1. Slide 1 hasanzulfiqar@yahoo.co.uk

2. Slide 2 hasanzulfiqar@yahoo.co.uk MNC and its Features; To describe the key theories that justify international business; and To explain the common methods used to conduct international business. Multinational v.s. domestic financial management, Reasons for going international, Exchange rates and trading in foreign exchange, International money and capital markets, Numerical Problems and Solutions. Contents of this Topic

3. Slide 3 hasanzulfiqar@yahoo.co.uk What is a multinational corporation? 1. A corporation that operates in two or more countries is called Multinational Corporation. 2. A multinational company is one which has its home in one country but live and operate under the law and customs of other country. the head office of multinational company is in one country and its branches are spread all over the world. 3. A company with production and distribution facilities in more than one country. Some times multinational corporations are called MNEs. UnileverNovartis Colgate Palmolive Glaxosmith HSBC

4. Slide 4 hasanzulfiqar@yahoo.co.uk Features of Multinational Company 1.Huge amount of capital 2.Large sized plant and machinery 3.Various activities 4.Market expansion on large scale 5.Professional management 6.Advance technology 7.Profit is the main objective 8.Control of head office 9.Creation of new project 10.Low-cost locations 11.Gaining a strong foothold into the international market 12.Cheaper labor costs 13.Cheaper raw materials and distribution costs 14.Taking advantage of the many tax breaks offered by foreign countries 15.Access to new technologies and methods 16.Availability of government grants

5. Slide 5 hasanzulfiqar@yahoo.co.uk 1. To seek new markets 2. To seek raw materials. 3. To seek new technology. 4. To seek production efficiency. 5. To avoid political and regulatory hurdles. 6. To diversify. 7. To Minimize costs of production 8. Globalization: Political and Labor Union Concerns Why Do Firms Expand Into Other Countries? 9. Privatizations of state- owned industries 10. Revolution in information technology 11. Wave of Mergers and Acquisitions (M&A) 12. Emergence of free market policies 13. Rise of Big Emerging Markets (BEMs) 14. Prime Transmitter of Competitive Forces 15. Massive deregulation 16. Collapse of communism

6. Slide 6 hasanzulfiqar@yahoo.co.uk Managing for Value for MNC Like domestic projects, foreign projects involve an investment decision and a financing decision. When managers make multinational finance decisions that maximize the overall present value of future cash flows, they maximize the firm’s value, and hence shareholder wealth. An MNC’s financial decisions include how much business to conduct in each country and how much financing to obtain in each currency. Its financial decisions determine its exposure to the international environment.

7. Slide 7 hasanzulfiqar@yahoo.co.uk Valuing International Cash Flows for MNC ECF= expected cash flows of MNC Cr = Conversion Rate CFHC = Cash flow from home country in home currency CFC 1 = Cash flow from country 01 in Local currency CFC 2 = Cash flow from country 02 in Local currency CFC 3 = Cash flow from country 03 in Local currency And so on ……

8. Slide 8 hasanzulfiqar@yahoo.co.uk Examples 01: Valuing International Cash Flows Consider a US firm that had expected cash flows of $100,000 from local business and 10,00,000 Mexican peso’s from business in Mexico at the end of year 2012. Assuming that the peso’s value is expected to be $0.09. Find out the expected dollar cash flow for US firm. Solutions:

9. Slide 9 hasanzulfiqar@yahoo.co.uk Practice 01: Valuing International Cash Flows Consider a Bangladeshi Multinational firm that had expected cash flows of Tk100,00,000 from local business and $10000 from business in USA at the end of period 2013. Assuming that the $ value is expected to be Tk 82.2425. Find out the expected cash flow in Terms of Taka for Bangladeshi firm.

