true or false: by pooling its cash reserves at a centralized depository in a major financial center, a company should be able to make better investment decisions because it has access to investment opportunities.
true; the centralized depository has financial experts with investment skills and know-how that a typical foreign subsidiary would lack.
in order to transfer funds across borders, Lisa's company relies on royalty payments, dividend remittances, and fronting loans. by using all of these techniques, Lisa's company is demonstrating the concept of ____.
unbundling
