International Business chapter 10

Choose a capital structure

- Determine the ideal long-term mix of debt versus equity financing.

Working capital and cash flow management

- Manage funds passing in and out of the firm's value-adding activities.

Bonds: A Major Source of Debt Financing

-A bond is a debt instrument that enables the issuer (borrower) to raise capital by promising to repay the principal along with the interest on a specified date (maturity). -Along with firms, governments, states, and other institutions also sell bonds. Investors purchase bonds and redeem them at face value in the future.

Foreign Exchange Trading

-A relatively limited number of currencies facilitate cross-border trade and investment, mainly dollars, euros, yen, and British pounds. -The daily volume of global trading in foreign exchange amounts to more than $4 trillion, which is more than 100 times the daily value of global trade in products and services. -Large banks are the primary dealers in currency. -Currency traders are especially active in major financial centers such as London, New York, and Tokyo. Trading is done increasingly online.

Task Three: Working Capital and Cash Flow Management

-Cash flow needs arise from everyday business activities such as paying for labor and materials or resources, servicing interest payments on debt, paying taxes, or paying dividends to shareholders. -Cash flow management ensures cash is available where and when it is needed. -Cash is generated from various sources and needs to be transferred from one part of the M N E to another. -International financial managers devise strategies for transferring funds within the firm's worldwide operations to optimize global operations.

China: An Emergent Banking Center

-China is rapidly becoming the world's largest economy and a center of global banking. -The country's big trade surplus and foreign investment inflows together have created massive reserves of foreign exchange. -Now home to several of the world's largest banks, the Chinese government is positioning Shanghai as a global financial hub.

Advantages of the Global Capital Markets for the Firm

-Compared to being restricted to financial markets in the home country, the global market provides a broader base from which the firm can draw funds. -Greater breadth of financing sources means firms can often access funds at substantially lower cost. -The market provides a variety of investment opportunities for M N E s, professional investment firms, and individuals.

Causes of Rapid Rise in Global Capital Markets

-Governments' deregulation of financial markets made capital easier to move across national borders. -Innovation in information and communication technologies accelerated the ease and pace of global financial transactions. -Globalization pressured firms to seek new and lower cost ways to finance global operations and to manage global financial management activities. -Widespread securitization led to conversion of illiquid financial instruments, such as bank loans, into tradable securities, such as bonds.

Task Four: Capital Budgeting

-Managers use capital budgeting to decide which international projects are economically desirable. -The net present value (N P V) of a project depends on the initial investment, cost of capital, and the amount of incremental cash flow or other advantages the proposed project is expected to provide over time. -Internationally, such decisions are complex because managers must consider many variables, each of which can strongly affect the potential profitability of a venture.

Financial Centers

-New York, London, and Tokyo are the major centers. -Frankfurt, Hong Kong, Paris, San Francisco, Sydney, Singapore, and Zurich are secondary centers. -Firms access major capital suppliers - banks, stock exchanges, venture capitalists - at such centers. -Stock market capitalization, April 20, 2018 U.S. $34 trillion Rest of the world's $44 trillion

Sources of Funding: 2. Debt Financing

-The firm borrows money from a creditor in exchange for repayment of principal and interest. -The main advantage over equity financing is the firm does not sacrifice any ownership interests. -Debt financing is obtained from two sources: loans (usually from banks) and the sale of bonds. -The firm may borrow money from banks in its home market or in foreign markets. -Borrowing internationally is complicated by differences in banking laws and infrastructure, lack of loanable funds, and fluctuating exchange rates.

Sources of Funding: 1. Equity Financing

-The firm obtains capital by selling shares of stock. -Main advantage is the firm obtains capital without incurring debt and having to repay funds to providers. -Main disadvantage is the firm's ownership is diluted. -The global equity market is the worldwide market of funds for equity financing - the stock exchanges worldwide where investors and firms meet to buy and sell shares of stock.

International Financial Management Tasks

1. Choose a capital structure 2.Raise funds for the firm 3.Working capital and cash flow management 4.Capital budgeting 5.Managing currency risk 6.Manage the diversity of international accounting and tax practices

Sources of Funding:

1. Equity Financing 2. Debt Financing 3. Intracorporate Financing

Methods for Transferring Funds within the M N E

1. trade credit 2. Dividend remittances 3.Royalty payments 4.fronting loan 5.Transfer pricing

Raise funds for the firm

Acquire equity, debt, or intra corporate financing for funding activities and investments.

Capital budgeting

Assess financial attractiveness of major investment projects (e.g., Foreign market expansion and entry).

