finacial mgt & intl business

8/13/2019 Finacial Mgt & Intl Business

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International

us ness


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Money means Many

The Objective of Business is toax m ze evenues an n m ze s

The Objective of the Finance Functionis to Maximize Return on Capital

mp oye an n m ze s

RRS/Feb04


3/26

Globalisation compulsions

Globalisation is Producing Where it is More Cost Effective and Selling inthe Markets Where the Value is the Highest

Reduction of Trade BarriersIncreased Prevalence of Electronic Commerce

Markets become More Homogeneous

Greater Economies of Scale are Realized

Domestic Operators Shift to become Global

Finance Must Support the Business as it Evolves into a Global Organizationperat ona y, t nvo ves op ng w t erent me ones,

Cultures, Languages, Regulations and Many More Locations

Strategically, there will be a Greater Variety of Options forRaisin Funds

RRS/Feb04


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Drivers of Corporate and FinanceDrivers of Corporate and Finance

Globalisation

Financial Structuring

Financial Reporting

Information Technology

Risk Management

Corporate Governance

Shareholder Value Creation

RRS/Feb04


5/26

Spectrum of Financial Management

Investment decisions, decisions about whatactivities to finance.

inancin decisionsdecisions about how tofinance those activities.

Money management decisions, decisions abouthow to manage the firms financial resources

RRS/Feb04

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Project and Parent Cash Flows

Project cash flows may not reach the parent:

Host country may block

Cash flow repatriation.

Cash flows may be taxed at an

unfavorable rate.

Host government may require apercentage of cash flows be

reinvested in the host country.

RRS/Feb04


8/26

Adjusting for Political and Economics

Political risk:Expropriation - Iranian revolution, 1979.oc a unres - a er e rea up o ugos av a,

company assets were rendered worthless.

Political chan e - ma lead to tax and ownershichanges.

Economic risk:

.

RRS/Feb04


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Risk and Capital Budgeting

Handling Risk

Treat all risk as a

single problem

rate to projectsin risky countries.

Better to revisefuture cash flows

downward to reflect

Penalizes early cashflows too much.

Later cash flows

adverse politicalor economic risk.Therefore:

RRS/Feb04

too little.


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Financing Decisions- Source of Financing

Source of financing:Global capital markets for lower cost financing.

Host-country may require projects to be locally

financed through debt or equity. .Host-government may offer low interest or subsidizedloans to attract investment.

Impact of local currency (appreciation/depreciation)influences capital and financing decisions.

RRS/Feb04


11/26

Financing Decisions- Financial structure

inancia structure:Debt/equity ratios vary with countries.

.

Follow local capital structure norms?More easil evaluate return on e uit relative tolocal competition.

Good for companys image.

es recommen a on: a op a nanc astructure that minimizes the cost of capital.

RRS/Feb04


12/26

Global Money Management- -

Minimizin cash balances:

Money market accounts - low interest - highliquidity.erti icates o eposit - ig er interest -

lower liquidity.

exchange):Transaction costs:changing from one

currency to another.Transfer fee: fee for moving cash from one

RRS/Feb04

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Global Money Management-The Tax Objective -

ountr es tax ncome earne outs e t e r oun ar es yentities based in their country.

Can ead to doub e ta ation.

Tax credit allows entity to reduce home taxes by amount

paid to foreign government.ax rea y s an agreemen e ween coun r es spec y ng

what items will be taxed by authorities in country whereincome is earned.

Deferral principle specifies that parent companies will notbe taxed on foreign income until the dividend is received.

RRS/Feb04


14/26

Moving Money Across Borders: Attainingc enc e an e uc ng a e

Unbundlin : a mix o techni ues to trans er li uid unds

from a foreign subsidiary to the parent company withoutpiquing the host-country.

.

Royalty payments and fees.

.

Fronting loans.

Selectin a articular olic is limited when aforeign subsidiary is part owned by a local joint-venture partner or local stockholders.

RRS/Feb04


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Dividend Remittances

Most common method of transfer.

Dividend varies with: .

Foreign exchange risk.

Dividends

ge o su si iary.

Extent of local equity

participation.

RRS/Feb04


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Royalty Payments and Fees

Royalties represent the remuneration paid to owners,

the firm.Common for parent to charge a subsidiary for technology,

.

May be levied as a fixed amount per unit sold or

percentage of revenue earned.ees are compensa on or pro ess ona serv ces or

expertise supplied to subsidiary.Management fees or technical assistance fees.

Fixed charges for services provided

RRS/Feb04


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Transfer PricesPrice at which goods or services are transferred

within a firms entities.Position funds within a company.ove oun s out o country y setting ig trans er

fees or into a country by setting low transfer fees.

Movement can be within subsidiaries or between theparent and its subsidiaries.

RRS/Feb04


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Benefits of Transfer Fees

Reduce tax liabilities by using transfer fees to- - .

Reduce foreign exchange risk exposure to expectedcurrency devaluation by transferring funds.

Can be used where dividends are restricted or

blocked by host-government policy.transfer prices and the value of the goods.

RRS/Feb04


19/26

Problems with Transfer Pricing

Governments dontlike it.Believe ri htl the

Impacts managementincentives & performance

lose money. eva uat ons.

Inconsistent withprofit center. Managers can hide

inefficiencies.

RRS/Feb04


20/26

Fronting Loans

channeled through a financial intermediary (bank). -

remittance of funds from subsidiary to parent.

Provides certain tax advantages.

RRS/Feb04


21/26

Fronting Loan

Deposit $1Million

Loan $1 Million

ax avenSubsidiary

on onBank

Foreign

Operatingu ary

Pays 8% Interest(Tax Free)

Pays 9% Interest(Tax Deductible)

RRS/Feb04


22/26

Techniques for Global Money Management

- entra ize epositories -

Need cash reserves to service accounts andinsuring against negative cash flows.

Should each subsidiary hold its own cash balance?

By pooling, firm can deposit larger cash amounts and.

If located in a major financial center can getinformation on ood investment o ortunities.

Can reduce the total size of cash pool and investlarger reserves in higher paying, long term,

RRS/Feb04

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23/26

Managing Foreign Exchange Risk

exchange rate will hurt the firm.Transaction ex osure:extent income fromtransactions is affected by currencyfluctuations.

exchange rates on consolidated results andbalance sheet.

Economic exposure:effect of changing exchangerates over future prices, sales and costs.

RRS/Feb04


24/26

Tactics and Strategies for Reducing

Primarily protect short-term cash flows.

Reducing Transaction and Translation Exposure

Reducing transaction and translation exposure:

Buying forward and currency swaps.ea s ra egy:co ec ng rece va es ear y w encurrency devaluation is anticipated and paying earlywhen currency may appreciate.

ag strategy: e ay ng rece va e co ect on w enanticipating currency appreciation and delayingpayables when currency depreciation is expected.

RRS/Feb04


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Tactics and Strategies for Reducing

Key is to distribute productive assets to various locations

Reducing Economic Exposure

so firm is not severely affected by exchange ratechanges.

Manufacturing

Dispersal

RRS/Feb04


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Developing Policies for Managing

ore gn xc ange xposure

No firm Rule, but commonality of approach doesexist:

Central control of exposure.

Distinguish between transaction/translation.

Forecast future exchange rate movements.

Good reporting systems to monitor firms exposure

to exchange rate changes.Produce monthly foreign exchange exposure reports.

RRS/Feb04

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