Chapter 10
Managerial Planning and Control
Discussion Questions
1. Four critical dimensions of long-range planning are:
a. Identifying key drivers of a company’s future progress.
2. A standard costing system has as its objective the notion of cost control. It estimates annually
what costs should be under ideal operating conditions. Actual results are then compared with
3. Financial managers must be prepared to evaluate foreign investments from multiple reporting
perspectives. This significantly complicates the information requirements for decisions on
foreign investment. Management’s objective from a parent company perspective is to
maximize shareholder wealth. To do this, management must select investment opportunities
4. Many variables must be considered when measuring a multinational entity’s cost of capital.
These variables include:
a. Differential interest rates between national markets
b. Foreign business risk
c. Foreign exchange risk
d. Political risk
e. Investor valuation models in different countries
f. International taxes
5. The first variance holds exchange rates constant and examines how the local manager
performed in terms of his or her primary operating responsibilities. In effect, the local
6. An examination of the seven caveats near the end of the chapter will highlight some of the
major issues involved in designing and implementing international performance evaluation
systems. We illustrate two major issues raised by these caveats.
First, foreign subsidiaries should not be evaluated as independent profit centers when they are
really strategic components of a multinational system. Company-wide return-on-investment
criteria should be replaced by performance measures more in line with the specific objectives
and environments of each foreign subsidiary being evaluated. One example of a dysfunctional
7. We favor the budgetary exchange rate combination that uses a projected rate to set the budget
and the end-of-period rate to track performance. Use of a projected rate to set the budget
encourages managers to incorporate the effects of anticipated exchange rate changes into
8. This discussion question is designed to get students to think outside the box, so their
9. For:
a. There is a reduced cost of implementation.
b. Financial control may not be a critical problem during the initial phase of operations.
c. There are fewer problems related to preparing and analyzing consolidated reports of
domestic and foreign operations.
d. The financial control system can be installed more quickly as system testing and design
have already been completed.
e. Headquarters personnel assigned abroad will feel comfortable with a familiar control
system.
f. The system facilitates centralized control from corporate headquarters.
Against:
a. The organization and environment of foreign operations may be sufficiently different to
warrant tailor-made control systems.
10. Value reporting is forward looking whereas the traditional financial reporting model students
learn is historical in its orientation. Those who favor value reporting will appreciate its focus
Exercises
1. a. €2,250/100 units = €22.50 X 1.10 = €24.75.
2. The following analysis ignores Russian withholding taxes on dividends remitted to the U.S.
Cash Flows
Russian Subsidiary Year 1 Year 2
a. Pretax earnings RUB 55,600,000 RUB 130,332,000
U.S. Parent
e. Income RUB 23,352,000 RUB 54,739,440
f. Dividend gross–up
(line d./line c. X line b) 15,568,000 36,492,960
many measurement issues surrounding foreign investment decisions.
Year Cash Flow Exchange Cash Flow PV factor Present Value
(Rubles) Rate (Dollars) at 20% equivalent
0 -6,000,000 1.000 -6,000,000
1 23,352,000 R26 = $1 898,154 .833 $ 748,162
Because the net present value is negative, the investment might not appear attractive.
However, students will quickly and rightly begin to question the exercise’s assumptions.
Points that students should raise include:
a. The measurement of cash flow: Should one ignore cash flows beyond year 6?
b. Do accounting principles differences affect the measurement of income and cash flow?
c. What is the terminal value (including the recapture of working capital at the end of the 6-
year investment horizon)?
d. Is it wise to penalize all future cash flows by a 10 percent premium? One could argue that
the risk premium might be partly offset by an international diversification discount. How
does one quantify risk in a multinational setting?
e. How reasonable are exchange rate forecasts?
4. This question should generate useful ideas and discussion on the importance of strategic
5. ZMK1,000,000 Expenses in Month 1
Varying Invoice Dates and Payment Dates
_____________________________________________________________________________________
Invoice Payment Conventional Proposed
Day Day Measure Measure Difference
________________________________________________________________
1 Cash 7,692 10,000 2,308
6.
Unit
(attributable items)
Sales $4,000,000
Other income 120,000
Costs and expenses:
Cost of sales 3,200,000
7. Manager
(controllable items)
Sales $4,000,000
Other income 120,000
The inclusion of select items of revenue and expense in the performance report of the manger of
Compagnie de Calais reflects the general principle that a manager should only be held accountable for
items over which he or she has some control.
8.
Sales Exchange $ Equivalent Variance
Rate
Local currency MXP8,000,000 CAD.00032 CAD 2,560
operating variance
Expenses Exchange $ Equivalent Variance
Rate
9. If the local currency is deemed the functional currency, the exchange rate variance in Exhibit
10-10 will change to negative 239. The difference in currency effects is due to the use of the
current instead of the temporal currency translation method (i.e., the use of the current rate to
translate inventories and fixed assets and their associated expenses).
Analysis of variance procedures would be the same as under the temporal method using the
beginning-of-year exchange rate as our benchmark. Thus, the volume price/cost and expense
variances would reflect the same relationships after translation to the parent currency as
before with the exception of the currency variance. The favorable exchange variance of
PC456 in operating earnings would be attributed to the following factors:
Higher sales volume PC +400
Lower selling price -300
10.
Sub Nominal Country Risk-adjustment Actual
ROI Risk ROI ROI
Coefficient
Case Study 10.1 Foreign Investment Analysis: A Tangled Affair
Following is a comparison of the translation adjustment with MBI’s exposure:
2007 $1.698 billion – $1.917 billion
$15.034 billion = –1.46%
Changes in the trade-weighted index:
As can be seen, the trade-weighted index is a reasonable proxy for MBI’s exchange rate experience.
Assuming that 90 percent of MBI’s net assets abroad are also in local currencies, the impact of foreign
currency (FC) changes on net assets employed (a measure of MBI’s foreign currency exposure per the
current rate translation method) follows:
2008 2007 2006
Real Change in Net Assets:
Year Reported Change Change in Real Change
Translation
Adjustment
The impact of foreign currency (FC) changes on revenues is determined as follows (in millions):
2008 2007 2006
Non-U.S. revenues $41,886 $36,965 $34,361
The impact of foreign exchange changes on net income is determined as:
2008 2007 2006
Foreign pretax income(bil.) $7.844 $7.496 $7.088
When the effect of exchange rate changes have been eliminated, we see a completely different picture
Case Study 10.2 Assessing Foreign Subsidiary Performance in a World of Floating Exchange Rates
A useful pedagogical approach to this case analysis is to have your students participate in a team debate.
One team should advocate the merits of ICI’s method of evaluating its foreign managers in a world of
floating exchange rates; the other should make a case for GE’s method. At the conclusion of the team
debate, students should be asked to individually reflect on the strengths of all arguments made and decide
for themselves which approach they feel is best. A good way to personalize the issue is to ask them to
vote for the company for which they would prefer to work as a foreign subsidiary manager, and why.
The following summarizes selected responses of some of our students to this performance evaluation
comparison.
General Electric
Merits: 1. Focuses on returns most germane to U.S. investors.
2. Develops exchange risk management capabilities of local managers.
4. Local manager knows exactly what is expected.
Limitations:
ICI
Merits: 1. Encourages local managers to focus on economic as opposed to accounting exposure.
Limitations:
1. Easy for local mangers to pass the buck.
3. Difficult to implement as performance standards are often fuzzy (i.e., it is very difficult to
measure economic exposure in practice).