Forward rate

Exchange rate applicable at some future date, but specified at time of the transaction (Terminology in Currency Trading)

Spot rate

Exchange rate based on the current rate of exchange. rate based on the current rate of exchange. (Terminology in Currency Trading)

Global capital market:

Financial markets where firms and governments raise intermediate-term and long-term financing. -International investors access a much wider range of investment opportunities than available in the domestic capital market. -Participating in the global capital market allows firms to access funds from a larger pool of capital at competitive interest rates.

Global money market:

Financial markets where firms and governments raise short-term financing. It is the meeting point of those who want to invest money and those who want to raise funds.

Manage the diversity of international accounting and tax practices

Learn to operate in a global environment with diverse accounting practices and international tax regimes.

Centralized Depository

M N E s pool surplus funds into a central depository that functions either globally or for a region. The funds are then directed to needful subsidiaries or invested to generate income.

Managing currency risk

Manage the multiple-currency transactions of the firm and the exposure to exchange-rate fluctuations.

Intracorporate financing:

Obtaining funds from within firm's network of subsidiaries and affiliates -In firms with extensive international operations, some units at times are cash rich while others are cash poor. -Usually has little effect on the parent's balance sheet because the funds are simply transferred from one area of the firm to another. -Minimizes transaction costs of borrowing from banks and avoids the ownership-diluting effects of equity financing.

and Multilateral Netting

Strategic reduction of cash transfers within the M N E family through the elimination of offsetting cash flows.

Capital structure:

The mix of long-term equity and debt financing firms use to support their activities. -Debt financing comes from either loans from banks and other financial intermediaries or money raised by selling corporate bonds to individuals or institutions -Shares of stock provide investors with an ownership (equity) in the firm. In new firms, founders may provide equity from their personal savings. -The firm obtains equity financing by selling stock to investors or by retaining earnings, which is profit reinvested in the firm rather than paid to investors.

trade credit

a subsidiary defers payment for goods received from the parent firm.

Eurodollars

are U.S. dollars held in banks outside the United States, including foreign branches of U.S. banks. -Other Eurocurrencies include euros, yen, and British pounds, as long as they are banked outside their home country.

Dividend remittances

are commonly used to transfer funds from foreign subsidiaries to the parent, but vary depending on tax levels, currency risks, and other factors.

Royalty payments

are compensation paid to owners of intellectual property.

Arbitragers

are currency traders who buy and sell the same currency in two or more foreign-exchange markets to profit from differences in the currency's exchange rate, for the sake of generating profits.

Speculators

are currency traders who seek profits by investing in currencies with the expectation that they will rise in value.

Foreign bonds

are sold outside the bond issuer's country and denominated in the currency of the country in which they are issued.

Eurobonds

are sold outside the bond issuer's home country and denominated in its own currency

Transaction exposure

currency risk that firms face when outstanding accounts receivable or payable are denominated in foreign currencies.

Economic exposure

currency risk that results from exchange rate fluctuations affecting the pricing of products, the cost of inputs, and the value of foreign investments.

Translation exposure

currency risk that results when a firm translates financial statements denominated in a foreign currency into the functional currency of the parent firm.

Firms access funds from a variety of sources

foreign bond markets, stock exchanges, banks, venture capital firms, and intra-corporate financing - based on wherever in the world capital is cheapest.

International Financial Management

is the acquisition and use of funds for cross-border trade, investment, and other commercial activities.

Transfer pricing /intracorporate pricing

refers to prices that subsidiaries and affiliates charge one another as they transfer goods and services within the same M N E. -Firms can use transfer pricing to shift profits out of high-tax countries into low-tax countries; minimize foreign exchange risks, for example, by moving funds out of countries where a currency devaluation is forecast; and optimize the management of internal cash flows.

Eurocurrency Market

representing money deposited in banks outside its country of origin, is a key source of loanable funds. U.S. dollars account for the largest share of such funds.

Hedgers

seek to minimize the risk of exchange rate fluctuations, often by buying forwards or similar financial instruments. They include MNEs who conduct international trade

global bond market

the international marketplace in which bonds are bought and sold, primarily through banks and stockbrokers.

fronting loan

the parent deposits a large sum in a foreign bank, which then transfers the funds to the subsidiary in the form of a loan -Fronting allows the parent to circumvent restrictions that foreign governments impose on direct intra-corporate loans. -If the loan is made through a bank in a tax haven country, the parent can minimize taxes that might otherwise be due if the loan were made directly.

M N E s must carry out transactions

transactions in a multitude of foreign currencies and diverse environments characterized by restrictions on capital flows, country risk, and varying accounting and tax systems.