The following is a consultancy report on the strategies that IFM Plc may incorporate in the plan to re-domicile the company from France to Monaco. The calculation on the net present value of the multinational is in the appendix. It then looks into the potential challenges of the exercise as well as the advantages of this strategy to the company. The second part answers question two on various ways through which the company may raise capital to expand to Asia. It also explores various issues to consider before venturing out to this market.
Evaluation of the proposed joint venture between IFM Plc and EMF Plc
EMF Plc is considering having a joint venture with EMF Plc in its subsidiary in Germany because the subsidiary has made losses for the past five years. The subsidiary has a net worth of twenty million Euros and a working capital of 3 million Euros with the initial investment of 10, 000 Euros. EMF Plc proposes to invest 4 million Euros while the IMF Plc will contribute the remaining sixty percent of the investment. It will give forty percent of the remaining funds in the following year. This is the current position of the subsidiary in terms of the investment. To boost the investment the initial capital inserted by the IMF Plc as shown in the appendix is 12 million Euros. The following are the book value of the subsidiary:
IFM Plc 2011 (German Subsidiary) – Book values.
|Fixed asset |
Investment (some of which is leased from Parent company)
IFM Plc 2011 (German Subsidiary).
Capital investment appraisal method you have used and it appropriateness
Net present value is useful in the analysis of the investments of the companies in the joint ventures. It is the preferred investment appraisal technique because it uses the time value of money concepts. All the future payments are discounted on the present value using a discount rate. Since this venture is expected to last for four years, the IFM PLC must evaluate whether the project will be profitable or not. To do this the company must analyse the investment and assess whether the investment will produce positive cash flow. It must evaluate the future net worth of the investment and the future net cash flow using the present monetary value. There are two parameters used in a calculating the net present value. The first one is discounting, which is the conversion of money receivable in the future into its present value. The discount rates in this case after calculation in the appendix is 10%. After identifying the IFM Plc discount rates, the next step is counting the discounted cash flow to forecast the cash flow of an investment proposal to determine their present value during the four years. An investment decision is to accept a project with a positive Net Present Value. In this case, the investment has a positive cash flow of 566, 000 Euros compared with the initial investment of 1200,000 Euros. When the NPV is positive it implies that, the investment will produce a return in excess of the initial capital such that it will meet the company’s target rate of return. If the NPV is negative, it implies that the investment will yield a lesser amount than the cost of capital meaning that the project will yield losses for the company. For the IFM Plc the company can engage in the investment as it has a positive Net Present Value (Smith & Walter 1999).
Advise to IFM Plc SMT on the challenges and benefits that they face when considering re-domiciling the France parent company to Monaco
In order to make an appropriate judgement on whether to re domicile the IFM Plc, one has to have a clear understanding of re-domiciling. Re-domiciling refers to the process of changing the company’s centre of operations from one state to another. It is changing the headquarters of the business to another state such that the business operations of the company are governed by the legal and business policies of the new host country. In the case of IFM Plc, the management is considering changing its global operations centre from France to Monaco. The aim of re domiciling a company is to reduce the costs as well as increase the profitability of the business. The following are advantages and disadvantages of the decision (Martin & Thompson 2010).
There are several advantages of relocating the legal entity of IFM Plc to Monaco. First, the company will have the advantage of being a new entrant where it will benefits from reduced tax payments for the first five years of its operation. This means that the company will pay out profits tax of zero percent for the first five years and a profit tax of five percent on the subsequent five years before stabilising and then pay the rest of the tax later. According to Monaco taxation policies, a company is exempted from tax payment if it makes 75% of its money from the principality. However, if more than twenty-five percent of its profits are generated from sales outside the principality, then the company pays a profit tax of 33%. The other taxation policy in Monaco regards policy on the income tax. The country does not charge any income tax on the employees who are residents of the country except for some French nationals who came to the country after 1962. This means that the company can minimise its taxes by channelling profits through the salaries that are non-taxable (Martin & Thompson 2010).
Other than the taxation, the other advantage of re domiciling to Monaco is that the principality is politically stable. The country has not experienced any social unrest since the Second World War. Its political environment is perfect for business operations as there is monarch government hence no elections in the country. The country has the highest number of police officers per kilometre squared in the world and therefore it is safe for business operation. In addition, it has had no social unrest and labour strikes. Social unrest is also rare in the principality of Monaco (Smith & Walter 1999).
