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International Business Strategy, Management

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Title: International Business Strategy, Management


1
International BusinessStrategy, Management the
New RealitiesCavusgil, Knight Riesenberger
  • Chapter 19
  • Financial Management and Accounting in the Global
    Firm

2
International Financial Management
  • The acquisition, management, and use of funds
    for
  • cross-national trade, investment, and other
  • commercial activities. It involves
  • Conducting transactions in various currencies
  • Operating in environments characterized by
    significant risk, capital flow restrictions, and
    varying accounting and tax systems
  • Seeking and accessing funds from banks, bond
    markets, stock exchanges, venture capital firms,
    and intra-corporate sources, located worldwide.

3
International Financial Management Tasks
  1. Decide on the Capital Structure. Determine the
    ideal long-term mix of debt versus equity
    financing.
  2. Raise funds for the firm. Acquire equity, debt,
    or intra-corporate financing for funding
    activities and investments.
  3. Working Capital and Cash Flow Management. Manage
    funds passing in and out of the firms
    value-adding activities.
  4. Capital Budgeting. Assess financial
    attractiveness of major investment projects
    (e.g., foreign market expansion).
  5. Currency Risk Management. Manage
    multiple-currency transactions and exposure to
    exchange-rate fluctuations.
  6. Manage the Diversity of international Accounting
    and Tax Practices. Operate in a global
    environment with diverse accounting practices and
    international tax regimes.

4
Task One Decide on the Capital Structure
  • Capital structure the mix of long-term equity
    financing and debt financing firms use to support
    their international activities.
  • Firm obtains equity financing by selling shares
    of stock to investors or by retaining earnings.
  • Shares of stock provide an investor with an
    ownership interest, that is, equity, in the firm.
  • Debt financing comes from either loans from banks
    and other financial intermediaries or money
    raised from the sale of corporate bonds.

5
Task Two Raising Funds
  • Global money market financial markets where
    firms
  • and governments raise short-term financing.
  • Global capital market financial markets where
    firms
  • and governments raise intermediate-term and
    long-term
  • financing.
  • Most funding is longer term. The global capital
    market is the meeting point of those who want to
    invest money and those who want to raise funds.
  • Main advantage of the global capital market
    ability to access funds from a wider range of
    sources at lower cost.

6
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7
The Global Capital Market is Huge and Growing
(as of 2006)
  • International issues of equity in world
    securities markets were about 380 billion, up
    from 83b in 1996 and just 14b in 1986.
  • Stock of cross-national bank loans and deposits
    was 18,916b, up from 7,205b ten years earlier.
  • There were 17,574b in outstanding international
    bonds and notes, up from 3,081b in 1996.
  • This is the globalization of finance.
  • Main facilitating factors Deregulation of global
    finance advanced ICTs globalization of business

8
Sources of Funding 1 Equity Financing
  • The firm obtains capital by selling shares of
    stock. In exchange, the shareholders obtain a
    percentage of ownership in the firm and, often, a
    stream of dividends.
  • Global equity market the worldwide market for
    equity financing -- stock exchanges worldwide
    where investors and firms meet to buy and sell
    shares of stock.

9
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10
Sources of Funding 2 Debt Financing
  • In debt financing, a firm borrows money from a
    creditor in exchange for repayment of principal
    and an agreed upon interest amount in the future.
  • Debt financing is obtained from loans and bonds.
  • International Loans. The firm may borrow money
    from banks in its home market or abroad.
  • Eurocurrency Market is money deposited in banks
    outside its country of origin, mainly U.S.
    dollars, eurodollars. Other eurocurrencies
    include euros, yen, and pounds, banked outside
    the home country

11
Bonds A Major Source of Debt Financing
  • A bond enables the issuer (borrower) to raise
    capital by promising to repay the principal along
    with interest at a specified date.
  • Global bond market is the international
    marketplace where bonds are bought and sold,
    primarily via banks and stockbrokers.
  • Foreign bonds are sold outside the bond issuers
    country and denominated in the currency of the
    country in which they are issued.
  • Eurobonds are sold outside the bond issuers home
    country and denominated in its own currency
    (e.g., when Toyota sells yen-denominated bonds in
    Europe)

12
Sources of Funding 3
Intra-Corporate Financing
  • Funds provided from sources inside the firm in
    the form of equity, loans, and trade credits.
    Trade credit arises when a supplier of goods and
    services grants the customer the option to pay
    later.
  • Advantages Often the lowest-cost capital
    minimizes the transactions costs typical of
    obtaining funds from other sources has little
    effect on the parent firms balance sheet avoids
    risk of debt financing avoids ownership-diluting
    effects of equity financing.

13
Task Three Working Capital and Cash Flow
Management
  • Working capital the current assets of the firm.
  • Working capital management aims to ensure cash is
    available where and when it is needed.
  • Cash flow needs arise from everyday business
    activities, such as paying for labor or
    materials.
  • Cash is generated from various sources and must
    be transferred from one part of the MNE to
    another.
  • International financial managers devise various
    strategies for transferring funds within the
    firms worldwide operations, to optimize global
    operations.

14
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15
Methods for Transferring Funds within the MNE
  • Through trade credit, a subsidiary defers payment
    for goods and services received from the parent.
  • Royalty payments remuneration paid to the owners
    of intellectual property, as parents often
    license the use of assets to subsidiaries.
  • Fronting loan a loan between the parent and its
    subsidiary, channeled through a bank. The parent
    deposits a sum in a foreign bank, which then
    transfers the funds to the subsidiary as a loan.
  • Transfer pricing the prices that subsidiaries
    and affiliates charge one another for transferred
    goods and services within the same MNE.

