Southport Minerals, Inc. is the largest sulphur producer in the United States.Due to a shortening of supply over the past few years Southport has enjoyed enormous profits and is extremely liquid with a debt/equity ratio of .02.
Currently sulphur production accounts for 90% of Southport's revenue.The company is searching for non-acquisition diversification opportunities.Southport has been presented with the opportunity to develop a copper mine in Indonesia.Increased uses of copper and rising copper prices have led Southport to consider this opportunity.
However, the location of the copper mine, and the political environment in Indonesia are risks that must be considered. The company has acquired the proper financing to proceed with the project.However, they must decide how to discount the cash flows to determine if the project is acceptable. Southport has decided to proceed with the project under a subsidiary (Southport Indonesia).Several reasons support the choice of creating a subsidiary rather than doing business as the current corporation.
First, the translation of foreign currency must be considered.If operating under one corporate entity each transaction must be translated.This would lead to a degree of discrepancies, creating confusion.Also, differences in tax and accounting regulations are a consideration.Foreign countries have different accounting systems and tax plans.
Therefore, two sets of book would be needed to reconcile foreign and domestic statements.Third a separate entity, creates shelter against political risk.The parent company is protected from political turmoil inside the foreign country.Southport has already had property expropriated in Cuba.The board is very wary of any future foreign risks.Any protection that Southport can guarantee the board will help sell the position.
In order to avoid potential distortions caused by foreign currency conversion, Southport should co…