What is a fronting loan? How does its structure potentially create value for a multinational corporation?
What will be an ideal response?
A fronting loan is a parent-to-affiliate loan that uses a large international bank as a financial intermediary. Rather than have the parent corporation make a loan directly to its foreign affiliate, the parent instead makes a deposit with an international bank. The bank, in turn, makes a loan to the foreign affiliate that is equivalent to 100% of the deposited funds. From the bank's perspective, a fronting loan is risk free because the loan is fully collateralized by the deposit of the parent. The bank willingly participates for a small fee, earned in the form of a spread between the deposit rate that is paid to the parent and the rate that is charged to the foreign affiliate. The primary reason for involving the international bank is to try to avoid the adverse impact of a blocked-funds situation. When a country rations foreign exchange, it often allows businesses to make some payments but not others. Interest and principal payments on intracompany loans from the foreign affiliate of an MNC operating in the country to its parent are generally given a lower priority by the government than interest and principal payments from the same foreign affiliate to an international bank in a neutral country. Although halting the payments made to large MNCs does have costs, the perceived costs are smaller than those incurred when a country stops allowing payments to be made to major international banks.
International banks can refuse to finance a country's international trade or can hamper the government's ability to borrow funds, whereas MNCs can do little more than threaten not to invest in the country in the future. Fronting loans can also give an MNC a tax advantage. If the local government allows the foreign affiliate to take a tax deduction for interest paid on a bank loan but does not allow a tax deduction for interest paid on an intracompany loan, the use of a fronting loan creates a valuable tax shield.
You might also like to view...
Each of the following is considered trade dress except
A. the font and size of print used in a national store's print advertising. B. the costume worn by your school's mascot at sporting and other events. C. the white linen tablecloths at the Four Seasons Restaurant in New York City. D. the brown uniforms and trucks at UPS.
A clothing store decides to expand to the international market and follows the same strategy in Europe and Asia that it did in North America. Their sales in Asia fail to pick up. What general environment dimension is affecting this company?
A. The technological dimension B. The economic dimension C. The international dimension D. The sociocultural dimension E. The natural dimension
At the end of the year, Jenkins Corporation had $120,00 . in the Factory Overhead account and applied factory overhead of $100,000 . Mark Gibbs, the controller, has decided that the difference is to large to close to Cost of Goods Sold. Work in process inventories were $30,000 . finished goods inventories were $60,00 . and cost of goods sold during the year was $210,000 . How should the entry to
dispose of the difference in overhead incurred and overhead applied affect Cost of Goods Sold? a. $14,00 . credit. b. $14,00 . debit. c. $6,00 . credit. d. 20,00 . debit.
Which of the following statements is true of a promotional mix?
a. Control over message content is greatest when public relations is used. b. A large audience is best reached with personal selling. c. In advertising, the sponsor or company is identified. d. The mode of communication for sales promotion is usually direct and personal.