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G roup M em bers:
1.
2.
3.
4.

Junaid Subhani.
Muhammad Abubakar Saleem.
Muhammad Iftikhar.
Sehrish Humayun.

Topic:

Financial Management for

MNCs

INTERNATIONAL BUSINESS

Fin an cial M an ag em en t for M N C s:

The objective of corporate financial management is to
maximize shareholder wealth.
With the integration of world markets, the amount of
foreign exchange transactions and the consequent risk for
the international business community has increased.
International investments often have more and different
kinds of risk than domestic investments .
INTERNATIONAL BUSINESS

Typ es of risk for M N C s:

Country risk
Economic risk
Financial risk
Political risk
Sustainability risk

INTERNATIONAL BUSINESS

Typ es of risk for M N C s:

Country risk:

Countrys business environment might inuence the MNCs

profits or the value of its assets (e.g. factories, inventory)
within the specific country.
Economic risk:
Considers a countrys economic strengths and weaknesses and
how these might affect investment.
Financial risk:
Considers the ability of the country to finance its trade debt and
commercial obligations.
INTERNATIONAL BUSINESS

Typ es of risk for M N C s:

Political risk:
The political stability of a country in areas such as
civil
unrest,
war,
terrorism,
and
changing
regulations.
Sustainability risk:
The factors that may increase the cost of capital or
reduce profits through changing environmental
conditions or changing regulatory environments.
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How MNCs consider sustainability risk in

their investment decisions:
Biodiversity:
Raw material impacts Supply chain interruptions Negative publicity
and reputational risk.
Climate Change and Energy:
Impacts on faculties and supply chain from climate change Increase in
operating costs from regulatory changes or increased energy prices.
Water:
Reduced output due to scarcity of conservation issues Increase in
operating costs.
Health and Environment:
Reputational damage reduces revenues Regulatory risk increases
costs Assets redesign may be required.
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Th e C ost of C ap ital an d P roject V alu ation :

The process of determining whether a project
should be financed based on its expected financial
returns is called the capital budgeting decision.

Financial managers use several methods to predict

the viability of an investment decision. We will
review one popular method called net present
value, or NPV.
INTERNATIONAL BUSINESS

Th e C ost of C ap ital an d P roject V alu ation :

Capital budgeting decision:
The process of determining whether a project
should be financed based on its expected financial
returns.
Net present value or NPV:
A technique used to estimate whether and when
an initial capital investment will lead to future cash
ows that exceed the cost of the capital
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M N C C ap ital S tru ctu re:

A major decision for the chief financial officer of an MNC is
assessing the best mixture of debt and equity for his or her
company.
Capital structure:
A companys mixture of debt and equity.
Cost of capital:
The cost of getting money for projects either from owners
(stockholders) retained earnings, from issuing new stocks, or by
borrowing.
Constant dividend growth model:
A technique to estimate the cost of new equity (issuing stocks).

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C ost of C ap ital for th e M N C :

The factors that cause the cost of capital to be different
for the MNC than for domestic firms:

Access to International Capital Markets:

MNCs are normally able to obtain funds through international
capital markets, where the cost of funds may be lower.
International Diversification:
MNCs may have more stable cash inows due to international
diversification, such that their probability of bankruptcy may be
lower.
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C ost of C ap ital for th e M N C :

Exchange-rate Risk Exposure:
MNCs may be more exposed to exchange rate uctuations,
such that their cash ows may be more uncertain and their
probability of bankruptcy higher.
Country Risk:
MNCs that have a higher percentage of assets invested in
foreign countries are more exposed to country risk.

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C ost of C ap ital for th e M N C :

How MNCs Decide on the Mixture of Debt and Equity in their Capital
Structure:
The characteristics of the company and the characteristics of the country
inuence the choice of more debt or equity.
Company Factors:
Stability of cash flows:

MNCs with more stable cash ows can handle more debt.
Credit risk:

MNCs that have lower credit risk have more access to credit.

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C ost of C ap ital for th e M N C :

Access to retained earnings:
Profitable MNCs and MNCs with less growth may be able to
finance most of their investment with retained earnings.
Guarantees on debt:
If the parent backs the subsidiarys debt, the subsidiary may
be able to borrow more.
Agency problems:
Host country shareholders may monitor a subsidiary, though
not from the parents perspective.
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C ost of C ap ital for th e M N C :

Country Factors:

Stock restrictions:

MNCs in countries where investors have less investment opportunities

may be able to raise equity at a lower cost.
Interest rates:

MNCs may be able to obtain loan able funds (debt) at a lower cost in
some countries.
Strength of currencies:

MNCs tend to borrow the host country currency if they expect it to

weaken, so as to reduce their exposure to exchange rate risk.
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C ost of C ap ital for th e M N C :

Country risk:
If the host government is likely to block funds or confiscate
assets, the subsidiary may prefer debt financing.
Tax laws:
MNCs may use more local debt financing if the local tax rates
(corporate tax rate, withholding tax rate, etc.) are higher.

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Fin an cin g In tern ation al Trad e:

Methods of Payment in International Trade:
In any international trade transaction, credit is provided by
either
the supplier (exporter),
the buyer (importer),
one or more financial institutions, or
Any combination of the above.
The form of credit whereby the supplier funds the entire trade
cycle is known as supplier credit.
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M eth od -1: P rep aym en ts

The goods will not be shipped until the buyer has paid
the seller.
Time of payment: Before shipment.
Goods available to buyers: After payment.
Risk to exporter: None.
Risk to importer: Relies completely on exporter to
ship goods as ordered.
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M eth od -2: Letters of cred it (L/C )

These are issued by a bank on behalf of the importer
promising to pay the exporter upon presentation of the
shipping documents.
Time of payment: When shipment is made.
Goods available to buyers: After payment.
Risk to exporter: Very little or none.
Risk to importer: Relies on exporter to ship goods as
described in documents.
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M eth od -3: D rafts (B ills of Exch an g e)

These are unconditional promises drawn by the exporter
instructing the buyer to pay the face amount of the drafts.

Banks on both ends usually act as intermediaries in the

processing of shipping documents and the collection of
payment. In banking terminology, the transactions are known
as documentary collections.

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M eth od -3: D rafts (B ills of Exch an g e)

Sight drafts (documents against payment):
When the shipment has been made, the draft is presented to
the buyer for payment.
Time of payment: On presentation of draft.
Goods available to buyers: After payment.
Risk to exporter: Disposal of unpaid goods.
Risk to importer: Relies on exporter to ship goods as
described in documents.
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M eth od -3: D rafts (B ills of Exch an g e)

Time drafts (documents against acceptance) :
When the shipment has been made, the buyer accepts (signs)
the presented draft.
Time of payment: On maturity of draft.
Goods available to buyers: Before payment.
Risk to exporter: Relies on buyer to pay.
Risk to importer: Relies on exporter to ship goods as
described in documents.
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M eth od -4: O p en A ccou n ts

The exporter ships the merchandise and expects the buyer
to remit payment according to the agreed-upon terms.
Time of payment: As agreed upon.
Goods available to buyers: Before payment.
Risk to exporter: Relies completely on buyer to pay account
as agreed upon.
Risk to importer: None.

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B alan ce of R isks for Im p orters an d Exp orters:

Draft:
A document that states that one party will pay the other party immediately
or at some future date.
Commercial invoice:
A document that identifies the parties involved, the terms of payment,
price, shipping information, and quantity, weight, packaging, etc.,
associated with the product.
Bill of lading:
The receipt showing that the merchandise has been shipped; it is usually
required that the importer present this receipt to get the merchandise.
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