The Financial Feasibility of Divesting Subsidiary

The Financial Feasibility of Divesting Subsidiary

Description/Paper Instructions

The Financial Feasibility of Divesting Subsidiary

Q1. The reduction in expected cash flows of Asian subsidiaries as a result of the Asian crisis likely resulted in a reduced valuation of these subsidiaries from the parent’s perspective. Explain why a U.S.-based MNC might not have sold its Asian subsidiaries. 

Q2. Ethridge Co. of Atlanta, Georgia has a subsidiary in India that produces products and sells products throughout Asia. In response to the September 11, 2001 terrorist attack on the U.S., Ethrdige Co. decided to conduct a capital budgeting analysis to determine whether it should divest the subsidiary. Why might this decision be different after the attack as opposed to before the attack? Describe the general method for determining whether the divestiture is financially feasible.

Student Response

Rodrigo Lima

WednesdayFeb 15 at 9:53am

Manage Discussion Entry

Hello Class,

Q1. The reduction in expected cash flows of Asian subsidiaries as a result of the Asian crisis likely resulted in a reduced valuation of these subsidiaries from the parent’s perspective. Explain why a U.S.-based MNC might not have sold its Asian subsidiaries.

The Asian financial crisis began in July of 1997 in Thailand and escalated across East Asia, having a strong effect on the economies in the region and lead to spillover effects in Eastern Europe and Latin America. “On July 2, 1997, Thailand devalued its currency relative to the U.S. dollar. This development, which followed months of speculative pressures that had substantially depleted Thailand’s official foreign exchange reserves, marked the beginning of a deep financial crisis across much of East Asia.” (Carson & Clark, 2013).

From time to time, a multinational company needs to reevaluate its direct foreign investments to decide if they need to be retained or sold. Many of these foreign projects might not be advantageous anymore because of MNCs increasing cost of capital, increasing government taxes and political risk in the host country. The revised assessment of economic conditions resulted on different divestments happening. Multinational companies based in the United States assess Asian subsidiaries values because of the crisis in Asia. It only sells its Asian subsidiaries if the present value of the cash flows from continuation of the subsidiary are lower than the proceeds that would be received by the project being divested, the MNC’s based in the United States might not have sold its Asian subsidiaries because the present value of the cash flows from continuation of the subsidiary are actually higher.

References:

Carson, M. & Clark, J. (November 22, 2013). Asian Financial Crisis. Retrieved from https://www.federalreservehistory.org/essays/asian-financial-crisisLinks to an external site.