Multinational businessTutorial/workshop week 3

FINANCING THE OPERATIONS OF THE MULTINATIONAL ENTERPRISE

Agenda

• Revision

Revision question

• Explain the meaning of capital structure. • From a managerial perspective, what are the advantages and disadvantages of financing obtained

from each of the following: equity, debt, and intra-corporate sources?• What are the major tasks involved in managing working capital and cash flow for international

operations? • What are the major steps involved in capital budgeting? For what types of ventures do internal

managers typically need to engage in capital budgeting? • Compare and contrast the different types of techniques used in evaluating capital investment

projects. • What are the types of currency exposure? Why is currency exposure potentially harmful to the

firm’s international operations? What steps can firms take to minimise currency exposure? • Who are the major players involved in foreign exchange trading? • As an international tax consultant to an MNE, what steps would you take to minimise tax

obligations around the world?

Equity financing

• Advantages and disadvantages of equity finance• Equity finance can sometimes be more appropriate than other sources of finance, eg bank

loans, but it can place different demands on you and your business.• The main advantages of equity finance are:• You will not have to keep up with costs of servicing bank loans or debt finance, allowing you

to use the capital for business activities.• Outside investors expect the business to deliver value, helping you explore and execute

growth ideas.• The right business angels and venture capitalists can bring valuable skills, contacts and

experience to your business. They can also assist with strategy and key decision making.• In common with you, investors have a vested interest in the business' success, ie its growth,

profitability and increase in value.• Investors are often prepared to provide follow-up funding as the business grows.

Equity financing

• The principal disadvantages of equity finance are:• Raising equity finance is demanding, costly and time consuming, and may take

management focus away from the core business activities.• Potential investors will seek comprehensive background information on you and your

business. They will look carefully at past results and forecasts and will probe the management team. Many businesses find this process useful, regardless of whether or not any fundraising is successful.

• Depending on the investor, you will lose a certain amount of your power to make management decisions.

• You will have to invest management time to provide regular information for the investor to monitor.

• There can be legal and regulatory issues to comply with when raising finance, eg when promoting investments.

Debt financing

• Advantages:• Utilization of resources• Short term needs• Tax advantage• No future lender claims• Not dilutive• Simple loan repayment• Future impact forecasting

• Disadvantages:• Regular monthly payments of principal and interest• Severe penalties for late or missed payments• Affect credit rating in case of failure to pay loan• Loan easily available only to established business• For small business they might not get enough loan so might have to look for other sources

Intra-corporate financing

• Advantages:• Interest payments are often tax deductibles: borrowing subsidiaries income

tax burden is reduced• Has little effect on the parents balance sheet when financial results are

consolidated• Saves transaction cost of borrowing funds from banks• Avoids dilution of ownership compared to equity financing

• Disadvantages:• Might not have enough money to finance the borrowing company• Government might put restriction

Working capital and cash flow management• Ensuring that cash is available where and when it is needed• Various strategies of transferring funds within the firms worldwide• Trade credit• Dividend remittances• Royalty payments• Fronting loan• Transfer pricing• Multilateral netting

Capital budgeting

• Steps:• Proposals generation• Review and analysis• Decision making• Implementation• Follow up