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Foundations of Multinational Financial
Management Alan Shapiro
John Wiley & Sons
Power Points byJoseph F. Greco, Ph.D.
California State University, Fullerton
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Current Asset Management and Short-
Term Financing
Chapter 19
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INTERNATIONAL CASH MANAGEMENT
I. INTERNATIONAL CASH MANAGEMENTA. Seven Key Areas:
1. Organization2. Collection/Fund Disbursement3. Interaffiliate Payments Netting4. Excess-Funds Investment5. Optimal Global Cash Balances6. Cash Planning/Budgeting7. Bank Relations
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INTERNATIONAL CASH MANAGEMENT
B. Goals of an International Cash Manager
1. Quick/efficient cash control2. Optimal conservation/usage
C.Organization: Centralize1. Advantages:
a. Efficient liquidity levelsb. Enhanced profitabilityc. Quicker headquarter
action
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INTERNATIONAL CASH MANAGEMENT
1. Advantages (con’t)d. Decision making
enhancede. Better volume currency
quotesf. Greater cash
managementexpertise
g. Less political risk
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INTERNATIONAL CASH MANAGEMENT
D. Collection/Disbursement of Funds1. Key Element: Accelerate collections2. Acceleration Methods:
a. Cable remittancesb. Mobilization centersc. Lock boxesd. Electronic fund transfers
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INTERNATIONAL CASH MANAGEMENT
3. Methods to Expedite Cash Payments
a. Cable remittancesb. Establish accounts in
client’s bankc. Negotiate with banks
- obtain value dating
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INTERNATIONAL CASH MANAGEMENT
E. Payments Netting1. Definition:
offset payments of affiliate receivables/payables so that net amounts only are transferred.2. Create Netting Center
a. a subsidiary set up in a location
with minimal exchange controls
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INTERNATIONAL CASH MANAGEMENT
2. Netting Centers (con’t)b. Coordinate interaffiliate
payment flowsc. Center’s value is a direct
functionof transfer volume.
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INTERNATIONAL CASH MANAGEMENT
F. Excess Funds Investment1. Major task:
a. determine minimum cashbalances
b. short-term investment ofexcess balances
2. Requirements:a. Forecast of cash needsb. Knowledge of minimum
cash position
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INTERNATIONAL CASH MANAGEMENT
3. Investment Selection Criteria:a. Government regulationsb. Market structurec. Foreign tax laws
G. Optimal Global Cash Balances1. Establish centrally managed
cashpool
2. Require affiliates to hold minimum
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INTERNATIONAL CASH MANAGEMENT
3. Benefits of Optimal Cash Balances
a. Less borrowing ncededb. More excess fund
investmentc. Reduced internal
expensed. Reduced currency
exposure
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INTERNATIONAL CASH MANAGEMENT
I. Bank RelationsA. Good Relations Will Avoid
1. Lost interest income2. Overpriced services3. Redundant services
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INTERNATIONAL CASH MANAGEMENT
2. Common Bank Relations Problems
a. Too many banksb. High costs
such as compensating balances
c. Inadequate reportingd. Excessive clearing
delays
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ACCOUNTS RECEIVABLE MANAGEMENT
II. ACCOUNTS RECEIVABLE MANAGEMENT
A. Trade Creditextended in anticipation of
profit by1. expanded sales volume2. retaining existing
customers
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ACCOUNTS RECEIVABLE MANAGEMENT
B. Credit Terms Should Consider1. Sales force2. Adjusting bonuses for cost
of credit sales.
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INVENTORY MANAGEMENT
III. INVENTORY MANAGEMENTA. Problems:
Seem to be more difficult due to
1. Long,variable transits2. Lengthy customs
procedures
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INVENTORY MANAGEMENT
B. Production Location/Inventory Control
1. Overseas locationmay lead to higher inventory carrying costs due toa. larger amounts of work-
in-process
b. more finished goods
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INVENTORY MANAGEMENT
C. Advanced Inventory Purchases1. Usually where there are no
forward hedges available2. Another hedging method:
advance inventory purchases of
imported items, i.e. inventory stockpiling.
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INVENTORY MANAGEMENT
d. Reason for Stockpiling:greater risk of delay
e. Solution to higher carrying costs:
Adjust affiliate’s profit margins
to reflect added costs.
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SHORT-TERM FINANCING
IV. SHORT-TERM FINANCINGA. Strategy
1. Identify: key factors2. Formulate/evaluate:
objectives3. Describe: available
options4. Develop a methodology:
to calculate/compare costs
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SHORT-TERM FINANCING
B. Key Factors1. Deviations from Int’l Fisher
Effect?a. If yes
trade-off required between
cost and exchange riskb. If no
costs are same everywhere
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SHORT-TERM FINANCING
2. Exchange Riska. Offset foreign assets with
foreign liabilitiesb. Borrow where no
exposureincreases exchange risk
3. Firm’s Risk Aversiondirect relation to price
incurred to reduce exposure
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SHORT-TERM FINANCING
4. Does Interest Rate Parity Hold?a. Yes. Currency is irrelevant.b. No. Cover costs may differ-added risk may mean theforward premium/discountdoes not offset interest ratedifferentials.
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SHORT-TERM FINANCING
5. Political Risk: If high, a. MNCs should
1.) maximizelocal financing.
2.) Faced with confiscation or currency controls,fewer assets at risk
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SHORT-TERM FINANCING OBJECTIVES
C.Short-Term Financing Objectives1. Four Possible Objectives:
a. Minimize expected cost.b. Minimize risk without
regardto cost.
c. Trade off expected cost and
systematic risk.d. Trade off expect cost and
total risk.
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SHORT-TERM FINANCING OBJECTIVES
D. Short-Term Financing Options1. Three Possibilities
a. Intercompany loansb. Local currency loansc. Euro market
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SHORT-TERM FINANCING OBJECTIVES
2. Local Currency Financing: Bank Loans
a. Short-term in naturerole of cleanup clause
b. Forms1.) Term loans2.) Line of credit3.) Overdrafts4.) Revolving Credit5.) Discounting
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EFFECTIVE INTEREST RATE
3. Calculating Interest Costsa. Effective interest rate
(EIR): most efficient measure of cost
b. Basic formula:
EIR = Annual Interest
Paid Funds Received
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COMMERCIAL PAPER
4. Commercial Papera. Definition:
short-term unsecured promissorynote generally sold by large MNCson a discount basis.
b. Standard maturitiesc. Bank fees charged for:
1.) Backup line of credit2.) Credit rating service