The Multinational Finance Function

1
Chapter 20

• The Multinational Finance Function

2
Multinational Finance

• CFO- acquires and allocates financial resources
• Global Environment
• Foreign-exchange risk
• Currency flows and restrictions
• Different tax rates and laws.
• Capital Structure

3
Global Debt

• Leverage- the degree to which the firm uses debt
  for financing
• Cost-effective
• Excessive reliance on long-term debt increases
  financial risk, requiring a higher return for
  investors
• Limited access to local capital markets
• Back-to-back loans

4
Eurocurrencies

• Any currency banked outside of its country of
  origin
• Important source of debt financing
• Wholesale market- large transactions
• Eurodollars- dollars banked outside of the U.S.
• 65-80 of Eurocurrency market

5
Eurocurrencies

• Major Sources of Eurocurrencies
• Foreign governments or individuals
• Multinational corporations
• Foreign banks
• Countries with large balance-of-payments surpluses

6
Eurocurrencies

• Public borrowers such as governments, central
  banks, and public sector corporations
• Short-term and medium-term borrowing
• Syndication- banks pool resources to make a large
  loan in order to spread risk
• LIBOR (London Inter-Bank Offered Rate) interest
  rate that banks use for Eurocurrency loans

7
International Bonds

• Foreign Bonds- sold outside the borrowers
  country, but in the currency of the issuing
  country
• Eurobond- sold in countries other than the one in
  whose currency the bond is denominated
• Global bond- combination of domestic bond and
  Eurobond registered in different national markets

8
Eurobond

• Issued in denominations of 5,000 or 10,000
• Bearer bond- anyone who holds the bond is
  entitled to interest and principal payments
• OTC bond- traded with investment bank, rather
  than on a securities exchange

9
Eurobond

• Top 5 Investment Banks in Eurobond Market
• Deutsche Bank (Germany)
• Morgan Stanley Dean Witter (U.S.)
• Warburg Dillon Read (Switzerland)
• ABN Amro (the Netherlands)
• Merrill Lynch (U.S.)

10
Equity Securities

• Investor takes an ownership position in return
  for shares of stock in the company and the
  promises of capital gains, appreciations in the
  value of the stock and/or dividends
• Private placement - venture capitalist
• Stock market - raise new capital
• Euroequity market shares sold outside the home
  country/ American Depository Receipt (ADR)

11
NYSE

• Provides opportunities to develop broad range of
  shareholders
• Facilitates U.S. mergers and acquisitions
• Increases the visibility of a company
• Supports incentive program for its employees by
  providing a liquid market for its shares

12
Offshore Financial Centers

• Cities or countries that engage in financial
  transactions that provide tax advantages to those
  who do business there
• Transactions are not in home countrys currency
• Different regulations and more flexible
• Cheaper source of funding for MNEs

13
Offshore Financial Centers

• Large foreign-currency market for deposits and
  loans (London)
• Large net supplier of funds (Switzerland)
• Intermediary or pass-through for international
  loan funds (Bahamas, Cayman Islands)
• Economic and political stability
• Efficient and experienced financial community
• Regulatory climate favorable to financial
  industry

14
Offshore Financial Centers

• Operational - extensive banking activities with
  short-term transactions (London)
• Booking little banking takes place, record
  transactions to take advantage of secrecy and
  low/no tax rates (Caribbean)

15
Internal Source of Funds

• Loans - interest paid by parent is tax deductible
  and considered taxable income to subsidiary
• Dividends not tax deductible to subsidiary and
  considered taxable income to parent
• Intercompany receivables and payables
• Investments through equity capital

16
Global Cash Management

• Budgets and forecasts are essential
• Meet local cash needs
• Invest excess cash or put into a cash pool to be
  distributed

17
Multilateral Netting

• Multilateral Netting enables companies to
  reduce the amount of cash flow and move cash more
  quickly and efficiently
• Optimizes use of excess cash
• Reduces costly foreign exchange
• Minimizes paperwork
• Tighter control and faster decision making
• Savings of transfer charges
• Quicker access to funds

18
Foreign Exchange Risk Management

• Translation Exposure Financial statements are
  translated into currency of parent company to be
  combined to form consolidated statements
• Transaction Exposure Accounts
  receivable/payable changes in value as exchange
  rate changes
• Economic Exposure Change in cash flow due to
  product pricing, sourcing and costs of inputs,
  and location of investments

19
Capital Budgeting Decision

• Rates of inflation
• Exchange rate changes
• Political risk
• Terminal value