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Index
Introduction Investment Decisions Financing Decisions Global Money ManagementThe Efficiency Objective Global Money ManagementThe Tax Objective Moving Money across BordersAttaining Efficiencies and Reducing Taxes Techniques for Global Money Management Cases
Introduction
Scope of financial management includes three sets of related decisions: Investment decisions
Decisions about what activities to finance
Financing decisions
Decisions about how to finance those activities
Introduction
In an international business, investment, financing, and money management decisions are complicated by different
currencies
tax regimes
Introduction
Financial managers must consider
1. when deciding which activities to finance 2. how best to finance those activities 3. how best to manage the firms financial resources 4. how best to protect the firm from political and economic risks (including foreign exchange risk)
Investment Decisions
Capital budgeting Project and Parent Cash Flows Adjusting for Political and Economic Risk
Review
CH2 CH3 Discuss how the political, economic ,legal, and cultural environment of a country can influence the benefits, costs and risks of doing business there and thus its attractiveness as an investment site. Discuss of the economic theory of foreign direct Investment. We looked at the political economy of foreign direct investment and considered the role that government intervention can play in foreign Investment.
CH7 CH8
CH12 We pulled much of this material together when we considered how a firm can reduce its costs of value creation and / or increase its value added by investing in productive activities in other countries. CH14 We considered the various models for entering foreign markets.
Capital budgeting
Capital budgeting: Quantifies the benefits, costs and risks of an investment Managers can reasonably compare different investment alternatives within and across countries Complicated process:
Identification
Selection
Follow-up
Development
Implementation
Host government may require a percentage of cash flows to be reinvested in the host country
Economic risk
Inflation
Financing Decisions
How the foreign investment will be financed How the financial structure of the foreign affiliate should be configured
Debt loans occur when a corporation borrows money and agrees to repay a predetermined portion of the loan amount at regular intervals regardless of how much profit it is making
Source of Financing
Global capital markets for lower cost financing. Impact of host country - may require projects to be locally financed through debt or equity
Limited liquidity raises the cost of capital Host government may offer low interest or subsidized loans to attract investment
Financial Structure
Financial structure: Follow local capital structure norms?
More easily evaluate return on equity relative to local competition Good for companys image
Best recommendation: adopt a financial structure that minimizes the cost of capital
Unbundling: A mix of techniques to transfer liquid funds from a foreign subsidiary to the parent company without piquing the host country
Dividend remittances Royalty payments and fees Transfer Prices Fronting loans Selecting a particular policy is limited when a foreign subsidiary is part owned by a local joint-venture partner or local stockholders
Dividend Remittances
Most common method of transfer
Dividend varies with:
Tax regulations
Transfer Prices
Price at which goods or services are transferred within a firms entities
Position funds within a company
Move founds out of country by setting high transfer fees or into a country by setting low transfer fees
Movement can be within subsidiaries or between the parent and its subsidiaries
Fronting Loans
Loan between a parent and subsidiary is channeled through a financial intermediary (bank)
Allows circumvention of host country restrictions on remittance of funds from subsidiary to parent Provides certain tax advantages
Firms use two money management techniques in attempting to manage their global cash resources in the most efficient manner: centralized depositories and multilateral netting.
Need cash reserves to service accounts and insuring against negative cash flows Should each subsidiary hold its own cash balance?
By pooling, firm can deposit larger cash amounts and earn higher interest rates If located in a major financial center, can get information on good investment opportunities Can reduce the total size of cash pool and invest larger reserves in higher paying, long term, instruments
(Netting Center)
Square root of ($1,000,000+2,000,000+3,000,000) = Square root of 14,000,000 =$3,741,657 $28 million+(3* $3,741,657) =$39,224,971 $46 million $39,224,971=$6,775,029
French subsidiary
$2 million
$6 million
Mexican subsidiary
Multilateral netting simply extending the bilateral concept to multiple subsidiaries within an international business
If the transaction costs is 1% Before multilateral netting, transaction costs is $ 430,000 ($43 million * 1%) After multilateral netting, transaction costs is $ 50,000 ($5 million* 1%) A saving of $380,000 achieved through multilateral netting