跨国公司财务管理
艾伦.C.夏皮罗(Alan C. Shapiro) 著
赵锡军 编审
顾苏秦 译校
PART I
ENVIRONMENT OF INTERNATIONAL FINANCIAL MANAGEMENT
CHAPTER 1
INTRODUCTION: MULTINATIONAL
ENTERPRISE AND MULTINATIONAL
FINANCIAL MANAGEMENT
Learning Objectives
● To understand the nature and benefits of globalization
● To explain why multinational corporations are the key players in international economic competition today
● To classify the three historical types of multinational corporation (MNC) and explain their motivations for international expansion
● To explain why managers of MNCs need to exploit rapidly changing global economic conditions and why political policy makers must also be concerned with the same changing conditions
Learning Objectives
● To identify the advantages of being multinational, including the benefits of international diversification
● To describe the general importance of financial economics to multinational financial management and the particular importance of the concepts of arbitrage, market efficiency, capital asset pricing, and total risk
● To characterize the global financial marketplace and explain why MNC managers must be alert to capital market imperfections and asymmetries in tax regulations
THE RISE OF THE MULTINATIONAL CORPORATION
A multinational corporation (MNC) is a company engaged in producing and selling goods or services in more than one country.
A brief taxonomy of the MNC and its evolution
Raw-Materials Seekers. Raw-materials seekers were the earliest multinationals, the villains of international business.
Market Seekers. The market seeker is the archetype of the modern multinational firm that goes overseas to produce and sell in foreign markets.
Cost Minimizers. These firms seek out and invest in lower cost production sites overseas (for example, Hong Kong, Taiwan, and Ireland) to remain cost-competitive both at home and abroad.
THE RISE OF THE MULTINATIONAL CORPORATION
the true multinational corporation is characterized more by its state of mind than by the size and worldwide dispersion of its assets.
the essential element that distinguishes the true multinational is its commitment to seeking out, undertaking, and integrating manufacturing, marketing, R&D, and financing opportunities on a global, not domestic, basis.
In a world in which change is the rule and not the exception, the key to international competitiveness is the ability of management to adjust to change and volatility at an ever faster rate.
New global manager is needed.
THE INTERNATIONALIZATION OF BUSINESS AND FINANCE
The existence of global competition and global markets for goods, services, and capital is a fundamental economic reality that has altered the behavior of companies and governments worldwide.
Politicians and labor leaders, unlike corporate leaders, usually take a more parochial view of globalization.
International economic integration reduces the freedom of governments to determine their own economic policy.
The stresses caused by global competition have stirred up protectionists and given rise to new concerns about the consequences of free trade.
The .–Canada trade agreement;
the North American Free Trade Agreement (NAFTA),
MULTINATIONAL FINANCIAL MANAGEMENT: THEORY AND PRACTICE
The main objective of multinational financial management is to maximize shareholder wealth as measured by share price.
Shareholders are the legal owners of the firm and management has a fiduciary obligation to act in their best interests.
Financial management is traditionally separated into two basic functions: the acquisition of funds (financing decision) and the investment of those funds (investment decision).
The risks of multinational management include exchange and inflation risks; international differences in tax rates; multiple money markets, often with limited access; currency controls; and political risks, such as sudden or creeping expropriation.
The most advantage of MNC is the international diversification of markets and production sites.
MULTINATIONAL FINANCIAL MANAGEMENT: THEORY AND PRACTICE
Some concepts of financial economics:
Arbitrage
Market efficiency
Capital Asset Pricing
Risk classification
OUTLINE OF THE BOOK
This book is divided into five parts.
Part I: Environment of International Financial Management
Part II: Foreign Exchange Risk Management
Part III: Financing the Multinational Corporation
Part IV: Foreign Investment Analysis
Part V: Multinational Working Capital Management
PART I
ENVIRONMENT OF INTERNATIONAL FINANCIAL MANAGEMENT
CHAPTER 2
THE FUNDAMENTAL OF INTERNATIONAL FINANCE
Learning Objectives
● To explain the concept of an equilibrium exchange rate
● To identify the basic factors affecting exchange rates in a floating exchange rate system
● To calculate the amount of currency appreciation or depreciation associated with a given exchange rate change
● To distinguish between a free float, a managed float, a target-zone arrangement, and a fixed-rate system of exchange rate determination
● To distinguish between the current account, the financial account, and the official reserves account and describe the links among these accounts
SETTING THE EQUILIBRIUM SPOT EXCHANGE RATE
Exchange rates can be for spot or forward delivery.
