IFM 4 TH MODULE [Compatibility Mode]

8/9/2019 IFM 4 TH MODULE [Compatibility Mode]

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International financial

management

HARISHA.B.VAIP(FINANCE AND CONTROL)

IIM BANGALORE

MODULE 4


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MODULE 4

MANAGING MULTINATIONALOPERATIONS

MULTINATIONAL TAXATION

INTER COMPANY FUND FLOW

MULTINATIONAL WORKING CAPITAL

FOREIGN TRADE

SHORT TERM FINANCING

FINANCING THE GLOBAL FIRM

GLOBAL COST OF CAPITAL AND FINANCIALSTRUCTURE

EQUITY AND DEBT FINANCING


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TOPICS TO BE DISCUSSED

SHORT TERM FINANCIAL

MANAGEMENT.

FINANCING THE FIRM

TAXATION


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SHORT TERM FINANCIALMANAGEMENT

Minimize the working capital needs

consistent with other policies.

Raise short term funds at the minimumpossible cost and deploy short term cash

balances at the maximum possible rate of

return .


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Cash Management

Cash management is considerably more

complex when compared to other short

term financial management for MNCs.

Centralized cash management

Decentralized cash management


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Centralized cash management

A MNC with subsidiaries in differentparts of the world can manage cash bycreating cash management center.

.

The advantages of this system are

1. Netting

2. Exposure management3. Cash pooling


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Netting

If all the resulting cash flows are executed on

a bilateral ,pair wise basis, a large number ofcurrency conversions would be involved with

substantial transaction cost.

With CMC all receivables and payables can bemanaged by netting & cash flows can be

settled.


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Exposure management

If individual subsidiaries are left to managetheir currency exposures ,each will have toaccess to derivatives market separately.

as possibilities of total loss.

The CMC can match and pair receivables

and payables and exploit the closecorrelation between some currencies.


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Cash pooling

CMC can act not only as netting center but

also as repository of all surplus funds.

CMC can be combined with a reinvoicing

center.(All subsidiaries can sell to RCwhere tax rates are low)

CMC and RC are located normally in

major money market centers.


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Techniques to optimizecash flow

Accelerating cash inflows.

Managing blocked funds.

Leadin and la in strate .

Using netting.

Minimizing the tax on cash flow through

international transfer pricing(.transferpricing.xls)


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Problems on leading and lagging

leading and lagging.xls


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Cash management problems

CASH MGT PROBLEMS.xls


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COST OF CAPITAL

Cost of capital of MNC varies because of the

following reasons1. Size of the firm

2. Forei n exchan e risk

3. Access to international markets

4. International diversification effect

5. Political risk

6. Country risk

7. Tax concessions


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Importance of k Cost of capital will be used as discounting rate.

To increase the share holders returns cash flows

alone need not be increased but K also can bereduced.

It helps in capital budgeting decisions.

Equity holders have call option on assets of thecompany.

WACC should be used.

K is simply the IRR In international finance cash flows should be duly

adjusted for taxes, exchange risk, timing ofrepatriation.


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Cost of debt

cost of debt problems.xls


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COST OF PREFERENCE

SHARES

K = D

P (1 - f)

K OF PREFERENCE SHARES.xls


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COST OF EQUITY

Ke = ( D/P)*100 + g

Ke accordin to CAPM model

Ke = Rf + B ( Rm Rf)

k EQUITY.xls


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CAPITAL STRUCTURE

INTERNATION FINANCING DECISION

How much debt?

domesticexternal

Maturity interest rates currency

Medium

Long short

Fixed floating

Access and availability domestic regulation

Choice of market and instrument


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Problem on evaluating

borrowing options

BORRWING OPTIONS.xls


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International Taxation

Double taxation relief.

Bilateral relief

Unilateral relief

Models of treaties

Types of agreements

Arms length price


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Double taxation relief

Double taxation means taxation of same

income of a person in more than one country.

Problem of DT arises when an income is taxed

in another by basis of residence.

Relief can be provided mainly by

1. Bilateral relief

2. Unilateral relief


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Bilateral relief-

The governments of two countries can enter into

agreement to provide relief against double taxation,

worked out on the basis of mutual agreementbetween the two concerned sovereign states.

Unilateral relief

Some relief can be provided even in such cases

by home country irrespective of whether theother country has any agreement or not.


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Models of treaties

OECD model( organization of Economic

co-operation and Development.)

UN Models Double Taxation Convention

between developed and developingcountries, 1980.

Indias treaties are mostly based on OECD

models


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Types of agreements

Limited agreement

Comprehensive agreements

double taxation related to income deriving fromoperation of aircraft, ships ,carriages of cargo andfreight

Comprehensive are very elaborate documentswhich lay down in detail how incomes undervarious heads may be dealt with.


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Arms length price sec 92F(II)

It means a price which is applied or

proposed to be applied in a transaction

between persons other than associated

en erpr ses. Any income arising from an international

transaction shall be computed having

regard to arms length price.


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Funding avenues in global

capital markets Prior to 1980 national markets were largely

isolated from each other and financialintermediaries in each country operated

principally in that country.

During 1970 OPEC countries surplus During 1980 large current account deficits in

US

During 1990 developing countries huge currentaccount deficits.

2000 onwards India enjoying surplus foreignexchange reserves


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Funds

Mutual funds

Pension funds

Insurance com anies

Unit trusts


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Bond market Bonds can be defined as negotiable instruments

with original maturity in excess of one year.

The domestic bond markets are dominated byrespective governments.US treasury , RBI bondetc.

en a non res ent ssuer ssues on s n t edomestic market of a country and currency isdomestic country's currency it is foreign bond.

If the currency is different then it is called as Euro

bond.

Trade name of foreign bonds are ,Yankee bonds

( US), Bulldog(UK), samurai(Japan), matador

(Spain)


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Example

When an Indian company issues bonds in

US market denominated in USD it is called

as foreign dollar bond.

If the same bond is issued in Londondenominated in USD then it is called as

Euro dollar bond.


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Variants in the bond

FRN ( Floating Rate Notes)

1. Capped FRN

2. Collared FRN

Zero coupon bonds

Deep discount bonds

Sinking fund bonds


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Medium term Notes(MTN)

It represents a medium term , non

un erwr en , xe n eres ra e source ofunding.


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Short term financing

Commercial papers

Bankers acceptances

Certificates of de osits.


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Certificates of deposits

It is a negotiable instrument evidencing a

deposit with a bank.

CD is a marketable instrument.

It is used by commercial banks as short

term funding instruments.


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Bankers acceptance

It is widely used in US money market to

finance domestic as well as international

trade.

The seller will draw a draft on the buyersbank


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International equity financing

Equity investment by foreign investors

into a country can occur in any of these

three ways.

1. FI can directly purchase shares in thestock market of the country. FII

2. Companies can issue depository receipts

3. Indirect purchases through a mutual fund.


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Risk diversification

Risk reduction through cross border portfolio

diversification continues to be an area of activeresearch.

1. The expected returns from investments

2. The fractions of total portfolio in that country

3. The exchange rate


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Depository Receipts Here shares are traded indirectly in the form of

depository receipts.

The shares issued by a firm are held by adepository.

Usually a large international bank

convertible currency usually USD.

The DR may be listed or traded on stock exchanges or OTC.

The issuer firm pays dividends in its homecurrency. This is converted into the foreigncurrency by the depository and distributed to the

holders of depository receipts holders.


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Documents

IFM 4 TH MODULE [Compatibility Mode]