International bussiness the challenge of global competition 11e chapter 21

Learning Objectives Explain capital structure choices and their impact on the MNC  Describe the process of multilateral netting and its contribution to cash flow management  Describe

Financial Management and

Accounting

chapter twenty-one

Learning Objectives

 Explain capital structure choices and their impact on the MNC

 Describe the process of multilateral netting and its

contribution to cash flow management

 Describe the importance of leading and lagging in cash flow

management

 Categorize foreign exchange risks into transaction exposure,

translation exposure, and economic exposure

 Describe the basic idea of a swap transaction and its

applications

Learning Objectives

financial manager

accounting

convergence process and its importance

Capital Structure of the Firm

• Retained earnings

• Debt

– Offshore financial center specializes in financing

nonresidents, low taxes and few banking

regulations

• Equity

– American depository receipts (ADRs): foreign

shares held by a custodian in the issuer’s home

market and traded in dollars on the U.S exchange

Financial Management Decisions

Cash Flow Management

• Multilateral Netting

– Subsidiaries transfer net intracompany cash flows

through a centralized clearing center

Cash Flow Management

• Leading and Lagging

– Timing payments early (lead) or late (lag),

depending on anticipated currency movements, so

they have the most favorable impact

Foreign Exchange Risk Management

• Transaction exposure

– Change in the value of financial position created by

foreign currency changes between establishment and settlement of contract

• Translation exposure

– Potential change in value of a company’s financial

position due to exposure created during consolidation process

• Economic exposure

– Potential for value of future cash flows to be

affected by unanticipated exchange rate movements

Transaction Exposure: Hedging

• Hedging

– process to reduce or eliminate financial risk

• Forward market hedge

– Foreign currency contract sold or bought forward in order to

protect against foreign currency movement

• Currency option hedge

– Option to buy or sell specific amount of foreign currency at

specific time to protect against foreign currency risk

• Money market hedge

– Method to hedge foreign currency exposure by borrowing and lending in domestic and foreign money markets

Transaction Exposure: Swaps

• Swap contract

– Spot sale/purchase of asset against future

purchase/sale of equal amount in order to hedge

– Exchange of debt service of loan or bond in one

currency for debt service of loan or bond in another currency

Transaction Exposure: Swaps cont’d.

• Interest Rate Swap

– Exchange of interest rate flows to manage interest

rate exposure

• Spot and forward market swaps

– Use spot and forward markets to hedge foreign currency

exposure

• Parallel Loans

– Matched loans across currencies made to cover risk

Translation Approaches

– Current rate method

• Current assets and liabilities are valued at

current spot rates and noncurrent assets and

liabilities are translated at historic exchange

rates

– Temporal method

• Monetary accounts are valued at spot rate and

accounts carried at historical cost are translated

at historic exchange rates

Hedges and Swaps as “Derivatives”

• Contract whose value is tied to the

performance of a financial instrument or

commodity

Sales Without Money

– Developing country makes payment in products

produced by use of developed country equipment

• Barter

– Direct exchange of goods or services for goods or

services

Sales Without Money, cont’d.

• Switch Trading

– Use of third party to market products

received in countertrade

• Offset

– Trade arrangement that requires portion of

the inputs be supplied by receiving country

• Clearing account arrangements

– Process to settle trading account within

specified time

Industrial Cooperation

• An exporter’s commitment to a longer-term

relationship than that in a simple export

sale, in which some of the production

occurs in the receiving country (five

Taxation and Transfer Pricing

• Income tax

– Direct tax levied on earnings

• Value-added tax (VAT)

– Indirect tax collected from parties as they add value

to product

• Withholding tax

– Indirect tax paid by payor, usually on passive

income

Taxation and Transfer Pricing

• Transfer Price

– The cost of intracompany sale of goods or services

International Accounting

• Accounting and Foreign Currency

– Consolidation

• Process of translating subsidiary results and

aggregating them into one financial report

– Functional Currency

• Primary currency of a business

Cultural Differences in Measurement and

Disclosure for Accounting Systems

Use of International Financial

Reporting Standards

Triple Bottom-Line Accounting

• 3BL

– A results or impact report on the environmental,

social, and financial impacts of the business