A spot rate is the price at which currencies are traded for immediate delivery, or in two days in the interbank market.
A forward rate is the price at which foreign exchange is quoted for delivery at a specified future date.
The exchange rates are market-clearing prices that equilibrate supplies and demands in the foreign exchange market.
SETTING THE EQUILIBRIUM SPOT EXCHANGE RATE
Factors that Affect the Equilibrium Exchange Rate:
As the supply and demand schedules for a currency change over time, the equilibrium exchange will also change.
Relative Inflation Rates
Relative Interest Rates
Relative Economic Growth Rates
Political and Economic Risk
Expectation and Asset Market model
Calculating Exchange Rate Change
ALTERNATIVE EXCHANGE RATE SYSTEMS
The international monetary system refers primarily to the set of policies, institutions, practices, regulations, and mechanisms that determine the rate at which one currency is exchanged for another.
This section considers five market mechanisms for establishing exchange rates:
free float
managed float
target-zone arrangement
fixed-rate system
the current hybrid system.
BALANCE-OF-PAYMENT CATEGORIES
The balance of payment is an accounting statement that summarizes all the economic transactions between residents of the home country and the residents of all other countries.
Currency inflows are recorded as credits, and outflows are recorded as debits.
There are three principal balance-of-payments categories:
1. Current account
2. Capital account
3. Financial account
For most countries, only the current and financial accounts are significant.
PART I
ENVIRONMENT OF INTERNATIONAL FINANCIAL MANAGEMENT
CHAPTER 3
COUNTRY RISK ANALYSIS
Learning Objectives
● To define what country risk means from the standpoint of an MNC
● To describe the social, cultural, political, and economic factors that affect the general level of risk in a country and identify key indicators of country risk and economic health
● To describe what we can learn about economic development from the contrasting experiences of a variety of countries
● To describe the economic and political factors that determine a country’s ability and willingness to repay its foreign debts
MEASURING POLITICAL RISK
Expropriation is the most obvious and extreme form of political risk,.
There are other significant political risks, including currency or trade controls, changes in tax or labor laws, regulatory restrictions, and requirements for additional local production.
Factors in political risk forecasting model
Political Stability
Economic Factors
Subjective Factors
Political Risk and Uncertain Property Rights
A useful indicator of the degree of political risk is the seriousness of capital flight.
ECONOMIC AND POLITICAL FACTORS UNDERLYING COUNTRY RISK
key factors that determine the economic performance of a country and its degree of risk
Fiscal Irresponsibility
Monetary Instability
Controlled Exchange Rate System
Wasteful Government Spending
Resource Base
Country Risk and Adjustment to External Shocks
Key Indicators of Country Risk and Economic Health
COUNTRY RISK ANALYSIS
IN INTERNATIONAL BANKING
From a bank’s standpoint, country risk is the possibility that borrowers in a country will be unable or unwilling to service or repay their debts to foreign lenders in a timely manner.
What ultimately determines a nation’s ability to repay foreign loans is that nation’s ability to generate . dollars and other hard currencies.
The Government’s Cost/Benefit Calculus
Lessons from the International Debt Crisis
PART II
FOREIGN EXCHANGE
RISK MANAGEMENT
CHAPTER 4
MEASURING AND MANAGING
TRANSLATION AND TRANSACTION
EXPOSURE
Learning Objectives
● To define translation and transaction exposure and operating exposure, distinguish them.
● To describe the four principal currency translation methods available and to calculate translation exposure using these different methods
● To identify the basic hedging strategy and techniques used by firms to manage their currency transaction and translation risks
● To describe the costs and benefit associated with using the different hedging techniques
● To describe and assess the economic soundness of the various corporate hedging objectives
ALTERNATIVE MEASURES
OF FOREIGN EXCHANGE EXPOSURE
The three basic types of exposure are translation exposure, transaction exposure, and operating exposure.
Transaction exposure and operating exposure combine to form economic exposure.
Translation exposure, also known as accounting exposure, arises from the need, for purposes of reporting and consolidation, to convert the financial statements of foreign operations from the local currencies (LC) involved to the home currency (HC).
Transaction exposure results from transactions that give rise to known, contractually binding future foreign-currency-denominated cash inflows or outflows.
Operating exposure measures the extent to which currency fluctuations can alter a company’s future operating cash flows, that is, its future revenues and costs.
ALTERNATIVE CURRENCY TRANSLATION METHODS
Companies with international operations will have foreign-currency-denominated assets and liabilities, revenues, and expenses. The financial statements of an MNC’s overseas subsidiaries must be translated from local currency to home currency before consolidation with the parent’s financial statements.
