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Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall
19-1
International Business
Environments & Operations
14e
Daniels ● Radebaugh ● Sullivan
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Chapter 19
The Multinational Finance Function
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Learning Objectives To describe the multinational finance function and how it
fits in the MNE’s organizational structure To show how companies can acquire outside funds for
normal operations and expansion, including offshore debt and equity funds
To explore how offshore financial centers are used to raise funds and manage cash flows
To explain how companies include international factors in the capital budgeting process
To discuss the major internal sources of funds available to the MNE and to show how these funds are managed globally
To describe how companies protect against the major financial risks of inflation and exchange rate movements
To highlight some of the tax issues facing MNEs
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Introduction MNEs use capital markets to finance
expansion Small companies deal in foreign currencies
to settle payments for exports and imports
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The Finance FunctionLearning Objective 1: To describe the multinational finance function and how it fits in the MNE’s organizational structure
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The Finance Function Key finance functions include
Capital structure Long-term financing Capital budgeting Working capital management
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The Role of the CFOThe Role of the Treasurer in the Finance Function
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Capital Structure Capital structure
mix between long-term debt and equity Leveraging
the degree to which a firm funds the growth of business by debt
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Capital StructureSelected Capital Structures, FY 2007
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Capital Structure Factors affecting the choice of capital
structure local tax rates the degree of development of local equity
markets creditor rights
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Capital Structure Sources of capital
banks sovereign wealth funds
Debt markets as a means of expansion local debt markets international debt markets
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Global Capital MarketsLearning Objective 2: To show how companies can acquire outside funds for normal operations and expansion, including offshore debt and equity funds
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Global Capital Markets Eurocurrency market
source of debt financing Eurocurrency
any currency banked outside its country of origin
Eurodollar a certificate of deposit in dollars in a bank
outside of the United States
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Global Capital Markets International bonds Foreign bonds
sold outside the borrower’s country but denominated in the country of issue currency
Eurobonds underwritten by a syndicate of banks from
different countries and sold in a currency other than that of the country of issue
Global bond
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Global Capital Markets Equity securities
investor takes an ownership position in return for shares of stock in the company and the promises of capital gains and maybe dividends
Market capitalization the total number of shares of stock listed times
the market price per share New York, Tokyo, and London have the three
largest stock markets in the world
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Global Capital MarketsGlobal Markets: Market Capitalization, 2008
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Global Capital Markets Euroequity market
the market for shares sold outside the boundaries of the issuing firm’s home country
allows firms to target another group of stockholders
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Offshore Financing and Offshore Financial CentersLearning Objective 3: To explore how offshore financial centers are used to raise funds and manage cash flows
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Offshore Financing and Offshore Financial Centers
Offshore financing the provision of financial services by banks and
other agents to nonresidents Offshore financial centers (OFCs)
cities or countries that provide large amounts of funds in currencies other than their own and are used as locations in which to raise and accumulate cash
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Capital Budgeting in a Global Context
Learning Objective 4: To explain how companies include international factors in the capital budgeting process
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Capital Budgeting in a Global Context
Capital budgeting the process whereby MNEs determine which
projects and countries will receive capital investment funds
Techniques Payback period Net present value of a project (NPV) Internal rate of return
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Capital Budgeting in a Global Context
Internal sources of funds Loans Investment through equity capital Intercompany receivables and payables Dividends
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Capital Budgeting in a Global ContextHow the MNE Handles its Funds: Internal Funds
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Capital Budgeting in a Global Context
CFOs must determine What are the local and corporate system needs
for cash? How can the cash be withdrawn from
subsidiaries and centralized? Once the cash has been centralized, what
should be done with it?
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Capital Budgeting in a Global Context
How the MNE Handles its Funds: Multilateral Cash Flows
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Capital Budgeting in a Global Context
How the MNE Handles its Funds: Multilateral Netting
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Foreign Exchange Risk Management
Learning Objective 6: To describe how companies protect against the major financial risks of inflation and exchange rate movements
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Foreign Exchange Risk Management
Types of foreign exchange exposure Translation
exposed accounts either gain or lose value in dollars when the exchange rate changes
Transaction when a transaction is denominated in a foreign
currency and the settlement results in a cash flow gain or loss
Economic or operating the potential for change in expected cash flows that
arises from the pricing of products, the sourcing and cost of inputs, and the location of investments
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Foreign Exchange Risk Management
Exposure Management Strategy Defining and measuring exposure Creating a reporting system Adopt a policy assigning responsibility for
minimizing or hedging exposure Formulating hedging strategies
Operational leads and lags strategy
Financial forward contracts and currency options
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Taxation of Foreign Source Income
Learning Objective 7: To highlight some of the tax issues facing MNEs
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Taxation of Foreign Source Income
Problems with foreign country tax laws arise from a lack of familiarity with laws loose enforcement
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Taxation of Foreign Source Income
The Tax Status of U.S.-Owned Foreign Subsidiaries
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Taxation of Foreign Source Income
Transfer prices a price on goods or services one member of a
corporate family sells to another Tax treaties
prevent double taxation or provide remedies when it occurs
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Technology and Cash Flows
Going forward Companies will focus more on moving
corporate cash worldwide to take advantage of differing rates of return and minimize tax bills
Technological innovation will allow companies to transfer funds more quickly worldwide
The OECD, the IMF, and the EU will help countries minimize tax differences and crack down on money transfers for illegal purposes
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All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without the prior written permission of the publisher. Printed in the United States of America.
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