09/12/2008Dr.Tomy Mathew*International Financial Management

Dr.Tomy Mathew

09/12/2008Dr.Tomy Mathew*Issues of IFMInvesting DecisionsFinancing DecisionsMoney Management Decisions

Dr.Tomy Mathew

09/12/2008Dr.Tomy Mathew*Investing DecisionsCapital BudgetingProject and Parent Cash FlowIncorporating RiskPolitical RiskEconomic Risk

Dr.Tomy Mathew

09/12/2008Dr.Tomy Mathew*Capital Budgeting ProcessFuture cash inflows are estimatedAppropriate discount rate is determinedEstimated future cash inflows are discountedPresent value of future cash inflows are compares with the cost of the projectProjects arte ranked in the order of Net Present ValueProject with the highest NPV is selected

Dr.Tomy Mathew

09/12/2008Dr.Tomy Mathew*Multinational Capital Budgeting. FeaturesInvolves multiple currenciesInvolves multiple tax rates and tax systemsSubject to foreign political riskSubject to capital flow restrictionsProject specific subsidies provided by the host governmentProject specific penalties imposed by the host governmentRestrictions on repatriating income

Dr.Tomy Mathew

09/12/2008Dr.Tomy Mathew*MCB Two perspectivesPerspective of the parentPerspective of the subsidiaryThe cash flow under the two perspectives will be different So the feasibility of the project changes with the change in the perspective.

Dr.Tomy Mathew

09/12/2008Dr.Tomy Mathew*Reasons for Change in Cash FlowExistence of Tax Differences:-If tax rates on fund remittances are high, the project may be feasible from the view point of the subsidiary and may not be viable form the point of view of the parentHigh Fees:When the parent charges high fees from the subsidiary, the net income of the subsidiary decreases and therefore it become unviable from subsidiaries perspective, but viable from parents perspective

Dr.Tomy Mathew

09/12/2008Dr.Tomy Mathew*Reasons for Change in Cash FlowRemittance Restrictions:-When there are restrictions on remittances, the project becomes unviable from parents perspective though viable from ht perspective of the subsidiaryExchange Rate variations:- If the parent's currency appreciates, the amount remitted to the parent may decline (in terms of parents currency) and the project becomes unviable, though it is viable in the perspective of the subsidiary

Dr.Tomy Mathew

09/12/2008Dr.Tomy Mathew*Reasons for Change in Cash FlowEffect on sales of other divisions:Because of the foreign investment the existing export of a multinational firm decrease. While evaluating the project from the perspective of the parent the loss due to decline in exports also should be considered

Dr.Tomy Mathew

09/12/2008Dr.Tomy Mathew*Capital Budgeting TechniquesPayback period (PBP)Average Rate of Return (ARR)Net Present Value (NPV)Profitability Index (PI)Internal Rate of Return (IRR)

Dr.Tomy Mathew

09/12/2008Dr.Tomy Mathew*Net Present Value (NPV)It is the most popular method of project evaluationThe present value of future cash inflows are compared with the cost of the project

Dr.Tomy Mathew

09/12/2008Dr.Tomy Mathew*NPV for International EvaluationInternational projects have certain special features such as blocking of funds, Cannibalization and sales creation, different levels of taxation, opportunity cost, transfer pricing, fees and royalties, etc.,The major draw back in using NPV for evaluation of international projects is that the risk perceptions of various types of cash flows cannot be incorporated

Dr.Tomy Mathew

09/12/2008Dr.Tomy Mathew*Adjusted Present Value(APV)In APV technique, the complexities found in investment overseas are separately accounted for.In this method each type of cash flow is discounted separately using different discount rates

Dr.Tomy Mathew

09/12/2008Dr.Tomy Mathew*Incorporating RiskTo incorporate political and economic risk A higher discount rate is generally used

Dr.Tomy Mathew

09/12/2008Dr.Tomy Mathew*Financing DecisionsSource of FinancingForeign Issue, Euro IssueFinancial Structure Debt-Equity CompositionMethod FinancingDepository Receipts, Equity, Bond, FCCB, ECB

Dr.Tomy Mathew

09/12/2008Dr.Tomy Mathew*Global Money ManagementObjectivesEfficiencyTax

Dr.Tomy Mathew

09/12/2008Dr.Tomy Mathew*Efficiency ObjectivesMinimising cash balanceReducing Transaction Cost

Dr.Tomy Mathew

09/12/2008Dr.Tomy Mathew*Attaining the ObjectivesDividend remittancesRoyalty paymentsTransfer pricesFronting Loans (A loan between a parent and its subsidiary channelled through a financial intermediary)

Dr.Tomy Mathew

09/12/2008Dr.Tomy Mathew*TechniquesCentralised DepositoriesMultilateral Netting

Dr.Tomy Mathew

09/12/2008Dr.Tomy Mathew*Cash ManagementCash flow management is a part of short term financial managementIt is an integral part of international financial management

Dr.Tomy Mathew

09/12/2008Dr.Tomy Mathew*Cash Management - ObjectivesTo allocate short-term investments and cash balance holdings between currencies and countries to maximize overall corporate returnsTo borrow in different money markets to achieve the minimum costReduce the tax

Dr.Tomy Mathew

09/12/2008Dr.Tomy Mathew*Cash Management Two broad issuesThe Investment and Borrowing CriteriaWhether a company should invest or borrow in domestic versus foreign currencyCentralised Vs. Decentralised cash managementWhether a company with receipts and payments in different countries and currencies should manage working capital locally or centrally