Four principal translation methods are available:
the current/noncurrent method,
the monetary/nonmonetary method,
the temporal method,
and the current rate method.
In practice, there are also variations of each method.
ALTERNATIVE CURRENCY TRANSLATION METHODS
Current/Noncurrent method
all the foreign subsidiary’s current assets and liabilities are translated into home currency at the current exchange rate. Each noncurrent asset or liability is translated at its historical exchange rate—that is, at the rate in effect at the time the asset was acquired or the liability was incurred.
The income statement is translated at the average exchange rate of the period, except for those revenues and expense items associated with noncurrent assets or libilities.
ALTERNATIVE CURRENCY TRANSLATION METHODS
Monetary/Nonmonetary Method
Monetary items (for example, cash, accounts payable and receivable, and long-term debt) are translated at the current rate; nonmonetary items (for example, inventory, fixed assets, and long-term investments) are translated at historical rates.
Income statement items are translated at the average exchange rate during the period, except for revenue and expense items related to nonmonetary assets and liabilities.
ALTERNATIVE CURRENCY TRANSLATION METHODS
Temporal Method
Under the temporal method, inventory is normally translated at the historical rate, but it can be translated at the current rate if the inventory is shown on the balance sheet at market values.
in the temporal method, it is based on the underlying approach to evaluating cost (historical versus market).
Income statement items normally are translated at an average rate for the reporting period.
Current Rate Method
The current rate method is the simplest: All balance sheet and income items are translated at the current rate.
DESIGNING A HEDGING STRATEGY
Hedging a particular currency exposure means establishing an offsetting currency position so as to lock in a dollar (home currency) value for the currency exposure and thereby eliminate the risk posed by currency fluctuations.
The usefulness of a particular hedging strategy depends on both acceptability and quality.
The objectives in management bahavior
Minimize translation exposure; Minimize earnings fluctuations owing to exchange rate changes; Minimize transaction exposure; Minimize economic exposure; Minimize foreign exchange risk management costs; Avoid surprises
DESIGNING A HEDGING STRATEGY
Costs and Benefits of Standard Hedging Techniques
Exposure Netting
Exposure netting involves offsetting exposures in one currency with exposures in the same or another currency, where exchange rates are expected to move in a way such that losses (gains) on the first exposed position will be offset by gains (losses) on the second currency exposure.
Accounting for Hedging and FASB 133
MANAGING TRANSLATION EXPOSURE
Firms have three available methods for managing their translation exposure: (1) adjusting fund flows, (2) entering into forward contracts, and (3) exposure netting.
Funds adjustment involves altering either the amounts or the currencies (or both) of the planned cash flows of the parent or its subsidiaries to reduce the firm’s local currency accounting exposure.
Evaluating Alternative Hedging Mechanisms
Ordinarily, the selection of a funds-adjustment strategy cannot proceed by evaluating each possible technique separately without risking suboptimization.
MANAGING TRANSACTION EXPOSURE
Various techniques for managing transaction exposure
Forward Market Hedge
Money-Market Hedge
Risk shifting
Pricing Decision
Exposure netting
Currency Risk Sharing
Currency Collars
Cross-Hedging
Foreign Currency Options
PART II
FOREIGN EXCHANGE
RISK MANAGEMENT
CHAPTER 5
MEASURING AND MANAGING
ECONOMIC EXPOSURE
Learning Objectives
● To define economic exposure and exchange risk and distinguish between the two
● To define operating exposure and distinguish between it and transaction exposure
● To identify the basic factors that determine the foreign exchange risk faced by a particular company or project
● To describe the marketing, production, and financial strategies that are appropriate for coping with the economic consequences of exchange rate changes
● To explain how companies can develop contingency plans to cope with exchange risk and the consequences of their ability to rapidly respond to currency changes
● To identify the role of the financial executive in facilitating the operation of an integrated exchange risk management program
FOREIGN EXCHANGE RISK AND ECONOMIC EXPOSURE
The most important aspect of foreign exchange risk management is to incorporate currency change expectations into all basic corporate decisions.
Economic exposure can be separated into two components: transaction exposure and operating exposure.
The exchange rate changes that give rise to operating exposure are real exchange rate changes. The real exchange rate is defined as the nominal exchange rate adjusted for changes in the relative purchasing power of each currency since some base period.
THE ECONOMIC CONSEQUENCES OF EXCHANGE RATE CHANGES
Transaction exposure arises out of the various types of transactions that require settlement in a foreign currency.
