Deck 10: Managing Money

Question 1

How did Alibaba finance its startup and continuous growth? Please identify its main sources of financing.

Answer 1

At first, Alibaba obtained capital through private placements with investors. In October 1999, Alibaba obtained a US$5 million first-round investment from a consortium led by Goldman Sachs. In 2000, it got $20 million by offering a 37% stake to Softbank, a Japanese telecom and Internet giant. In 2004, Alibaba raised another $82 million venture capital from a group of investors led by Softbank. In 2005, Yahoo invested US$1 billion for 40% of Alibaba's equity. In 2009, Alibaba received a US$75 million investment from General Atlantic.
Alibaba also raised capital through an IPO. In 2007, the company listed its B2B business on the Hong Kong Stock Exchange (HKSE). On its first day of trading, Alibaba's opening price reached HK$30 per share, more than double the HK$13.50 issuing price. In 2012, Alibaba delisted from the Hong Kong Stock Market through a buyout at HK$13.50 a share, the same as the original issue price but a 46% premium to the last close price before the announcement. Two years later, Alibaba went public again in the New York Stock Exchange (NYSE). This time, most of its businesses except financial and logistic services were listed. The company chose the NYSE because China's local financial markets were not developed enough for Alibaba and HKSE did not allow a dual-class share structure, which enables insiders to retain control after IPO. The IPO was rather successful and raised US$21.8 billion. Alibaba's stock price on that day gave the company a market capitalization of US$231 billion.

Question 2

What kind of roles did various financing sources play in Alibaba's growth? What were the benefits and drawbacks of those sources?

Answer 2

The early investors led by Goldman Sachs and Softbank are venture capital investors. This form of financing specializes in funding early-stage startups (like Alibaba then) that have high growth potential. Such funding was critical to Alibaba's survival and early expansion as it was too small and too young to raise capital in the public markets or secure debt financing. In exchange for their high-risk investments, venture capitalists got significant ownership of the company.
Later, Alibaba received funding from strategic investors that seek business collaborations. Yahoo provided not only financial resources but also strategic partnership. Under their agreement, Yahoo acquired 40% of Alibaba's equity, and Alibaba took over the operation of Yahoo! China. The investment from General Atlantic was reportedly driven by Alibaba's need for General Atlantic's guidance on international expansion. Those strategic investors offered important assistance for Alibaba's business development. However, as the friction between Yahoo and Alibaba showed, such relationships may turn bad when the involved companies pursue different strategic directions.
Alibaba also listed shares on the HKSE and NYSE. Financing in the public markets can be advantageous in attracting additional investments, improving liquidity of shares, lowering cost of capital, and enhancing visibility and acceptance in foreign markets. But the company now faces the reporting and compliance requirements of foreign stock exchange authorities (e.g., Alibaba was not able to adopt a dual-class share structure in HKSE). It may also face powerful institutional investors that monitor management.

Question 3

How do you evaluate the relationship between Yahoo and Alibaba? If you were a Yahoo executive, how would you handle the stake in Alibaba?

Answer 3

This question can be used for role-play discussion. Students may be assigned to play the role of Yahoo executives or the role of Alibaba executives. Obviously, both companies sought to increase their own gains in the relationship. Yahoo probably wanted to retain the ownership of Alibaba as it was one of Yahoo's few growing businesses. However, the company was struggling in the U.S. market and lacked capabilities to manage Alibaba. On the other hand, Alibaba showed great growth potential and its management team wanted more control. They moved its crucial online-payment platform out of Alibaba to a separate entity. They wanted to have a dual-class share structure to retain control after IPO. Eventually, Yahoo reduced its ownership and sold half of its stake to Alibaba for US$7.1 billion.

Question 4

What motivated Canada's adoption of IFRS?

Question 5

What are the implications of adopting IFRS for international businesses?

Question 6

Should countries that have not converted to IFRS (e.g., the U.S.) follow Canada's step?

Question 7

What factors drove the expansion of the Big Four's China businesses in China?

Question 8

What accounting challenges do multinational companies face in international markets?

Question 9

How can professional service firms like the Big Four help international businesses?

Question 10

What are your thoughts on the merger of Burger King and Tim Hortons?

Question 11

In your opinion, why did the new company set up its headquarters in Canada?

Question 12

Do you agree that tax inversion should be restricted? Why?

Question 13

How did Apple reduce its total tax payment?

