MMI's Goals, Investment Return, Projects 1. MMI should eliminate the hurd

1. MMI should eliminate the hurdle rate completely, but not just because eliminating the rate will result in more proposals reaching top management. MMI's goals in establishing the hurdle rate of 15 percent are admirable in that it is seeking to establish company-wide performance standards. Such standards provide guidelines for the company as a whole, and are not in and of themselves poor ideas. MMI's difficulties arise from the fact that it is a multinational organization with varied product lines and operating environments, and its foreign affiliates are unable to consistently provide 15 percent return. If the company as a whole sets 15 percent as its goal, it can balance projects that offer higher returns with projects that offer lower returns so that the average of 15 percent.

More proposals reaching top management is not necessarily the ideal, either. Such a result will mean that top management will spend an increased amount of time selecting and monitoring the projects, which could result in resentment among the foreign affiliates as a result of the perceived intrusion in their operations. However, more proposals would also mean that management receives additional input from the field and may spot a proposal from one affiliate that could be adapted and applied to another.

The company may also want to consider increasing the investment level above which projects must be approved by central management. Currently set at $250,000, the company might consider doubl

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pose projects that meet long-term as well as short-term goals. These projects could include low-return items that are long-term in nature, or projects that may be low-return but that offer entry into a new market. Similarly, managers would be more willing to take on projects that have high potential, but also high risk. The goal is to manage each foreign affiliate so that it is best able to take advantage of the environment in which it operates, not impose the same goal on all aspects of the operation. Questions Part II 1. If the company finances the operations of its foreign affiliates through equity funds, the foreign affiliates will have low debt/equity ratios. However, the company forfeits some tax advantages in that interest payments on loans are tax deductible in most cases, while equity transfers are not. If the company loans funds directly to its foreign affiliates, the foreign operations have a high debt/equity ratio, which the parent company may not desire. However, in this case, the tax consequences are generally more favorable to the company and its foreign affiliates. Another source of funds for foreign affiliates is to use their retained earnings. This is a common strategy in domestic firms, and can be used

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