Multi-Diversified (MD) is an established, U.S.-based multinational corporation that is in the business of producing and selling widgets. MD is listed on the New York Stock Exchange (NYSE) and is required to report using U.S. GAAP. They are headquartered in Las Vegas, Nevada and employ nearly 50,000 people. Sustainability is a major part of their brand and company culture. MD voluntarily produces CSR reports in addition to their financials each period.

After performing a SWOT analysis, MD decided that they needed to expand internationally to areas that have low labor costs, low tax rates, and where there is a sufficient market demand for widgets.

Before selecting potential geographical areas for expansion, MD wants to gauge the international appetite for widgets by making export sales to the large global market of Singapore. They made the sales on May 1, 2020 (sales price: 10,000 foreign currency units) and collected payment on May 31, 2020.

Management identified three potential international targets for a new and highly efficient production facility. Management estimates that they have $1,000,000 to initially invest. They need to reclaim their investment within 5 years and require a return of at least 5%. The information about these targets is below.

For whichever target MD chooses, MD plans to be very involved in day-to-day operations as well as determine sales prices, lend money to the target for wages and capital investment decisions, and have a significant amount of upstream and downstream transactions.

TARGET DETAILS

	Location	Payback Period	ROI	NPV	IRR	Corporate Tax Rate	Proposed Sale Price
Alpha Company	Greece	10 years	5.23%	0.0	6.45%	29%	$5.6 million
Bravo Inc.	Australia	6.5 years	4.98%	1.0	4.93%	30%	$7.8 million
Charlie Ltd.	Venezuela	4 years	6.73%	3.2	7.25%	34%	$4.4 million

Notes to Alpha Company’s financial statements:

Greek firms, as part of the EU, are required to use IFRS as of 2005. This year Alpha invested heavily in AI—research costs were 700,000€ and development costs were 1.3 million Euros.

Notes to Bravo Inc.’s financial statements:

Bravo Inc. follows Australian GAAP, which is equivalent to IFRS. They use the revaluation method for measuring their PP&E and check for impairments each year. This year they reversed 500,000 Australian Dollar worth of impairments for their PP&E.

Notes to Charlie Ltd.’s financial statements:

Venezuelan firms are required to use Venezuelan GAAP, which is a modified and outdated version of IFRS. As such, they are still allowed to use LIFO. If they were using the up-to-date IFRS rules, they would have been forced to use an alternative inventory cost flow assumption and would miss out on cost savings of 765,000 Venezuelan Bolivar this period.

INSTRUCTIONS

Please address the following points regarding the case. You are free to use your notes, textbook, and the internet. If you use the latter, please cite your source to avoid plagiarism. You should use your own words to answer the questions or face penalties (see syllabus). Given the format of the case, you are expected to provide detailed answers to each question to receive full credit.

1. With respect to the export sale to Singapore, please record the journal entries for May 1 and May 31[1]. Do you wish you had hedged (use numbers to support your answer)? Comparing the two hedging instruments we discussed in class, which one you would use for future export sales and why?

Answer rating: 100% (QA)

1Journal Entries for May 1 and May 31 May 1 Export Sales Dr 10000 Foreign Currency Units Accounts Receivable Cr 10000 Foreign Currency Units May 31 Cash Dr 10000 Foreign Currency Units Accounts Receiv... View the full answer