The other advantage of re domiciling is the fact that the population living in the country is wealthy. The principality has the highest concentration of millionaires in the world and therefore the need for financial services is high, which is the specialisation of the company (Smith & Walter 1999). This implies that IMF Plc can increase its sales by focusing on this market. Other than the advantages, there are also disadvantages of re domiciling to Monaco. The business taxes for companies operating in the country are extremely higher in comparison with those of France. This is because in France the tax rates for the business are at twenty nine percent (Smith & Walter 1999). This is unfavourable for the company to operate in Monaco if seventy-five per cent of the business or revenues earned by the company are at thirty-three per cent. The company is likely to generate most of its profits from subsidiaries that are in United Kingdom, Germany, Austria and Poland. The company is also considering venturing out to Asia. This means that the company must consider generating over sixty percent of its revenues from outside the country within the next five years (Smith & Walter 1999). The second disadvantage is that the principality of Monaco has high rental rates on property and therefore it may mean an increased expense especially if the company does not have its own assets in the principality (Smith & Walter 1999).
The other challenge to consider when operating the business from Monaco consists of high wages or salaries for the employees. The living standards in Monaco are relatively higher than in France (Martin & Thompson 2010).
Other than operational costs, re domiciling the business in Monaco is also expensive, as the business has to pay initial or start up costs such as the legal fees and licensing, which might cost a million Euros depending on the type of business set up. These costs are unnecessary if the company chose to stay in France. Nevertheless, the company can utilise the five-year start up tax waiver to grow its business from Monaco. This would see the business saving 1.3 Million Euros every year from taxation giving the company an edge by having more equity to finance its expansion programs as the company intends to have subsidiaries in Asia especially in India. However, the licensing costs for the re domiciling the company operations to Monaco have been estimated to five million Euros.
Currently the company’s subsidiary in Germany is not making profit, it is imperative to establish whether operating from Monaco, and having EMF Plc, as an emerging competitor is a viable option. It is worth noting that businesses owned by non-Monaco citizens pay taxes to the principality of Monaco at a tax of 13.5 %. This will apply to the taxes that the financier receives as profit from the business. However, because the subsidiary is in Germany and operates under Germany business laws it may not be subject to Monaco taxation policies (Martin & Thompson 2010).
Clearly state what options of sources of finance the multinational corporation has to fund the proposed expansion across Asia
The IFM Plc has plans to move to Asia and specifically to China and India. This expansion will require an estimated cost of ten million euro to establish the business in China and to start operating. The following are some of the sources of capital that the company has. The first source is equity financing where the shareholders of the company finance the company’s operations through re investing the profits back to the business. Currently the overall revenues of IFM Plc are 1.8 million Euros; this can go to the business operations (Martin & Thompson 2010).
Equity financing has its own advantages. The first one is that the equity increases the asset value of the company. Equity financing is also advantageous as the resources given to the business are for the business and the company cannot compensate the individual in case of loss of the property (Madura 2009).
The investors in an attempt to control their money and ensure they do not experience loss provide invaluable advice to the company on how to go about the business in terms of marketing and increasing the sales. However, the major challenge with equity financing is that the owners of the business must release a share of control over the business (Martin & Thompson 2010).
Net Present Value is useful in the analysis of the investments of the companies in the joint ventures. It is the preferred investment appraisal technique because it uses the time value of money concepts. All the future payments are discounted on the present value using a discount rate. The NPV should not be used exclusively but supplemented with other analysis such as the Internal Rate of Return.
The criterion for acceptance or rejection of the offer using the NPV values is as follows. For an offer to be accepted, the NPV value must be greater than zero. For the case of IFM Plc, the value obtained is 566.45. Therefore, it means the company can enter into the ventures with the PFM plc Company because it can meet its financial obligations (Buckley 2000).
The IFM Plc venture with EMF Plc can be viable financially, but there is a need for other factors that affect the success of the venture to be analysed, including the development of an efficient management structure. Differences in the understanding of the venture objectives may be fatal for the process because it can cause disunity leading to failure of the venture (Martin & Thompson 2010).
The other challenge with equity financing is that the business must consider the investors in their decisions and they must act in the investors’ best interest (Shapiro, 2009). Otherwise, lawsuits are likely to occur and bitter relationships with the investors are likely to arise (Martin & Thompson 2010). Concerning equity financing, the EMF Plc Company in Germany is seeking to buy out the IFM Plc subsidiary in the country on a fifty-fifty basis. Currently, the subsidiary in Germany is worth 20 million Euros with thirteen million Euros equity and seven million Euros debt financed. The EMF Plc is seeking to contribute 4 million euro for a fifty per cent stake in the subsidiary. This amount is smaller as compared to the overall equity in the business. It would be appropriate if the company considers selling the whole stake of the Germany subsidiary than accepting the joint venture offer from EMF Plc. This may involve sale of the assets, which are worth seventeen million Euros in value. After paying the debt, an estimate of twelve million Euros is left. The amount can be a huge boost for the company in its attempt to conquer non-euro zone in Asia (Smith & Walter 1999).
