Professional Documents
Culture Documents
Learning Objectives
How does multinational working capital
management differ from domestic working capital management? What are the objectives of international cash management? What techniques are used by MNCs for making cross-border payments? What key factors are associated with a firms funding strategy? What short-term financing options are available?
Additional Risks
Movement of Capital
Decisions
Taxes
Cash Management
Cash levels are determined independently of
characteristics
lowering the cost of settling cash flows between related and unrelated firms
Wire transfers Cash pooling Payment netting Electronic fund transfers
Wire Transfers
Variety of methods but two most popular
benefits.
Subsidiaries hold minimum cash for their own transactions and no cash for precautionary purposes All excess funds are remitted to a central cash depository Centralized depositories provide the following advantages: Information advantage is attained by central depository on currency movements and interest rate risk Precautionary balance advantages as MNC can reduce pool without any loss in level of protection Interest rate advantages as funds can be borrowed at a lower cost and invested at a more advantageous rate. Location can provide tax benefits, access to international communications, clearly defined legal procedures.
Multilateral Netting
Netting involves offsetting receivables
against payables so that only the net amounts are transferred among affiliates. Types
Bilateral netting Multilateral netting
Payments Netting
Example: A Belgian affiliate owes an Italian
affiliate $5,000,000, while the Italian affiliate simultaneously owes the Belgian affiliate $3,000,000.
Bilateral settlement calls for $2,000,000 payment from Belgium to Italy and cancellation of the remainder via offset. Multilateral netting is an extension of bilateral netting.
Assume that payments are due between Apexs European operations each month. Without netting Apex de France would make three separate transactions each way.
MNCs foreign affiliates poses a complex decision problem. Financing options for a subsidiary include:
Intercompany loans from the parent or a sister affiliate. Local currency financing.
Political Risk
Financing Objectives
Minimize covered after-tax interest costs
Intercompany Loans
The cost of an intercompany loan is
Commercial Paper
Discount loan
Loan with compensating balance
requirement
Simple interest loan Discount loan
products, needs to acquire 1 million in funds today to expand a pimiento-stuffing facility. Banca di Roma has offered them a choice of an 11% loan payable at maturity or a 10% loan on a discount basis. Which loan should Olivera choose?
a firm needs to estimate and then compare the effective after-tax dollar costs of local currency financing and dollar financing.
In reality, the value of the currency borrowed will most likely change with respect to the borrowers local currency over time. Breakeven analysis can be used to determine the least expensive financing source for each future exchange rate.
which can borrow pesos at 80% or dollars at 12% for one year.
If the peso is expected to devalue from MP$ 7.50/$ at the beginning of the year to MP$ 10.23/$ at the end of the year, what is the expected before-tax dollar cost of the peso loan? What is the cost of the dollar loan to Ford? What is the breakeven rate of currency change at which the dollar cost of borrowing pesos is just equal to the cost of dollar financing?
53%.
What is the expected after-tax dollar cost of borrowing pesos? What is the expected after-tax cost of the dollar loan? What is the breakeven rate of currency change at which the after-tax dollar cost of local currency financing is just equal to the after-tax cost of dollar financing?
currency
rH (LC) = rL (1 - Ta)(1 + c) + c
After-tax cost of dollar loan rH (HC) = rH (1 - Ta) + cTa Breakeven rate of currency change rL(1 - Ta)(1 + c) + c = rH(1 - Ta) + cTa