International

Business
Environments & Operations
14e Global Edition
Daniels

Radebaugh

Copyright 2013 Pearson Education

Sullivan

19-1

Chapter 19
The Multinational
Finance Function

Copyright 2013 Pearson Education

19-2

Learning Objectives

To describe the multinational finance function and how it

fits in the MNEs organizational structure
To show how companies can acquire outside funds for
normal operations and expansion, including offshore debt
and equity funds
To explore how offshore financial centers are used to raise
funds and manage cash flows
To explain how companies include international factors in
the capital budgeting process
To discuss the major internal sources of funds available to
the MNE and to show how these funds are managed
globally
To describe how companies protect against the major
financial risks of inflation and exchange rate movements
To highlight some of the tax issues facing MNEs

Copyright 2013 Pearson Education

19-3

Introduction
MNEs use capital markets to finance
expansion
Small companies deal in foreign currencies
to settle payments for exports and imports

Copyright 2013 Pearson Education

19-4

The Finance Function

Learning Objective 1:
To describe the multinational finance
function and how it fits in the MNEs
organizational structure

Copyright 2013 Pearson Education

19-5

The Finance Function

Key finance functions include

Capital structure
Long-term financing
Capital budgeting
Working capital management

Copyright 2013 Pearson Education

19-6

The Role of the CFO

The Role of the Treasurer in the Finance Function

Copyright 2013 Pearson Education

19-7

Capital Structure

Capital structure

mix between long-term debt and equity

Leveraging

the degree to which a firm funds the growth of

business by debt

Copyright 2013 Pearson Education

19-8

Capital Structure
Selected Capital Structures, FY 2007

Copyright 2013 Pearson Education

19-9

Capital Structure

Factors affecting the choice of capital

structure

local tax rates

the degree of development of local equity
markets
creditor rights

Copyright 2013 Pearson Education

19-10

Capital Structure

Sources of capital

banks
sovereign wealth funds

Debt markets as a means of expansion

local

debt markets
international debt markets

Copyright 2013 Pearson Education

19-11

Global Capital Markets

Learning Objective 2:
To show how companies can acquire
outside funds for normal operations and
expansion, including offshore debt and
equity funds

Copyright 2013 Pearson Education

19-12

Global Capital Markets

Eurocurrency market

Eurocurrency

source of debt financing

any currency banked outside its country of
origin

Eurodollar

a certificate of deposit in dollars in a bank

outside of the United States

Copyright 2013 Pearson Education

19-13

Global Capital Markets

International bonds
Foreign bonds

sold outside the borrowers country but

denominated in the country of issue currency

Eurobonds

underwritten by a syndicate of banks from

different countries and sold in a currency other
than that of the country of issue
Global bond

Copyright 2013 Pearson Education

19-14

Global Capital Markets

Equity securities

investor takes an ownership position in return

for shares of stock in the company and the
promises of capital gains and maybe dividends

Market capitalization

the total number of shares of stock listed times

the market price per share
New York, Tokyo, and London have the
three largest stock markets in the world

Copyright 2013 Pearson Education

19-15

Global Capital Markets

Global Markets: Market Capitalization, 2008

Copyright 2013 Pearson Education

19-16

Global Capital Markets

Euroequity market
the market for shares sold outside the
boundaries of the issuing firms home
country
allows firms to target another group
of stockholders

Copyright 2013 Pearson Education

19-17

Offshore Financing and

Offshore Financial Centers
Learning Objective 3:
To explore how offshore financial centers
are used to raise funds and manage cash
flows

Copyright 2013 Pearson Education

19-18

Offshore Financing and

Offshore Financial Centers

Offshore financing

the provision of financial services by banks and

other agents to nonresidents

Offshore financial centers (OFCs)

cities or countries that provide large amounts

of funds in currencies other than their own and
are used as locations in which to raise and
accumulate cash

Copyright 2013 Pearson Education

19-19

Capital Budgeting
in a Global Context
Learning Objective 4:
To explain how companies include
international factors in the capital
budgeting process

Copyright 2013 Pearson Education

19-20

Capital Budgeting
in a Global Context

Capital budgeting

the process whereby MNEs determine which

projects and countries will receive capital
investment funds

Techniques

Payback period
Net present value of a project (NPV)
Internal rate of return

Copyright 2013 Pearson Education

19-21

Capital Budgeting
in a Global Context

Internal sources of funds

Loans
Investment through equity capital
Intercompany receivables and payables
Dividends

Copyright 2013 Pearson Education

19-22

Capital Budgeting
in a Global Context
How the MNE Handles its Funds: Internal Funds

Copyright 2013 Pearson Education

19-23

Capital Budgeting
in a Global Context

CFOs must determine

What are the local and corporate system needs

for cash?
How can the cash be withdrawn from
subsidiaries and centralized?
Once the cash has been centralized, what
should be done with it?

Copyright 2013 Pearson Education

19-24

Capital Budgeting
in a Global Context
How the MNE Handles its Funds: Multilateral Cash Flows

Copyright 2013 Pearson Education

19-25

Capital Budgeting
in a Global Context
How the MNE Handles its Funds: Multilateral Netting

Copyright 2013 Pearson Education

19-26

Foreign Exchange
Risk Management
Learning Objective 6:
To describe how companies protect
against the major financial risks of
inflation and exchange rate movements

Copyright 2013 Pearson Education

19-27

Foreign Exchange
Risk Management

Types of foreign exchange exposure

Translation
exposed accounts either gain or lose value in dollars
when the exchange rate changes
Transaction
when a transaction is denominated in a foreign
currency and the settlement results in a cash flow
gain or loss
Economic or operating
the potential for change in expected cash flows that
arises from the pricing of products, the sourcing and
cost of inputs, and the location of investments

Copyright 2013 Pearson Education

19-28

Foreign Exchange
Risk Management

Exposure Management Strategy

Defining and measuring exposure

Creating a reporting system
Adopt a policy assigning responsibility for
minimizing or hedging exposure
Formulating hedging strategies
Operational
leads and lags strategy
Financial
forward contracts and currency options

Copyright 2013 Pearson Education

19-29

Taxation of
Foreign Source Income
Learning Objective 7:
To highlight some of the tax issues facing
MNEs

Copyright 2013 Pearson Education

19-30

Taxation of
Foreign Source Income

Problems with foreign country tax laws

arise from
a lack of familiarity with laws
loose enforcement

Copyright 2013 Pearson Education

19-31

Taxation of
Foreign Source Income
The Tax Status of U.S.-Owned Foreign Subsidiaries

Copyright 2013 Pearson Education

19-32

Taxation of
Foreign Source Income

Transfer prices

a price on goods or services one member of a

corporate family sells to another

Tax treaties

prevent double taxation or provide remedies

when it occurs

Copyright 2013 Pearson Education

19-33

Technology and Cash Flows

Going forward

Companies will focus more on moving

corporate cash worldwide to take advantage of
differing rates of return and minimize tax bills
Technological innovation will allow companies
to transfer funds more quickly worldwide
The OECD, the IMF, and the EU will help
countries minimize tax differences and crack
down on money transfers for illegal purposes

Copyright 2013 Pearson Education

19-34

All rights reserved. No part of this publication may be reproduced, stored in

a retrieval system, or transmitted, in any form or by any means, electronic,
mechanical, photocopying, recording, or otherwise, without the prior written
permission of the publisher. Printed in the United States of America.

Copyright 2013 Pearson Education

19-35