Question 14

What are your thoughts on Apple's tax avoidance practices? Were they "good"?

Question 15

Should governments take actions to deter tax avoidance?

Question 16

What are the main payment methods used in international trade? Among these methods, why is letter of credit more widely used than others?

Question 17

How can a company finance its international expansion? Please describe the major sources of funding.

Question 18

What approaches can a multinational company use to effectively manage and protect its financial resources around the world?

Question 19

What challenges do different accounting standards and currencies impose on the accounting function of international business?

Question 20

How do multinational companies handle different tax rates and double taxation? How do they lower their worldwide tax payment?

Question 21

Which of the following payment methods is most preferred by exporters?

A) Draft
B) Letter of credit
C) Open account
D) Cash in advance

Question 22

Which of the following payment methods is most commonly used in international trade?

A) Consignment
B) Letter of credit
C) Open account
D) Cash in advance

Question 23

Letter of credit has the following features except _____.

A) It is requested to be made by the exporter to its bank.
B) It is a promise of payment made by a bank.
C) It guarantees payment if the exporter presents the required documents.
D) It requires the importer to pay the issuing bank once specified conditions are met.

Question 24

_______ is a written order by one party to another party to make a certain amount of payment.

A) Bill of lading
B) Bill of credit
C) Bill of exchange
D) Bill of shipment

Question 25

When a letter of credit is used, a draft is drawn to __________.

A) the importer
B) the exporter
C) the issuing bank of L/C
D) the carrier (shipping company)

Question 26

The bill of lading serves the following functions except ________.

A) it is a receipt issued by the carriers
B) it indicates the ownership of the cargo being shipped
C) it documents the specifics of the shipment
D) it offers a short-term loan to the importer

Question 27

Common approaches to financing international trade include the following except ________.

A) credit terms offered by exporters
B) financing provided by equity investors
C) lines of credit from commercial banks
D) financial assistance from government agencies like the ExIm Bank

Question 28

What is the purpose of analyzing capital structure?

A) To decide on an appropriate mix of equity and debts
B) To increase the cost of capital
C) To increase the leverage of a firm
D) To lower the debts a firm has

Question 29

When a subsidiary obtains a loan from its parent company, it conducts __________.

A) debt market financing
B) bank financing
C) equity market financing
D) intercompany financing

Question 30

When a company sell shares through private placement, it conducts __________.

A) intercompany financing
B) debt financing
C) equity financing
D) public offering of shares

Question 31

An advantage of intercompany financing is:

A) It allows an MNC to better utilize its internal resources
B) It allows an MNC to move money freely across border
C) It helps raise additional capital for the MNC
D) It increase the MNC's visibility in financial markets

Question 32

A disadvantage of debt financing is:

A) It increases the cost of capital
B) It can be risky if a firm has excessive debts
C) It requires a company to relinquish some control of the business
D) It is universally available to all firms

Question 33

In the Eurocurrency market, Eurocurrency refers to ______________.

A) currency banked outside its country of origin
B) currency banked in the Euro zone
C) currency banked outside of the Euro zone
D) currency banked as Euro

Question 34

When a company seek financing in bond markets, it has the following options except _________.

A) issuing domestic bonds
B) issuing foreign bonds
C) issuing Eurobonds
D) issuing treasury bonds

Question 35

A disadvantage of financing through equity markets is:

A) It increases the cost of capital
B) It lowers the visibility of a company
C) It requires a company to relinquish some control of the business
D) It lowers the liquidity of equity shares

Question 36

When a company seeks equity financing, it may obtain capital from ______.

A) private placements with investors
B) initial public offering in home-country stock markets
C) initial public offering in foreign stock markets
D) All of the above

Question 37

Which of the following statements is correct?

A) Cross listing helps lower the costs of reporting and compliance
B) Government financing can take form of loans or equity
C) MNCs can only get government financing from home-country governments
D) Eurocurrency loans typically have higher interest rates than domestic loans

Question 38

In order to allocate financial resources, MNCs may use _________ to quantify and compare the benefit, the cost, and the risk of an investment.

A) currency hedging
B) tax inversion
C) credit insurance
D) capital budgeting

Question 39

Which of the following statements is correct?

