Foundations of Multinational Financial Management 5 th Edition Alan Shapiro J.Wiley & Sons

1. Foundations of Multinational Financial Management5th EditionAlan Shapiro J.Wiley & Sons Power Points by Joseph F. Greco, Ph.D. California State University, Fullerton

2. Current Asset Management and Short-Term Financing Chapter 19

3. INTERNATIONAL CASH MANAGEMENT • I. INTERNATIONAL CASH MANAGEMENT • A. Seven Key Areas Involve Issues about • 1. Organization • 2. Collection/Fund Disbursement • 3. Interaffiliate Payments • 4. Investment of Excess Funds • 5. Optimal Global Cash Balances • 6. Cash Planning/Budgeting • *7. Bank Relations

4. INTERNATIONAL CASH MANAGEMENT • B. Goals of an International Cash Manager: similar to domestic manager • 1. Quick and efficient cash control • 2. Optimal conservation and usage • response

5. INTERNATIONAL CASH MANAGEMENT • Issue (#1): Centralize Organization • 1. Advantages: • a. Efficient liquidity levels • b. Enhanced profitability • c. Quicker headquarter

6. INTERNATIONAL CASH MANAGEMENT • 1. Advantages (con’t) • d. Decision making enhanced • e. Better volume currency quotes • f. Greater cash management • expertise • g. Less political risk

7. INTERNATIONAL CASH MANAGEMENT • Issue (#2): Collection/Disbursement of Funds • 1. Key Element: Accelerate collections • 2. Acceleration Methods: • a. Electronic fund transfers • b. Mobilization centers

8. INTERNATIONAL CASH MANAGEMENT • 3. Methods to Expedite Cash Payments • a. Wire cash transfers • b. Establish accounts in client’s bank • c. Negotiate with banks • - obtain value dating

9. INTERNATIONAL CASH MANAGEMENT • Issue (#3): Interaffiliate Payments • Use Payments Netting • 1. Definition: • offset payments of affiliate receivables/payables • net amounts only are transferred.

10. INTERNATIONAL CASH MANAGEMENT • 2. Create Netting Center • a. set up a subsidiary in a location • with minimal exchange controls • b. Coordinate interaffiliate payment flows • c. Netting Center’s value: • a direct function of the volume of transfers.

11. INTERNATIONAL CASH MANAGEMENT • Issue (#4): Excess Funds Investment • 1. Major task: a. determine minimum cash • balances • b. short-term investment of • excess balances

12. INTERNATIONAL CASH MANAGEMENT • 2. Requirements: • a. Forecast of cash needs • b. Knowledge of minimum • cash position

13. INTERNATIONAL CASH MANAGEMENT • 3. Investment Selection Criteria: • a. Degree of Government regulations • b. Market structure • c. Leniency of Foreign tax laws

14. INTERNATIONAL CASH MANAGEMENT • Issue (#5) Optimal Global Cash Balances • 1. Establish centrally managed cash pool • 2. Require affiliates to hold minimum amounts

15. INTERNATIONAL CASH MANAGEMENT • 3. Benefits of Optimal Global Cash Balances • a. Less outside borrowing needed • b. More excess fund for investment • c. Reduced internal expense • d. Reduced currency exposure

16. INTERNATIONAL CASH MANAGEMENT • Issue (#6) Cash Planning and Budgeting

17. INTERNATIONAL CASH MANAGEMENT • Issue (#7) Bank Relations • 1. Good Relations Will Avoid • a. Lost interest income • b. Overpriced services • c. Redundant services

18. INTERNATIONAL CASH MANAGEMENT • 2. Common Bank Relations Problems • a. Too many banks • b. High costs • such as compensating balances • c. Inadequate reporting • d. Excessive clearing delays

19. ACCOUNTS RECEIVABLE MANAGEMENT • II. ACCOUNTS RECEIVABLE MANAGEMENT • A. Trade Credits • extended in anticipation of profit by • 1. expanded sales volume • 2. retaining existing customers

20. ACCOUNTS RECEIVABLE MANAGEMENT • B. Credit Terms Should Consider • 1. Sales force • customer selection criteria • 2. Adjusting sales bonuses for cost of credit sales.

