North Star Essays

North Star Essays North Star Essay North Star Essay North Star Company is considering establishing a subsidiary to manufacture clothing in Singapore. Its sales would be invoiced in Singapore $. North Star Company expects to receive S$30 million after taxes as a result of selling the subsidiary at the end of year six. Fifty percent of the net cash flows to the subsidiary would be remitted to the parent while the remaining fifty percent would be reinvested to support ongoing operations. North Star anticipates a ten percent withholding tax on funds remitted to the United States. The first financing arrangement would include an initial investment of S$40 million by North Star. Any investment in working capital is to be assumed by the buyer in year six. The expected salvage value has already accounted for this transfer of working capital to the buyer in year six. The initial investment could be financed completely by the parent by converting $20 million at the present exchange rate of $. 50 per Singapore dollar to achieve S$40 million. North Star Company will go forward with its intentions to build the subsidiary only if it expects o achieve a return on its capital of 18 percent or more. The alternative arrangement requires the parent to provide $10 million which means that the subsidiary would need to barrow S$20 million. Under this scenario, the subsidiary would obtains a 20 year loan and pay interest S$ 1. 6 million per year. In addition, the forecasted proceeds to be received from the subsidiary (after taxes) at the end of six years would be S$ 20 million. Assume the parents required rate of return would still be 18 percent.