The greater a company’s flexibility to substitute between home-country and foreign-country inputs or production, the less exchange risk the company will face.
The major conclusion is that the sector of the economy in which a firm operates (export, import-competing, or purely domestic), the sources of the firm’s inputs (imports, domestic traded or nontraded goods), and fluctuations in the real exchange rate are far more important in delineating the firm’s true economic exposure than is any accounting definition.
IDENTIFYING ECONOMIC EXPOSURE
Aspen Skiing Company
Petróleos Mexicanos
Toyota Motor Company
CALCULATING ECONOMIC EXPOSURE
Spectrum Manufacturing AB example
Spectrum’s Accounting Exposure
Spectrum’s Economic Exposure
Scenario 1: All Variables Remain the Same.
Scenario 2: Krona Sales Prices and All Costs Rise; Volume Remains the Same.
Scenario 3: Partial Increases in Prices, Costs, and Volume.
MANAGING OPERATING EXPOSURE
Because currency risk affects all facets of a company’s operations, it should not be the concern of financial managers alone.
Marketing Management of Exchange Risk
Market Selection
Pricing Strategy
Product Strategy
Production Management of Exchange Risk
Input Mix
Shifting Production Among Plants
Plant Location
Raising Productivity
Planning for Exchange Rate Changes
Financial Management of Exchange Risk
PART III
FINANCING THE MULTINATIONAL CORPORATION
CHAPTER 6
INTERNATIONAL FINANCING AND
NATIONAL CAPITAL MARKETS
Learning Objectives
● To describe trends and differences in corporate financing patterns around the world
● To define securitization and explain the forces that underlie it and how it has affected the financing policies of MNCs
● To explain why bank lending is on the decline worldwide and how banks have responded to their loss of market share
● To explain what is meant by the globalization of financial markets and identify the factors that have affected the process of globalization
● To describe the external medium and long-term financing options available to the multinational corporation
● To identify the functions and consequences of financial markets
● To describe the links between national and international capital markets
● To describe the types and roles of development banks
CORPORATE SOURCES AND USES OF FUNDS
Firms have three general sources of funds available: internally generated cash, short-term external funds, and long-term external funds.
Financial Markets versus Financial Intermediaries
Bank borrowing vs sell securities
Financial Systems and Corporate Governance
effective corporate governance requires that everyone involved in governing the company must be assigned a carefully chosen role and they must be provided with responsibility, authority, and accountability, all to be done with the paramount objective of creating shareholder value.
The difference in financial systems has real consequences for financial structures.
Globalization of Financial Markets
NATIONAL CAPITAL MARKETS AS INTERNATIONAL FINANCIAL CENTERS
The principal functions of a financial market and its intermediaries are to mobilize savings and to allocate those funds among potential users on the basis of expected risk-adjusted returns.
International Financial Markets
Foreign access to domestic Markets
The foreign bond market
The foreign bank market
The foreign equity market
Globalization of financial markets has its downside
DEVELOPMENT BANK
To help provide the huge financial resources required to promote the development of economically backward areas, the United States and other countries have established a variety of development banks, whose lending is directed to investments that might not otherwise be funded by private capital.
There are three types of development banks:
the World Bank Group,
regional development banks,
and national development banks.
Private-Sector Alternatives
PART III
FINANCING THE MULTINATIONAL CORPORATION
CHAPTER 7
THE EUROMARKETS
Learning Objectives
● To describe the Eurocurrency and Eurobond markets and explain why they exist
● To describe the characteristics and pricing of Eurocurrency loans, Eurobonds, Euronotes, and Euro-commercial paper
● To explain the links between the Euromarkets and their domestic counterparts
THE EUROCURRENCY MARKET
A Eurocurrency is a dollar or other freely convertible currency deposited in a bank outside its country of origin.
. dollars on deposit in London become Eurodollars.
The Eurocurrency market then consists of those banks—called Eurobanks—that accept deposits and make loans in foreign currencies.
Modern Origins of Eurocurrency
The creation of Eurodollar
Eurocurrency Loans
THE EUROCURRENCY MARKET
Relationship Between Domestic and Eurocurrency Money Markets
The presence of arbitrage activities ensures a close relationship between interest rates in national and international (Eurocurrency) money markets.
Interest Differentials
Eurocurrency Spreads
Euromarket Trend
EUROBONDS
Unlike domestic bond markets, however, the Eurobond market is almost entirely free of official regulation and is instead self-regulated by the Association of International Bond Dealers.
Borrowers in the Eurobond market are typically well known and have impeccable credit ratings.
