Direct Foreign Investment Decision Proposal Essay

4829 words - 20 pages

Direct Foreign Investment Decision ProposalStar Jeans Company has been weighing the option to enter into foreign territory to do business. There are several factors that have played a part in this decision; one that has taken over 3 weeks to conclude. After careful examination and close analysis, the financial team at Star Jeans Company has devised the optimal financial and investment strategy for entry into Brazil. Team B will present this strategy and discuss a range of analysis to support that decision, ranging from foreign exchange rate to a contingency plan.Reasons for Choosing BrazilOne of the most important questions that one would ask is why invest in Brazil? One major reason is a ...view middle of the document...

S. and Brazil. It has made a direct foreign investment in Brazil by opening a manufacturing facility in the country. As a result, the company expects to have the choice of reinvesting any profits in Brazil or to remit them to the parent company in the U.S. However, and even though it would be unexpected, the Brazilian government may block funds from leaving its country.This will affect the parent company in the U.S. because it expects to be able to have access to these funds. It might have plans to use them for any of the following reasons: to pay executive management in the U.S., to pay dividends to shareholders, to make loan repayments, to make investments in U.S. securities or other foreign securities outside of Brazil, or to make a capital investment (e.g. in property or equipment) in the U.S.If Brazil prevents Star Jeans Company from remitting funds to the U.S, it could adversely affect the company. For example, the company may be relying on these funds to pay down debt in the U.S. If it does not have access to these funds, the company will have to find money elsewhere to pay its loans. This money, in turn will be taken from other sources of operations within the company. That money may have been earmarked for other projects that must now be delayed because the earnings from Brazil cannot be transferred to the U.S.If the company had planned on using these funds to pay shareholders, the dividend may now be less than expected which could reduce the overall value of the company. In the worst case scenario, the Board of Directors may fire certain members of management for making the decision to make a direct foreign investment in Brazil. The investment may not be creating value for the company if the earnings cannot be remitted to the U.S. The Board might then view the investment as a liability. However, it might be too costly to close the manufacturing facility, and the company will have to keep operating it even though it would prefer not to anymore.If the Brazilian government does not prevent Start Jeans Company from remitting funds to the U.S., the company will have a great deal more flexibility in reinvesting these funds. It may choose to remit them to the U.S., but this will not necessarily be the best financial decision for the company.If the Subsidiary Provided FundsReinvesting the earnings of the Brazilian plant in Brazil might earn the largest gains for Star Jeans Company. The Brazilian subsidiary's profits may not be maximized if forced to remit that money to the parent company in the U.S. This is because the Brazilian plant's internal rate of return may be higher than that of any of the parent company's facilities in the U.S. If that is the case, it would benefit the subsidiary to expand its operations in Brazil. It could consider opening an additional production line, adding an additional work shift to its work day, or physically expanding the plant itself in order to handle more production.The subsidiary might also lose out by...

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