Which of the two financing arrangements would you recommend for the parent? Assess the forecasted NPV for
Question:
Which of the two financing arrangements would you recommend for the parent? Assess
the forecasted NPV for each exchange rate scenario to compare the two financing
arrangements and substantiate your recommendation.
b) In part 'a' above, an alternative financing arrangement of partial financing by the
subsidiary was considered, with an assumption that the required rate of return by the
parent would not be affected. Is there any reason why the parent's required rate of
return might increase when using this financing arrangement? Explain. How would you
revise the analysis in the previous question under this situation? Note: This question
requires discussion, not analysis.
c) Would you recommend that North Star Company establish the subsidiary even if the
withholding tax is 20 percent?
d) Assume that there is some concern about the economic conditions in Singapore, which
could cause a reduction in the net cash flows to the subsidiary. Explain how Excel could
be used to reevaluate the project based on alternative cash flow scenarios. That is, how
can this form of country risk be incorporated into the capital budgeting decision? Note:
This question requires discussion, not analysis.