16
Multilateral Netting
  • Strategic reduction of cash transfers within the
    MNE family via elimination of offsetting cash
    flows.
  • Involves three or more subsidiaries that hold
    accounts payable or accounts receivable with each
    other. MNEs with many subsidiaries may establish
    a netting center.
  • The center advises each subsidiary of the amounts
    to pay and receive from other subsidiaries on a
    specified date.
  • Firms like Philips saves millions each year in
    transaction costs due to multilateral netting.

17
Task Four Capital Budgeting
  • Helps managers decide which international
    expansion projects are economically desirable.
  • The decision to accept or reject an investment
    project depends on the projects initial
    investment requirement, its cost of capital, and
    the benefits the project is expected to provide.
  • Involves net present value analysis.
  • Can be very complex, because there are many
    variables to consider.
  • Facilitated by spreadsheet analysis

18
Task Five Currency Risk Management
  • Currency risk the peril resulting from adverse
    unexpected fluctuations in exchange rates.
  • Exporters and licensors face currency risk
    because foreign buyers pay in their own
    currencies.
  • Foreign direct investors face currency risk
    because they receive both payments and incur
    obligations in foreign currencies.
  • Managers of foreign investment portfolios face
    currency risk as the value of stocks fluctuate.

19
Three Types of Currency Risk
  • Transaction exposure. Arises when outstanding
    accounts receivable or payable are denominated in
    foreign currencies.
  • Translation exposure. Results financial
    statements denominated in a foreign currency are
    translated into the functional currency of the
    parent, as part of consolidating international
    financial results.
  • Economic exposure. Results from exchange rate
    fluctuations affecting the pricing of products,
    the cost of inputs, and the value of foreign
    investments.

20
Foreign Exchange Trading
  • A small number of currencies facilitate
    international trade and investment. Some 2/3 of
    foreign reserves are in U.S. dollars, 25 in
    euros, 7 in yen and British pounds, and only 2
    in the worlds 150 other currencies.
  • Volume of currencies exchanged is huge. As of
    2007, some 3 trillion worth of currency was
    traded everyday, 10 times the value of daily
    stock and bond turnover, and 100 times the value
    of daily merchandise trade. One-third of all
    currency trading, about 1 trillion per day,
    takes place in London.

21
Specialized Terminology for Currency Trading
  • Spot rate the exchange rate applicable to the
    trading of foreign currencies in which the
    current rate of exchange is used and delivery is
    considered immediate.
  • Forward rate the exchange rate applicable to the
    collection or delivery of foreign currencies at
    some future date, but a rate specified at the
    time of the transaction.

22
Exchange Rate Forecasting and Hedging
  • Firms attempt to forecast exchange rate
    fluctuations.
  • Firms attempt to proactively manage exchange rate
    exposure via hedging.
  • Forecasts are available from banks and business
    news sources.
  • Online sources include the Bank for International
    Settlements (www.bis.org), the World Bank
    (www.worldbank.org), and the European Central
    Bank (www.ecb.int).

23
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24
Task Six Manage the Diversity of International
Accounting and Tax Practices
  • The firms accounting systems must identify,
    measure, and communicate financial information,
    often in complex multi-country operations, with
    much variation in national accounting systems.
  • For example, there are dozens of approaches for
    determining RD expenditures, cost of goods sold,
    asset valuation, net profits, etc.
  • Financial statements prepared according to the
    rules of one country may be difficult to compare
    with those prepared in another country.

25
Transparency in Financial Reporting
  • Transparency is the degree to which firms
    regularly and comprehensively reveal substantial
    information about their financial condition and
    accounting practices.
  • In order to increase transparency in the United
    States, the federal government passed the
    Sarbanes-Oxley Act in 2002, making CEOs and CFOs
    personally responsible for the accuracy of annual
    reports and other financial data.
  • In general, accounting standards are becoming
    more standardized worldwide.

26
Consolidating Financial Statements of
Subsidiaries
  • Involves translating data denominated in
    foreign currencies into the firms functional
    currency on headquarters financial statements.
  • Current rate method -- all foreign currency
    balance-sheet and income statement items are
    translated at the current exchange rate -- the
    spot exchange rate in effect on the day the
    statements are prepared.
  • Temporal method -- the choice of exchange rate
    depends on the underlying method of valuation. If
    assets and liabilities are normally valued at
    historical cost, then they are translated at the
    historical rates. If assets and liabilities are
    normally valued at market cost, they are
    translated at the current rate of exchange.

27
International Taxation
  • A direct tax is imposed on income derived from
    the firms business activities.
  • An indirect tax applies to firms that license or
    franchise products and services, or who charge
    interest. In effect, the local government
    withholds some percentage of payments as tax.
  • A sales tax is a flat percentage tax on the value
    of goods or services sold, and paid by the
    ultimate user.
  • A value-added tax (VAT) is payable at each stage
    of processing in the value chain of a product or
    service. It is common in Canada, Europe, and
    Latin America.

28
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29
Tax Havens
  • A country hospitable to business and inward
    investment because of its low corporate income
    tax.
  • Examples Bahamas, Luxembourg, Monaco, Singapore,
    Switzerland
  • They exist partly because MNEs want to structure
    their global activities in ways that minimize
    taxes.
  • MNEs take advantage of tax havens either by
    establishing operations in them or by funneling
    business transactions through them.
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