Repayment period is long, which in turn reduces the average interest rate of the loan. The most appropriate source of funds is the hedge funds investment as they offer loans at very low interest rates for a long period. However, when taking loans the company must consider the inflation rates in the company and the net present value of the company (Martin & Thompson 2010).
Factors to consider in the restructuring of the parent company to Asia
The politics of a country affects the economy of the country extensively. Countries with stable political processes register better economic growth compared to unstable countries. Instability in the political environment of the country will discourage investors if there are threats of property loss and decline of the economic performance of the market after every election. Most of the investment capitals are usually bank loans (Shapiro 2009). Therefore, any changes affecting the repayment of the loan will be detrimental for the business. IFM Plc intends to have a branch in China, which has a different market and work force. Such legal implications are imperative during the consideration of political risks associated with the venture. China does not have wild social unrest and the political environment is conducive for foreign investments (Shapiro 2009).
Transfer pricing policy
This is the money paid by one company to another for the products as well as services offered. It dictates the method and approach in the determination of the product’s price. International price transfer policies aim at achieving worldwide tax minimization, reduction of import duties, avoidance of financial restrictions and winning approval from the host company (Madura 2009). The host country for the target restructuring is China. Transfer pricing is useful in the transfer of taxable profits from a country with a high tax rate to another with low tax rate.
Corporate tax rates vary from country to country with some having low or non-existent rates, making the countries the preferred destination for multinationals. IFM Plc plans to transfer the parent company from Germany to China.
Multinational financial system
Large multinationals have the ability to move revenues and profits amongst its subsidiaries through internal transfer mechanisms, including transfer prices of goods and services traded internally, loans within the different subsidiaries and global tax planning. IFM Plc should use the methods above in reducing expenses and increase growth revenue in the market. The use of loans in the process will lead to the development of the subsidiary and reduce reliance on the outside loans from the financial institution (Buckley 2000).
International tax planning
International taxes affect the performance of the company, especially in the countries of operation with high taxes. There are several methods of solving this problem. One of the methods is the creation of a holding company at the parent country. The setting up of the holding company is applicable in regimes that have a wide range of tax treaties with important trading countries. The foreign subsidiaries should be in countries allowing for the zero rates on income tax on foreign-owned holding companies or countries with zero or low rate of income tax. The repatriation of IFM Plc to France and in Asia may facilitate the creation of a holding company in the two countries to facilitate in the tax planning (Shapiro, 2009).
With appropriate tax planning and financial management, global expansion of IFM Plc Company is possible. The company can utilise Monaco to shelter its income. After sheltering the income, the company can then sell its subsidiary in Germany and use the capital to expand the business in Asia where the services offered by the company are likely to have a huge market.
Buckley, A 2000, Multinational finance, Financial Times /Prentice Hall, California.
Madura, J 2009, International financial management, Cengage Learning, London.
Martin, F & Thompson, J 2010, Strategic management, Cengage Learning EMEA, London.
Shapiro, A 2009, Multinational financial management, John Wiley and Sons, London.
Smith, R & Walter, I 1999, Global capital markets and banking, McGraw-Hill Book, New York.
NPV = Initial Outlay of Cash – ∑ [(Net Cash Flow Per Period) / (1 + i)t ].
Where, t=time period of cash flow, i =discount rate (dependent on the market risks standards.
The NPV for the Joint venture is greater than zero (3.70>0). This implies that the joint venture is worth investing in. The joint venture is stable and can meet its financial obligations.
The NPV calculation of IFM plc produced the following results.
|exchange rate calculation|
|calculation of discount rate |
t = 29%, Total = 20, Equity = 13
|debt =||7||total =||20|
|cost of equity (ke)||12%|
|cost of debt (kd)||7%|
|calculation of wacc|
Calculation of gross cash inflow.
|Year 1||Year 2||Year 3||Year 4|
|CF from uk (£)||450||517.5||595.125||684.39375|
|CF from uk (euros)converted||382.19703||443.878333||515.514143||598.710979|
|total net CF (Euros 000’s)||1282.19703||1478.87833||1705.76414||1967.49848|
Calculation of net CF (000’ Euros).
|year 1||year 2||year 3||year 4|
|Net cash flow||1067.8||1259.1||1480.5||1736.6|
Calculation of tax payable 29%.
|Year 1||Year 2||Year 3||Year 4||Year 5|
|Projected cash flows in Euros (000’s)|
|Gross cash flow||1067.8||1259.1||1480.5||1736.6|
|Tax @29 %||309.7||365.1||429.3||503.6|
|Post – Net CF||53.3||735.0||900.9||1092.8||-503.6|
|Discount factor 10 %||1||0.9091||0.8264||0.7513||0.683||0.6209|
Net present value = 566. 45.