宁波工程学院国商教研室蒋力编 Topic 2 Financial Management of the Multinational Firm

10-2 宁波工程学院国商教研室蒋力编 Differences Multinational V.S. Dometics? Different Currencies V.S. Single Different Political Environments V.S. Single Different Social Environments V.S. Single Different Economic Environment V.S. Single

10-3 宁波工程学院国商教研室蒋力编 Topic Outline Financial Control Cash Management Intrafirm Transfers Capital Budgeting

10-4 宁波工程学院国商教研室蒋力编 Financial Control Should the firm have centralized financial control system in the home country? Or should the firm let each affiliate handle it locally? There is no “correct” financial control system

10-5 宁波工程学院国商教研室蒋力编 Financial Control With the centralized financial control, the foreign managers evaluated on there ability to meet the goal established by the parent for key variables like sales or operation costs. The parent firm managers are responsible for maximizing the domestic currency value of the firm. With the decentralized financial control, the foreign manager must be involved in cash management and international financing issue, the foreign manager makes decisions aim at increasing the parent’s domestic currency value of the subsidiary.

10-6 宁波工程学院国商教研室蒋力编 Cash Management The optimal size of the firm’s liquid resources depend upon: The cost of keeping “too much” cash on hand.  i.e. the opportunity costs of holding cash The cost of not keeping enough cash on hand.  i.e. the transaction costs associated with having too little cash The corporate treasurer is concerned with maintaining the correct level of liquidity at the minimum possible cost.

10-7 宁波工程学院国商教研室蒋力编 Multilateral Netting The multinational treasurer faces the challenge of managing liquid assets determined in different currencies $10 $35 $40$30 $20 $25 $60 $40 $10 $30 $20 $30

10-8 宁波工程学院国商教研室蒋力编 Multilateral Netting –Is an efficient and cost-effective mechanism for settling interaffiliate foreign exchange transactions. Offsetting payables and receivables between subsidiaries.

10-9 宁波工程学院国商教研室蒋力编 Multilateral Netting Consider a U.S. MNC with three subsidiaries and the following foreign exchange transactions: $10 $35 $40$30 $20 $25 $60 $40 $10 $30 $20 $30

10-10 宁波工程学院国商教研室蒋力编 Multilateral Netting Bilateral Netting would reduce the number of foreign exchange transactions by half: $10 $35 $40$30 $20 $25 $60 $40 $10 $30 $20 $30

10-11 宁波工程学院国商教研室蒋力编 Multilateral Netting Bilateral Netting would reduce the number of foreign exchange transactions by half: $10 $35 $40$30 $25 $60 $40 $10 $20 $30

10-12 宁波工程学院国商教研室蒋力编 Multilateral Netting Bilateral Netting would reduce the number of foreign exchange transactions by half: $10 $35 $40$30 $25 $60 $40 $10 $20 $30

10-13 宁波工程学院国商教研室蒋力编 Multilateral Netting Bilateral Netting would reduce the number of foreign exchange transactions by half: $10 $35 $10 $25 $60 $40 $10 $20 $30

10-14 宁波工程学院国商教研室蒋力编 Multilateral Netting Bilateral Netting would reduce the number of foreign exchange transactions by half: $10 $35 $10 $25 $60 $40 $10 $20 $30

10-15 宁波工程学院国商教研室蒋力编 Multilateral Netting Bilateral Netting would reduce the number of foreign exchange transactions by half: $10 $35 $10 $25 $60 $40 $10

10-16 宁波工程学院国商教研室蒋力编 Multilateral Netting Bilateral Netting would reduce the number of foreign exchange transactions by half: $10 $35 $10 $25 $60 $40 $10

10-17 宁波工程学院国商教研室蒋力编 Multilateral Netting Bilateral Netting would reduce the number of foreign exchange transactions by half: $25 $10 $25 $60 $40 $10

10-18 宁波工程学院国商教研室蒋力编 Multilateral Netting Bilateral Netting would reduce the number of foreign exchange transactions by half: $25 $10 $25 $60 $40 $10

10-19 宁波工程学院国商教研室蒋力编 Multilateral Netting Bilateral Netting would reduce the number of foreign exchange transactions by half: $25 $10 $25 $20 $10

10-20 宁波工程学院国商教研室蒋力编 Multilateral Netting Bilateral Netting would reduce the number of foreign exchange transactions by half: $25 $10 $25 $20 $10

