International Finance Problem Set on Working Capital Management 2. Homestead, Inc. manufactures basic farm equipment in China, Spain, and the U.S. Each subsidiary has monthly unsettled balances due to or from other subsidiaries. At the end of December, unsettled intracompany debts in U.S. dollars were as follows: |
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Homestead China: |
Amount |
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Owes to Spanish subsidiary |
$ 6,000,000 |
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Owes to U.S. parent |
$ 8,000,000 |
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Homestead Spain: |
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Owes to Chinese subsidiary |
$ 5,000,000 |
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Owes to U.S. parent |
$ 6,000,000 |
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Homestead U.S.: |
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Owes to Chinese subsidiary |
$ 4,000,000 |
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Owes to Spanish subsidiary |
$ 8,000,000 |
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Foreign exchange transaction costs |
0.400% |
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a) | (in million) | China | Spain | US | |||
owes to | China | - | 6 | 8 | |||
Spain | 5 | - | 6 | ||||
US | 4 | 8 | - | ||||
Netting off intra company debts: | |||||||
China has to give $1 million to Spain | |||||||
US ha sto give $2 million to Spain | |||||||
China has to give $4 million to US | |||||||
b) | Total transaction is 1 + 2 + 4 = $7 million. | ||||||
Transaction cost is $7 million *0.40%. | |||||||
$0.03 | million | ||||||
Savings in transaction expenses over the no-netting alternative is $0.03 million. |
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