Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall 19-1 International Business Environments & Operations 14e Daniels ● Radebaugh ● Sullivan

Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall

19-1

International Business

Environments & Operations

14e

Daniels ● Radebaugh ● Sullivan


19-2

Chapter 19

The Multinational Finance Function


19-3

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 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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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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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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How the MNE Handles its Funds: Multilateral Cash Flows


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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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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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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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Problems with foreign country tax laws arise from a lack of familiarity with laws loose enforcement


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The Tax Status of U.S.-Owned Foreign Subsidiaries


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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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Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall 19-1 International Business Environments & Operations 14e Daniels ● Radebaugh ● Sullivan