21. INVENTORY MANAGEMENT • III. INVENTORY MANAGEMENT • A. Problems: • MNCs seem to have more difficulties due to • 1. Long,variable transits • 2. Lengthy customs procedures

22. INVENTORY MANAGEMENT • B. Issue: Production Location 1. Overseas location may lead to higher inventory carrying costs due to • a. larger amounts of work-in- • process • b. more finished goods • 2. Why?

23. INVENTORY MANAGEMENT • C. Subsidiary Practice known as: • Advanced Inventory Purchases • aka • inventory stockpiling.

24. INVENTORY MANAGEMENT • D. Reason for Stockpiling: • reduce risk of shipping delays • Results of Stockpiling: • Higher carrying costs • F. Solution to higher carrying costs: • Adjust affiliate’s profit margins to reflect added costs.

25. CHAPTER 19 PART 2 Short-Term Financing

26. SHORT-TERM FINANCING • IV. SHORT-TERM FINANCING • A. Strategy • 1. Identify: 3 key factors • 2. Formulate/evaluate: objectives • 3. Describe: available options • 4. Develop a methodology: • to calculate/compare costs EIR

27. SHORT-TERM FINANCING • B. Key Factors • 1. Deviations from Int’l Fisher Effect? • a. If yes • trade-off required between cost and exchange risk • b. If no • costs are same everywhere

28. SHORT-TERM FINANCING • 2. Does Interest Rate Parity Hold? • a. Yes. Currency is irrelevant. • b. No. Cover costs may differ • -added risk may mean the forward premium/discount does not offset interest rate differentials.

29. SHORT-TERM FINANCING • 3. Political Risk: If high, • a. MNCs should • 1.) maximize local financing. • 2.) Faced with confiscation or currency controls, • fewer assets at risk

30. SHORT-TERM FINANCING OBJECTIVES • C. Short-Term Financing Objectives • 1. Possible Objectives: • a. Minimize expected cost. • b. Minimize risk without regard • to cost.

31. SHORT-TERM FINANCING OBJECTIVES • D. Short-Term Financing Options • 1. Three Possibilities • a. Inter-company loans • b. Local currency loans • c. Euro market

32. SHORT-TERM FINANCING OBJECTIVES • 2. Local Currency Financing: Bank Loans • a. Short-term in nature • What is the role of cleanup clause? • b. Forms of Local Currency bank loans • 1.) Term loans • 2.) Line of credit • 3.) Discounting

33. EFFECTIVE INTEREST RATE • 3. Calculating Interest Costs • a. Effective interest rate (EIR): - most efficient measure of cost • b. Basic formula: • EIR = Annual Interest Paid • Funds Received

34. EFFECTIVE INTEREST RATE • Sample Problem #1 • Pro Logic Co. receives a loan for $10,000 at 11% interest payable at maturity at the end of one year. What is the EIR? • EIR = $1,100(10,000x.11) • $10,000 10,000 • = 11%

35. EFFECTIVE INTEREST RATE • Sample Problem #2 Discounting the loan • Pro Logic Co. receives a loan for $10,000 at 11% on a discounted basis for one year. What is the EIR? • EIR = $1,100(10,000x.11) • $8,900 10,000-1100 • = 1100 • 8900 • = 12.4%

36. EFFECTIVE INTEREST RATE • Sample Problem #3: Compensating Balances • Pro Logic Co. receives a loan for $10,000 at 11% with a 15% compensating balance requirement for one year. What is the EIR? • EIR = $1,100(10,000x.11) • $8,500 10,000-1500 • = 1100 • 8500 • = 12.9%

37. EFFECTIVE INTEREST RATE • Sample Problem #4: Compensating Balance on a discounted loan • Pro Logic Co. receives a loan for $10,000 at 11% on a discounted basis and a 15% compensating balance requirement for one year. What is the EIR? • EIR = $1,100(10,000x.11) • $7,400 10,000-1100-1500 • = 14.9%

38. COMMERCIAL PAPER • 4. Non-bank lending : Commercial Paper • a. Definition: • short-term unsecured promissory • note generally sold by large MNCs • on a discount basis. • b. Standard maturities • c. Bank fees charged for: • 1.) Backup line of credit • 2.) Credit rating service