Links Between the Domestic and Eurobond Markets
Placement
Currency Denomination
Interest rates
Eurobond Retirement
Ratings
EUROBONDS
Rational for Existence of Eurobond Market
Eurobonds versus Eurocurrency Loans
Cost of borrowing
Maturity
Size of issue
Flexibility
Speed
NOTE ISSUANCE FACILITIES AND EURONOTES
The note issuance facility (NIF) allows borrowers to issue their own short-term Euronotes, which are then placed or distributed by the financial institutions providing the NIF.
Note Issuance Facilities versus Eurobonds
Drawdown flexibility
Timing flexibility
Choice of maturities
Euro-Medium-Term Notes
Euro-Commercial Paper
The Asiacurrency Market
PART III
FINANCING THE MULTINATIONAL CORPORATION
CHAPTER 8
THE COST OF CAPITAL FOR
FOREIGN INVESTMENTS
Learning Objectives
● To determine the cost of capital for foreign investments and identify those circumstances under which that cost should be higher, lower, or the same as that for comparable domestic projects
● To identify and address the key issues involved in applying the capital asset pricing model to estimate the cost of capital for foreign projects
● To illustrate the impact of globalization on the cost of capital
● To calculate the effective dollar costs of foreign currency borrowing taking into account interest rates, exchange rate changes, and taxes
● To identify the relevant factors and tradeoffs in establishing a company’s worldwide capital structure
● To calculate the value of below-market financing opportunities
THE COST OF EQUITY CAPITAL
The cost of equity capital for a firm is the minimum rate of return necessary to induce investors to buy or hold the firm’s stock.
The Capital asset pricing model
The CAPM is based on the notion that intelligent, risk-averse shareholders will seek to diversify their risks, and, as a consequence, the only risk that will be rewarded with a risk premium will be systematic risk.
Weighted average cost of capital
DISCOUNT RATES FOR FOREIGN INVESTMENTS
Key Issues in Estimating Foreign Project Discount Rates
1. Should the corporate proxies be . or local (., foreign) companies?
2. Is the relevant base portfolio against which the proxy betas are estimated the . market portfolio, the local portfolio, or the world market portfolio?
3. Should the market risk premium be based on the . market or the local market?
4. How, if at all, should country risk be incorporated in the cost of capital estimates?
DISCOUNT RATES FOR FOREIGN INVESTMENTS
Three alternatives for estimating proxy betas are proposed here.
Local Companies
Proxy Industry
Adjusted . Industry Beta
In employing the CAPM, the base portfolio against which the proxy betas are estimated can be the home portfolio or the global market portfolio.
The Impact of Globalization on the Cost of Capital
Other things being equal, the use of a global CAPM means a lower cost of capital for this company.
Empirical Evidence
The Relevant Market Risk Premium
ESTABLISHING A WORLDWIDE CAPITAL STRUCTURE
The Cost of Debt Capital
In general, the after-tax dollar cost of borrowing in the local currency for a foreign affiliate equals the after-tax interest expense plus the change in the exchange rate.
The capital structure problem for the multinational enterprise is to determine the mix of debt and equity for the parent entity and for all consolidated and unconsolidated subsidiaries that maximizes shareholder wealth.
Foreign Subsidiary Capital Structure
Conform to the capital structure of the parent company
Reflect the capitalization norms in each foreign country
Vary to take advantage of opportunities to minimize the MNC’s cost of capital
ESTABLISHING A WORLDWIDE CAPITAL STRUCTURE
Political Risk Management
Currency Risk Management
Leverage and Foreign Tax Credit
Leasing and Taxes
Cost-Minimizing Approach to Global Capital Structure
Valuing Low-Cost Financing Opportunities
Taxes
Zero-Coupon Bonds
Debt versus Equity Financing
Government Credit and Capital Control
Government Subsidies and Incentives
PART IV
FOREIGN INVESTMENT
ANALYSIS
CHAPTER 15
INTERNATIONAL PORTFOLIO
INVESTMENT
Learning Objectives
● To describe the risks and advantages of international investing
● To explain how international investing can allow investors to achieve a better risk-return trade-off than by investing solely in . securities
● To identify the barriers to investing overseas
● To describe the various ways in which . investors can diversify into foreign securities
● To calculate the currency risk associated with investing in securities issued in different markets and denominated in various currencies
● To calculate the return associated with investing in securities issued in different markets and denominated in various currencies
THE RISKS AND BENEFITS OF INTERNATIONAL EQUITY INVESTING
The risks of international investing
1. Changes in currency exchange rates
2. Dramatic changes in market value
3. Political, economic, and social events
4. Lack of liquidity
5. Less information
6. Reliance on foreign legal remedies
7. Different market operations
This relation follows from the basic rule of portfolio diversification: The broader the diversification, the more stable the returns and the more diffuse the risks.
