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Multinational Financial Management Alan Shapiro
9th Edition J.Wiley & Sons
Power Points by
Joseph F. Greco, Ph.D.
California State University, Fullerton
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CHAPTER 19
Current Asset Management and Short-Term Financing
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International Cash Management
PART 1
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INTERNATIONAL CASH MANAGEMENT
I. INTERNATIONAL CASH MANAGEMENTA. Seven Key Areas Involve Issues about
1. Organization2. Collection/Fund Disbursement3. Interaffiliate Payments 4. Investment of Excess Funds5. Optimal Global Cash Balances6. Cash Planning/Budgeting
7. Bank Relations
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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
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INTERNATIONAL CASH MANAGEMENT
Issue (#1): Centralize OrganizationIssue (#1): Centralize Organization1. Advantages:
a. Efficient liquidity levels
b. Enhanced profitability
c. Quicker headquarter
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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
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INTERNATIONAL CASH MANAGEMENT
Issue (#2): Collection/Disbursement of Issue (#2): Collection/Disbursement of FundsFunds
1. Key Element: Accelerate collections
2. Acceleration Methods:
a. Electronic fund transfers
b. Mobilization centers
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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
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INTERNATIONAL CASH MANAGEMENT
Issue (#3): Interaffiliate Payments Issue (#3): Interaffiliate Payments
Use Payments Netting1. Definition:
-offset payments of affiliate receivables/payables
-net amounts only are transferred.
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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
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INTERNATIONAL CASH MANAGEMENT
Issue (#4): Excess Fund InvestmentIssue (#4): Excess Fund Investment1. Major task:
a. determine minimum cash
balances
b. short-term investment of
excess balances
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INTERNATIONAL CASH MANAGEMENT
2. Requirements:a. Forecast of cash needs
b. Knowledge of minimum cash position
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INTERNATIONAL CASH MANAGEMENT
3. Investment Selection Criteria:
a. Degree of Government regulations
b. Market structure
c. Leniency of Foreign tax laws
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INTERNATIONAL CASH MANAGEMENT
Issue (#5) Optimal Global Cash Issue (#5) Optimal Global Cash BalancesBalances
1. Establish centrally managed cash pool
2. Require affiliates to hold minimum amounts
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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
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INTERNATIONAL CASH MANAGEMENT
Issue (#6) Cash Planning and Issue (#6) Cash Planning and BudgetingBudgeting
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INTERNATIONAL CASH MANAGEMENT
Issue (#7) Bank RelationsIssue (#7) Bank Relations 1. Good Relations Will Avoid
a. Lost interest income
b. Overpriced services
c. Redundant services
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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
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ACCOUNTS RECEIVABLE MANAGEMENT
II. ACCOUNTS RECEIVABLE MANAGEMENT
A. Trade Credits
extended in anticipation of profit by
1. expanded sales volume
2. retaining existing customers
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ACCOUNTS RECEIVABLE MANAGEMENT
B. Credit Terms Should Consider
1. Sales force
customer selection criteria
2. Adjusting sales bonuses for cost of credit sales.
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INVENTORY MANAGEMENT
III. INVENTORY MANAGEMENTA. Problems:
MNCs seem to have more difficulties due to
1. Long,variable transits
2. Lengthy customs procedures
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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
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INVENTORY MANAGEMENT
C. Subsidiary Practice known as: Advanced Inventory Purchases or inventory stockpiling
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INVENTORY MANAGEMENT
D.Reason for Stockpiling:reduce risk of shipping delays
Results of Stockpiling:
Higher carrying costs
E. Solution to higher carrying costs:
Adjust affiliate’s profit margins to reflect added costs.
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CHAPTER 19 PART 2
Short-Term Financing
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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 = The Effective Interest Rate
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SHORT-TERM FINANCING
B. Key Factors1. Deviations from Int’l Fisher Effect?
a. If yes
trade-off required between cost and exchange risk
b. If no
costs are same everywhere
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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.
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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
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SHORT-TERM FINANCING OBJECTIVES
C. Short-Term Financing Objectives
1. Possible Objectives:
a. Minimize expected cost
b. Minimize risk without regard to cost
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SHORT-TERM FINANCING OBJECTIVES
D. Short-Term Financing Options
1. Three Possibilities
a. Inter-company loans
b. Local currency loans
c. Euro market
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SHORT-TERM FINANCING OBJECTIVES
2. Local Currency Financing: Bank Loans
a. Short-term in nature
b. Forms of Local Currency bank loans
1.) Term loans
2.) Line of credit
3.) Discounting
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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
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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%
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EFFECTIVE INTEREST RATE
Sample Problem #2 Discounting the loanPro 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
= 11008900
= 12.4%
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EFFECTIVE INTEREST RATE
Sample Problem #3: Compensating BalancesPro 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= 11008500= 12.9%
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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%
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COMMERCIAL PAPER
4. Non-bank lending : Commercial Papera. Definition:
short-term unsecured promissorynote generally sold by large MNCson a discount basis.
b. Standard maturitiesc. Bank fees charged for:
1.) Backup line of credit2.) Credit rating service