Question

International Finance Problem Set on Working Capital Management 2. Homestead, Inc. manufactures basic farm equipment in...

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:

Homestead China:

Amount

     Owes to Spanish subsidiary

$ 6,000,000

     Owes to U.S. parent

$ 8,000,000

Homestead Spain:

     Owes to Chinese subsidiary

$ 5,000,000

     Owes to U.S. parent

$ 6,000,000

Homestead U.S.:

     Owes to Chinese subsidiary

$ 4,000,000

     Owes to Spanish subsidiary

$ 8,000,000

Foreign exchange transaction costs

0.400%

  1. How could Homestead net these intracompany debts?
  2. How much would be saved in transaction expenses over the no-netting alternative if transaction costs are 0.400%?

Homework Answers

Answer #1
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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