THE RISKS AND BENEFITS OF INTERNATIONAL EQUITY INVESTING
Correlations and the Gains from Diversification
Foreign market betas, which are a measure of market risk derived from the capital asset pricing model, are calculated relative to the . market in the same way that individual asset betas are calculated
The obvious conclusion is that international diversification pushes out the efficient frontier—the set of portfolios that has the smallest possible standard deviation for its level of expected return and has the maximum expected return for a given level of risk—allowing investors simultaneously to reduce their risk and increase their expected return.
Investing in Emerging Markets
Barriers to international Diversification
INTERNATIONAL PORTFOLIO
INVESTMENT
International Bond Investment
Optimal International Asset Allocation
Measuring the Total Return From Foreign Portfolio Investing
In general, the total dollar return on an investment can be divided into three separate elements: dividend/interest income, capital gains (losses), and currency gains (losses).
Bond; stock
Measuring Exchange Risk on Foreign Securities
PART IV
FOREIGN INVESTMENT
ANALYSIS
CHAPTER 16
CORPORATE STRATEGY AND
FOREIGN DIRECT INVESTMENT
Learning Objectives
● To identify the stages of corporate expansion overseas by which companies gradually become multinational corporations (MNCs)
● To identify the fundamental motives for companies to invest abroad in order to determine those foreign investments that are most likely to be successful
● To identify the competitive advantages that a firm must have to be a successful multinational
● To describe the strategies followed by MNCs in defending and exploiting barriers to entry created by product and factor market imperfections
● To identify the factors that help determine whether a firm will export its output, license foreign companies to manufacture its products, or set up its own production or service facilities abroad
● To specify a five-step approach to designing a global expansion strategy
THE PROCESS OF OVERSEAS EXPANSION
The sequence of overseas expansion normally involves exporting, setting up a foreign sales subsidiary, securing licensing agreements, and eventually establishing foreign production.
This evolutionary approach to overseas expansion is a risk-minimizing response to operating in a highly uncertain foreign environment.
Exporting
Overseas Production
Licensing
THE STRATEGY OF MULTINATIONAL ENTERPRISE
Theory of The Multinational Corporation
Product and Factor Market Imperfections
Financial Market Imperfections
The Strategy of Multinational Enterprise
Innovation-Based Multinationals
The Mature Multinationals
The Senescent Multinationals
Foreign Direct Investment and Survival
Cost Reduction
Economies of Scale
Multiple Sourcing
Knowledge Seeking
Keeping Domestic Customers
DESIGNING A GLOBAL EXPANSION STRATEGY
1. Awareness of Profitable Investment
2. Selecting a Mode of Entry
3. Auditing the Effectiveness of Entry Modes
4. Using Appropriate Evaluation Criteria
5. Estimating the Longevity of a Competitive Advantage
PART IV
FOREIGN INVESTMENT
ANALYSIS
CHAPTER 17
CAPITAL BUDGETING FOR THE
MULTINATIONAL CORPORATION
Learning Objectives
● To assess the profitability of foreign investments by identifying the incremental cash flows generated by these investments
● To contrast the net present value approach using a weighted cost of capital with the adjusted present value approach for valuing foreign projects and explain when each method is most appropriate
● To compute the unlevered equity beta in order to calculate the all-equity cost of capital
● To identify the differences between foreign project and parent cash flows and describe a three-stage approach to account for these differences in a capital-budgeting analysis
● To describe the three main methods for incorporating political and economic risks into foreign investment analysis and determine the circumstances (if any) under which each of these methods is most appropriate
● To explain what growth options are
BASICS OF CAPITAL BUDGETING
The net present value (NPV) is defined as the present value of future cash flows discounted at the project’s cost of capital minus the initial net cash outlay for the project.
Projects with a positive NPV should be accepted; projects with a negative NPV should be rejected.
If two projects are mutually exclusive, the one with the higher NPV should be accepted.
What matters is the incremental cash flows generated by the project.
