Questions
11-1. In the case of Allergan and Pfizer, there are two sovereign powers in play – Ireland and the
United States. Why was Ireland interested in letting the inversion take place, and
why was the U.S. government against the inversion? Is the decision by the United States a direct
affront to the sovereignty of Ireland?
FDI has been a cornerstone of Ireland’s economic performance over the past decade contributing
to growth and employment. Consequently, Ireland continues to provide incentives to attract FDI.
Chief among those incentives is the low corporate tax rate. On the other hand, the U.S.
Regarding sovereignty, students’ responses can vary. It is, however, common in international
11-2. In what ways are tax inversions beneficial to both the United States and the host country of
the inversion?
By merging with foreign firms and incorporating abroad to reduce their tax liability, American
companies free up more cash for reinvestments, which might benefit both the U.S. and the host
country of the inversion. For instance, Burger King has proven its prediction that growth, not just
CLOSING CASE: Does the Devil Really Wear Prada?
The Prada Group is one of the top luxury businesses in the world. It is a closely held firm. The
company previously considered going public in the form of an IPO to acquire capital for future
expansion. However, the company recognized that an IPO would force the company to deal with
outside shareholders, and alter the ownership structure of the organization. Further, the company
had to also make decisions regarding where an IPO should be offered. Some advocated a listing
on the Milan Stock Exchange, and others in Asia, which is closer to future growth markets. The
China market was particularly appealing. The company eventually opted for an IPO in Hong
Kong. As we moved into 2016, Prada has suffered for a variety of reasons. Persistent weakness
in Hong Kong has really hurt Prada sales. Tighter visa restrictions on Chinese shoppers who
looked to Hong Kong as the place to shop pushed a lot of Chinese shoppers to Europe. However,
the terrorist attacks in Paris dramatically reduced the flow of Chinese tourists to Europe. The
economic slowdown in China coupled with a rise in the Hong Kong dollar, which is pegged; to
the United States also hurt the sales of Prada and other luxury brands.
QUESTIONS
11-3. Do you agree with the decision to list an IPO, or should Prada have borrowed more
money, possibly floating a dim sum bond or a Eurobond in London or elsewhere?
11-4. What do you feel are the best justifications for Prada to issue the IPO in Hong Kong? Are
there any downsides to their decision to list in Hong Kong?
11-5. Many of the other luxury fashion companies are also largely family owned. What is the
impact to Prada of diluting the family ownership, and is this a model that other companies can
be expected to follow?
11-6. Given the downturn in the economy in Hong Kong and China, what do you think Prada’s
future is in the region?
ADDITIONAL EXERCISES: Global Capital Markets
Exercise 11.1. When using capital budgeting techniques to evaluate a potential foreign
project, a firm needs to recognize the specific political and economic risks (including
foreign-exchange risk) arising from that foreign location. Ask students to compare the
advantages of (i) using a higher discount rate and (ii) forecasting lower cash flows to
evaluate such projects. (LO: 1, Learning Outcome: To describe the financial function and
how it fits in the MNE’s organizational structure, AACSB: Analytical Skills.)
Exercise 11.2. Typically, the cost of capital is lower in the global capital market than in
domestic capital markets. Other things being equal, firms will likely prefer to finance their
investments by borrowing from the global capital market. However, such borrowing may be
restricted by host-country regulations or demands. Ask the students to discuss the point at
which firms should consider using the global equity markets to finance foreign investments
and operations in lieu of the global debt markets. Are firms likely to encounter restrictions in
the equity markets as well? What are the effects of such restrictions likely to be on a firm’s
investment and operating decisions? (LO: 2, Learning Outcome: To show how companies
can acquire outside funds for normal operations and expansion, including offshore debt and
equity funds, AACSB: Dynamics of the Global Economy.)