Dr.Tomy Mathew

09/12/2008Dr.Tomy Mathew*The Investment and Borrowing Criteria Factors to be consideredThe expected change in the foreign exchange rateThe current and future interest rateThe transaction cost

Dr.Tomy Mathew

09/12/2008Dr.Tomy Mathew*The Investment and BorrowingDetermining the currency of investmentDetermining the currency of borrowing

Dr.Tomy Mathew

09/12/2008Dr.Tomy Mathew*Determining the currency of investmentInvestors should be indifferent between home- and foreign-currency denominated securities, if the home-currency interest rate equals the foreign-currency interest rate plus the annualised forward exchange premium/discount on the foreign currency

Dr.Tomy Mathew

09/12/2008Dr.Tomy Mathew*Determining the currency of investmentInvestors should invest in the home currency when the domestic-currency interest rate exceeds the sum of the foreign currency rate plus the forward exchange premium/discount and invest abroad when the domestic currency rate is less than this sum

Dr.Tomy Mathew

09/12/2008Dr.Tomy Mathew*Determining the currency of borrowing 1The borrowing criterion is the same as the investment criterion with the inequality reversed. That is,Borrowers should be indifferent between home- and foreign-currency denominated securities if the home-currency interest rate equals the foreign-currency interest rate plus the annualised forward exchange premium/discount on the foreign currency

Dr.Tomy Mathew

09/12/2008Dr.Tomy Mathew*Determining the currency of borrowing 2Borrowers should borrow in the home currency when the domestic-currency interest rate is less than the sum of the foreign currency rate plus the forward exchange premium/discount and borrow from abroad when the domestic currency rate is higher than this sum

Dr.Tomy Mathew

09/12/2008Dr.Tomy Mathew*Impact of Transaction cost on borrowing and lendingTransaction costs on foreign exchange tend to favour the choice of domestic currency investmentsLevi 419Foreign currency borrowings are discouraged by borrowing-lending spreadsLevi 421

Dr.Tomy Mathew

09/12/2008Dr.Tomy Mathew*Centralised Vs. Decentralised Cash management

A multinational corporation with subsidiaries in different parts of the world may have cash flows in a variety of currencies and countries.It can leave cash management toindividual subsidiaries or have a centralised cash management system

Dr.Tomy Mathew

09/12/2008Dr.Tomy Mathew*Advantages of Centralised Cash management SystemNettingLeading and LaggingCurrency DiversificationPoolingSecurity Availability and Efficiency of Collections

Dr.Tomy Mathew

09/12/2008Dr.Tomy Mathew*NettingNetting involves the cash management centre nets out receivables against payables, and only the net cash flows are settled among different units of the corporate familyNetting need not be confined to intra-corporate transactions. Transactions with third parties can also be incorporated

Dr.Tomy Mathew

09/12/2008Dr.Tomy Mathew*Leading and LaggingLeading and lagging involves the movement of cash inflows and outflows forward and backward in time so as to permit netting and achieve other goalsThe opportunities for leading and lagging are limited by preference of the other partyWhen transactions are between divisions of the same multinational the scope for leading an lagging is considerable

Dr.Tomy Mathew

09/12/2008Dr.Tomy Mathew*Currency DiversificationA portfolio of inflows and outflows in different currencies will have a smaller variance of value than the sum of variances of the values of the individual currencies.The adverse effect from exchange rate variations in one currency will more or less will be compensated by the favourable variations in the exchange rate of one or more other currencies

Dr.Tomy Mathew

09/12/2008Dr.Tomy Mathew*PoolingPooling occurs when cash is held as well as managed centrallyThe advantage of pooling is that cash needs can be met wherever they occur without having to keep precautionary balances in each countryUncertainties and delays in moving funds to where they are needed require that some balance be maintained everywhereWith pooling, a given probability of having sufficient cash to meet liquidity needs can be achieved with smaller holdings.

Dr.Tomy Mathew

09/12/2008Dr.Tomy Mathew*Security Availability and Efficiency in CollectionsIf the centralisation occurs in a major international financial center like London or New York, there are additional advantages in terms of:A broader range of securities that are available andAn ability to function in an efficient financial system

Dr.Tomy Mathew

09/12/2008Dr.Tomy Mathew*Disadvantages of Centralised Cash managementSome funds have to be held in each subsidiary to meet unforeseen payments since banking system in many developing countries do not permit rapid transfers of fundsSome payments are to be made on the spot for which purpose local banks have to be used and local banking relationships are essential

Dr.Tomy Mathew

09/12/2008Dr.Tomy Mathew*Factors affecting the Location of Cash

FactorImplicationAbsence of Forward marketsKeep funds in the currency received if an anticipated future need existsTransaction costsKeep funds in the currency receivedPolitical riskMove funds to the home marketLiquidity needsKeep funds in the currency most likely to be needed in the futureWithholding taxAvoid countries whose withholding rates exceed the domestic tax rate

Dr.Tomy Mathew

09/12/2008Dr.Tomy Mathew*Tax IssueDouble Taxation (Tax paid in both the countries)Tax on repatriation (Tax on only that incomer which is transferred to another country)

Dr.Tomy Mathew

09/12/2008Dr.Tomy Mathew*AssignmentRead the closing case in P.856 and prepare a write up in two pagesRead question No.4 in page 855 and write an answer in one pageDate of submission 13/12/2008

Dr.Tomy Mathew