Alternative Capital-Budgeting Frameworks
An Adjusted Present Value Approach
ISSUES IN FOREIGN INVESTMENT ANALYSIS
Parent versus Project Cash Flows
A Three-Stage Approach
Estimating Incremental Project Cash Flows
Tax Factors
Political and Economic Risk Analysis
Adjusting the Discount Rate or Payback Period
Adjusting Expected Values
Exchange Rate Changes and Inflation
FOREIGN PROJECT APPRAISAL
Estimation of Project Cash Flows
Initial Investment Outlay
Financing
Interest Subsidies
Sales and Revenue Forecasts
Production Cost Estimates
Projected Net Income
Additions to Working Capital
Terminal Value
Estimated Project Present Value
FOREIGN PROJECT APPRAISAL
Estimation of Parent Cash Flows
Loan Payments
Remittances
Earnings on Exports
Estimated Present Value of Project
Lost Sales
Political Risk Analysis
Expropriation
Blocked Funds
Growth option and Project Evaluation
PART V
MULTINATIONAL WORKING CAPITAL MANAGEMENT
CHAPTER 12
FINANCING FOREIGN TRADE
Learning Objectives
● To describe the five principal means of payment in international trade
● To explain from the standpoint of an exporter the advantages and disadvantages associated with each means of arranging payment
● To identify the necessary documentation associated with each payment procedure
● To describe the primary functions associated with the use of the basic trade-financing instruments and documents
● To describe the different methods of private sector export financing
● To explain the benefits and costs of factoring
Learning Objectives
● To identify the different government-sponsored export-financing and credit insurance programs
● To describe the trends and consequences of public sector export financing
● To define countertrade and describe the specific forms it takes
● To explain the costs and benefits to both parties of countertrade transactions
PAYMENT TERMS IN INTERNATIONAL TRADE
The five principal means of payment in international trade, ranked in terms of increasing risk to the exporter, are
1. Cash in advance
2. Letter of credit
3. Draft
4. Consignment
5. Open account
As a general rule, the greater the protection afforded the exporter, the less convenient are the payment terms for the buyer (importer). Some of these methods, however, are designed to protect both parties against commercial and/or political risks.
PAYMENT TERMS IN INTERNATIONAL TRADE
Cash in Advance
Cash in advance affords the exporter the greatest protection because payment is received either before shipment or upon arrival of the goods. This method also allows the exporter to avoid tying up its own funds.
Letter of Credit
Importers often will balk at paying cash in advance and will demand credit terms instead. When credit is extended, the letter of credit (L/C) offers the exporter the greatest degree of safety.
Draft
A draft is an unconditional order in writing— usually signed by the exporter (seller) and addressed to the importer (buyer) or the importer’s agent—ordering the importer to pay on demand, or at a fixed or determinable future date, the amount specified on its face. Such an instrument, also known as a bill of exchange,
PAYMENT TERMS IN INTERNATIONAL TRADE
Consignment
Goods sent on consignment are only shipped, but not sold, to the importer. The exporter (consignor) retains title to the goods until the importer (consignee) has sold them to a third party. This arrangement is normally made only with a related company because of the large risks involved.
Open Account
Open account selling is shipping goods first and billing the importer later. The credit terms are arranged between the buyer and the seller, but the seller has little evidence of the importer’s obligation to pay a certain amount at a certain date. Sales on open account, therefore, are made only to a foreign affiliate or to a customer with which the exporter has a long history of favorable business dealings.
DOCUMENTS IN INTERNATIONAL TRADE
Bill of Lading
Commercial Invoice
Insurance Certificate
Consular Invoice
FINANCING TECHNIQUES IN INTERNATIONAL TRADE
Bankers’ Acceptances
Creating an Acceptance
Terms of Acceptance Financing
Evaluating the Cost of Acceptance Financing
Discounting
Factoring
Forfaiting
GOVERNMENT SOURCES OF EXPORT FINANCING AND CREDIT INSURANCE
Export Financing
Export-Import Bank
Private Export Funding Corporation
Export-Credit Insurance
Foreign Credit Insurance Association
Taking Advantage of Government-Subsidized Export Financing
Export Financing Strategy
Import Financing Strategy
Countertrade
PART V
MULTINATIONAL WORKING CAPITAL MANAGEMENT
CHAPTER 13
CURRENT ASSET MANAGEMENT
AND SHORT-TERM FINANCING
Learning Objectives
● To describe the basic objectives of international cash management
● To identify the advantages of a centralized international cash management program
● To describe the techniques that multinational corporations (MNCs) can use to expedite the collection of funds both within a foreign country and across borders, and to more effectively manage their disbursements
● To define payments netting and explain its benefits
● To identify the basic techniques and guidelines for globally managing a marketable securities portfolio
● To describe the techniques companies can use for international cash planning and budgeting
Learning Objectives
● To describe a five-step approach that firms can use to compare the expected benefits and costs associated with extending credit internationally
● To identify the inventory management problems faced by MNCs and the techniques that they can use to deal with these problems
● To identify the key factors associated with developing a short-term overseas financing strategy
● To describe and evaluate the objectives that a firm might use to arrive at its borrowing strategy, including deciding where and in which currencies to borrow
● To describe the available short-term borrowing options
INTERNATIONAL CASH MANAGEMENT
International money managers attempt to attain on a worldwide basis the traditional domestic objectives of cash management: (1) bringing the company’s cash resources within control as quickly and efficiently as possible and (2) achieving the optimum conservation and utilization of these funds.