A) Capital budgeting is easier for MNCs because they can disperse financial resources globally
B) MNCs need to structure the bank accounts and cash balances of their subsidiaries to effectively manage their financial resources
C) Such cash management activities as global liquidity and foreign exchange exposure should be decentralized to lower risks
D) Local disbursement, collection, and payroll should be centralized to improve efficiency

Question 40

_____ is a process to offset accounts payable and accounts receivable among subsidiaries.

A) Netting
B) Cash pooling
C) Consolidation
D) Translation

Question 41

Cash pooling has the following benefits except _________.

A) accumulating a large balance in a centralized account to get a better interest rate
B) using cash excesses from some subsidiaries to fund the cash needs of other subsidiaries
C) lowering the total requirement for precautionary cash balance
D) reducing the amount and number of money transfers

Question 42

Tools MNCs may use to protect financial resources include the following except _____.

A) derivative financial instruments
B) timing change of fund transfer (e.g., lag or lead)
C) creating unequal foreign currency inflow and outflow
D) diversifying financial resources

Question 43

Which of the following statements is incorrect?

A) Different accounting standards can lead to performance variations in financial reports
B) The consolidated reports of a publicly held company need to comply with the GAAP of all the countries in which it operates
C) MNCs' subsidiaries are required to provide financial statements in accordance with the host-country's GAAP
D) MNCs' subsidiaries may be required by their headquarters to provide financial information based on the home-country GAAP.

Question 44

In order to correctly record transactions, MNCs need to define 3Cs. The 3Cs include the following except _______.

A) cash
B) calendar
C) currency
D) chart of account

Question 45

For taxation purpose, the reporting currency of a subsidiary is usually ________.

A) the home-country currency
B) the host-country currency
C) the parent company's reporting currency
D) the subsidiary's functional currency

Question 46

A German MNC conducts most transactions in U.S. dollars. The functional currency of the company is _______, and the reporting currency of the company is _________.

A) U.S. dollar … euro
B) Euro … euro
C) U.S. dollar … U.S. dollar
D) U.S. dollar … euro

Question 47

Which of the following countries have not adopted IFRS yet?

A) France
B) China
C) Canada
D) The United States

Question 48

Adopting IFRS has the following benefits except _____.

A) generating comparable financial information
B) reducing the costs of consolidation
C) catering for different accounting traditions
D) making a company's financials more accessible to international investors

Question 49

When the functional currency of a subsidiary is different from the parent firm's reporting currency, it should use _____ to translate financial statements.

A) current rate method
B) temporal method
C) forward rate method
D) swap rate method

Question 50

Which of the following statements is incorrect?

A) An MNC's subsidiary in a highly inflationary economy should use the parent firm's reporting currency as its functional currency
B) The current rate methods translate all monetary assets and liabilities at the exchange rate on the transaction date
C) The temporal method translates all nonmonetary assets and liabilities at the exchange rate on the transaction date
D) When presenting an MNC's financial information as one economic unit, intra-group transactions should be eliminated.

Question 51

Which of the following statements is incorrect?

A) Sale tax in the U.S. is calculated based on the total purchase price
B) Value-added tax is calculated at the last stage of the supply chain
C) Countries differ in not only tax rates but also in how they determine taxable income
D) Withholding tax is tax levied on passive incomes like dividends and royalties

Question 52

The following approaches have been adopted by some countries to eliminate double tax on income transferred across borders except __________.

A) eliminating tax on foreign source income
B) offering credit for tax paid overseas
C) forbidding MNC subsidiaries from claiming royalty payments as tax-deductible expenses
D) reaching tax treaties to regulate how much tax should be paid in each country

Question 53

The purpose of transfer pricing is to _________________.

A) set the prices of exported goods and services
B) increase scrutiny from tax authorities
C) lower the tax burden by setting the prices of internal transactions
D) delineate the performance of entities involved in internal transactions

Question 54

Which of the following is an approach MNCs have used to lower tax payment?

A) Lowering prices on inputs from subsidiaries in low-tax countries
B) Increasing prices on inputs from subsidiaries in high-tax countries
C) Moving incorporation location out of low-tax countries
D) Funneling income to subsidiaries in low-tax countries

Question 55

The following countries/regions are known for their low taxes except _____.

A) Bermuda
B) Cuba
C) Hong Kong
D) Ireland

Question 56

Describe the processes and key feature of Letter of Credit?

Question 57

Describe the main payment methods in international trade.

Question 58

What are the major financial sources MNCs may use?

Question 59

What are the advantages and disadvantages of different financial sources for MNCs?

Question 60

What are the major accounting issues MNCs need to consider?

Question 61

What are the main tax issues MNCs need to consider?