10-21 宁波工程学院国商教研室蒋力编 Multilateral Netting Bilateral Netting would reduce the number of foreign exchange transactions by half: $25 $10 $15 $20 $10

10-22 宁波工程学院国商教研室蒋力编 Multilateral Netting Consider simplifying the bilateral netting with multilateral netting: $25 $10 $15 $20 $10

10-23 宁波工程学院国商教研室蒋力编 Multilateral Netting Consider simplifying the bilateral netting with multilateral netting: $15 $10 $15 $20 $10

10-24 宁波工程学院国商教研室蒋力编 Multilateral Netting Consider simplifying the bilateral netting with multilateral netting: $15 $10 $15 $20 $10

10-25 宁波工程学院国商教研室蒋力编 Multilateral Netting Consider simplifying the bilateral netting with multilateral netting: $15 $10 $15 $20 $10

10-26 宁波工程学院国商教研室蒋力编 Multilateral Netting Consider simplifying the bilateral netting with multilateral netting: $15 $10 $15 $30 $10

10-27 宁波工程学院国商教研室蒋力编 Multilateral Netting Consider simplifying the bilateral netting with multilateral netting: $15 $10 $15 $30 $10

10-28 宁波工程学院国商教研室蒋力编 Multilateral Netting Consider simplifying the bilateral netting with multilateral netting: $15 $10 $15 $30 $10

10-29 宁波工程学院国商教研室蒋力编 Multilateral Netting Consider simplifying the bilateral netting with multilateral netting: $10 $15 $30 $10

10-30 宁波工程学院国商教研室蒋力编 Multilateral Netting Consider simplifying the bilateral netting with multilateral netting: $10 $15 $30 $10

10-31 宁波工程学院国商教研室蒋力编 Multilateral Netting Consider simplifying the bilateral netting with multilateral netting: $10 $15 $30 $10

10-32 宁波工程学院国商教研室蒋力编 Multilateral Netting Consider simplifying the bilateral netting with multilateral netting: $10 $15 $30

10-33 宁波工程学院国商教研室蒋力编 Multilateral Netting Consider simplifying the bilateral netting with multilateral netting: $10 $15 $30

10-34 宁波工程学院国商教研室蒋力编 Multilateral Netting Consider simplifying the bilateral netting with multilateral netting: $15 $40

10-35 宁波工程学院国商教研室蒋力编 Multilateral Netting Clearly, multilateral netting can simplify things greatly. $15 $40

10-36 宁波工程学院国商教研室蒋力编 Multilateral Netting Compare this: $10 $35 $40$30 $20 $25 $60 $40 $10 $30 $20 $30

10-37 宁波工程学院国商教研室蒋力编 Multilateral Netting With this: $15 $40

10-38 宁波工程学院国商教研室蒋力编 What if the payments and receipts are not for the same date? Netting could still be done by leading or lagging currency flows. But reqiures excellent information flows and cooperation between all subsidiaries and headquarters

10-39 宁波工程学院国商教研室蒋力编 Intrafirm transfer - Transfer Pricing The Transfer Price is the price that one subsidiary charges another subsidiary for internal goods transfers. The parent firm always has an incentive to minimize taxes by pricing transfers in order to keep prfoits low in high tax countries and profis high in low tax countries Example P177

10-40 宁波工程学院国商教研室蒋力编 Problems with Tranfer Pricing Governments often restrict the ability of multinationals to use transfer pricing to minimize taxes. The contribution of each subsidiary will be artificially distorted by transfer pricing. The profitability of some subsidiaries would be apparently impoved (or impaired)

10-41 宁波工程学院国商教研室蒋力编 Capital Budgeting Capital budgeting refer to the evaluation of prospective investment alternatives and the commitment of funds to preferred projects. The useful approache to capital budgeting is net present value

10-42 宁波工程学院国商教研室蒋力编 Review of Domestic Capital Budgeting The basic net present value equation is Where: CF t = expected incremental after-tax cash flow in year t, I = initial investment d = discount rate. t = economic life of the project in years.

10-43 宁波工程学院国商教研室蒋力编 Review of Domestic Capital Budgeting The NPV rule is to accept a project if NPV  0 and to reject a project if NPV  0

10-44 宁波工程学院国商教研室蒋力编 The Adjusted Present Value Model For multinational firm, it can be converted to adjusted present value (APV) P179 where FIN is any additional financial effect on cash flow in year t P179 Example: P180 Midas Gold Extractor