Collection and Disbursement of Funds
Payments Netting in International Cash Management
Management of the Short-Term Investment Portfolio
Optimal Worldwide Cash Levels
Cash Planning and Budgeting
Bank Relations
CURRENT ASSET MANAGEMENT
Accounts Receivable Management
Credit Extension
Inventory Management
Production Location and Inventory Control
Advance Inventory Purchases
Inventory Stockpiling
SHORT-TERM FINANCING
Key Factors in Short-Term Financing Strategy
Short-Term Financing Objectives
1. Minimize expected cost
2. Minimize risk without regard to cost
3. Trade off expected cost and systematic risk
4. Trade off expected cost and total risk
Short-Term Financing Options
(1) the intercompany loan
(2) the local currency loan
(3) commercial paper
Calculating the Dollar Costs of Alternative Financing Options
PART V
MULTINATIONAL WORKING CAPITAL MANAGEMENT
CHAPTER 14
MANAGING THE MULTINATIONAL
FINANCIAL SYSTEM
Learning Objectives
● To identify the principal transfer mechanisms that multinational corporations (MNCs) can use to move money and profits among their various affiliates and to describe their tax, currency control, and cash management implications
● To identify the three principal arbitrage opportunities available to MNCs that stem from their ability to shift profits and funds internally
● To describe the costs and benefits associated with each transfer mechanism, as well as the constraints on their use
● To identify the factors that affect a multinational firm’s ability to benefit from its internal financial transfer system
● To describe the information an MNC needs to take full advantage of its internal financial system
THE VALUE OF THE MULTINATIONAL
FINANCIAL SYSTEM
The MNC has considerable freedom in selecting the financial channels through which funds, allocated profits, or both are moved.
patents and trademarks can be sold outright or transferred in return for a contractual stream of royalty payments.
profits and cash can be move from one unit to another by adjusting transfer prices
With regard to investment flows, capital can be sent overseas as debt with some choice of interest rate, currency of denomination, and repayment schedule, or as equity with returns in the form of dividends.
THE VALUE OF THE MULTINATIONAL
FINANCIAL SYSTEM
Timing Flexibility
Leading and Lagging
Value
The value of the MNC’s network of financial linkages stems from the wide variations in national tax systems and significant costs and barriers associated with international financial transfers.
The ability to transfer funds and to reallocate profits internally presents multinationals with three different types of arbitrage opportunities:
1. Tax arbitrage; 2. Financial market arbitrage; 3. Regulatory system arbitrage
INTERCOMPANY FUND-FLOW MECHANISMS: COSTS AND BENEFITS
The different channels available to the multinational enterprise for moving money and profits internationally
Tax Factors
Transfer Pricing
The most important uses of transfer pricing include (1) reducing taxes, (2) reducing tariffs, and (3) avoiding exchange controls.
Transfer prices also may be used to increase the MNC’s share of profits from a joint venture and to disguise an affiliate’s true profitability.
Reinvoicing Centers
Fees and Royalties
INTERCOMPANY FUND-FLOW MECHANISMS: COSTS AND BENEFITS
Leading and Lagging
Shifting Liquidity
Advantages
Government Restrictions
Intercompany Loans
Back-to-Back Loans
Parallel Loans
Dividends
Tax Effects
Financing Requirements
Exchange Controls
Joint Ventures
DESIGNING A GLOBAL REMITTANCE POLICY
In order to take proper advantage of its internal financial system, the firm must conduct a systematic and comprehensive analysis of the available remittance options and their associated costs and benefits.
This task requires the following four interrelated decisions: (1) how much money (if any) to remit, (2) when to do so, (3) where to transmit these funds, and (4) which transfer method(s) to use.
A number of factors strongly affect an MNC’s ability to benefit from its internal financial transfer system. These include the (1) number of financial links, (2) volume of interaffiliate transactions, (3) foreign-affiliate ownership pattern, (4) degree of product and service standardization, and (5) government regulations.