10. Slide 10 hasanzulfiqar@yahoo.co.uk Practice 02: Valuing International Cash Flows Consider a Bangladeshi Multinational firm that had expected cash flows of Tk 500,00,000 from local business and $10000 from business in USA and Rs 15,00,000 at the end of period 2011. Assuming that the $ value is expected to be Tk 83.4545 and Rs value is Tk 1.6525. Find out the expected cash flow in Terms of Taka for Bangladeshi firm. Tk. 53313295

11. Slide 11 hasanzulfiqar@yahoo.co.uk Valuation Model for an MNC Cr = Conversion Rate CFHC = Cash flow from home country in Local currency CFC 1 = Cash flow from country 01 CFC 2 = Cash flow from country 02 CFC 3 = Cash flow from country 03 i = the weighted average cost of capital of the parent company

12. Slide 12 hasanzulfiqar@yahoo.co.uk Example 02: Valuing of MNC Consider a US firm that had expected cash flows of $100,000 from local business and 1000000 Mexican peso’s from business in Mexico at the end of period 01. Assuming that the peso’s value is expected to be $0.09. Find out the expected dollar cash flow and the Value for US firm if weighted average cost of capital (i) is 10%.

13. Slide 13 hasanzulfiqar@yahoo.co.uk Practice 03: Valuing International Cash Flows Consider a Bangladeshi Multinational firm that had expected cash flows of Tk100,00,000 from local business and $10000 from business in USA at the end of period 01. Assuming that the $ value is expected to be Tk 69.2425. Find out the expected cash flow and the Value of the firm if weighted average cost of capital (i) is 12% for Bangladeshi firm. Tk. 9546808.04

14. Slide 14 hasanzulfiqar@yahoo.co.uk Practice 04: Valuing International Cash Flows for more than 01 year Consider a Bangladeshi Multinational firm that had expected cash flows of Tk 100,00,000 from local business and $10000 from business in USA at the end of period 01. Assuming that the $ value is expected to be Tk 69.2425. In Year 02, the expected cash flows of Tk 200,00,000 from local business and $150000 from business in USA. Assuming that the $ value is expected to be Tk 72.2425. Find out the expected cash flow and the Value of the firm if weighted average cost of capital (i) is 12.5% for Bangladeshi firm.

15. Slide 15 hasanzulfiqar@yahoo.co.uk Solution: Practice-4

16. Slide 16 hasanzulfiqar@yahoo.co.uk Practice: 04: Shareholder Return If a share price rises from Tk 16 to Tk 8 over a one- year period, what was the rate of return to the shareholder if: 1. The company paid no dividends? 2. The company paid a dividend of Tk 1 per share? 1.12.50% 2.18.75%

17. Slide 17 hasanzulfiqar@yahoo.co.uk Example 03: MNC’s P/E ratios and Acquisitions Assume the following hypothetical firms in the pharmaceutical industry. Pharm-USA wants to acquire Pharm-Italy. It offers 5,500,000 shares of Pharm-USA, with a current market value of $220,000,000 and a 10% premium on Pharm-Italy’s shares, for all of Pharm-Italy’s shares. CompanyP/E ratio Number of shares Market value per share EarningsEPSTotal Market Value Pharm-Italy 20100,00,000 $ 20.00 $ 100,00,000 $ 1.00 2000,00,000 Pharm-USA 40100,00,000 $ 40.00 $ 100,00,000 $ 1.00$4000,00,000 a.How many shares would Pharm-USA have outstanding after the acquisition of Pharm-Italy? b.What would be the consolidated earnings of the combined Pharm-USA and Pharm-Italy? c.Assuming the market continues to capitalize Pharm-USA's earnings at a P/E ratio of 40, what would be the new market value of Pharm-USA? d.What is the new earnings per share of Pharm-USA? e.What is the new market value of a share of Pharm-USA? f.How much did Pharm-USA's stock price increase? g.Assume that the market takes a negative view of the acquisition and lowers Pharm-USA's P/E ratio to 30. What would be the new market price per share of stock? What would be its percentage loss?

18. Slide 18 hasanzulfiqar@yahoo.co.uk a. How many shares would Pharm-USA have outstanding after the acquisition of Pharm-Italy? Because Pharm-Italy shares are worth $20 per share, they are only worth one-half the value per share of Pharm- USA's $40 per share. So, on a straight exchange, 1 Pharm-USA share is worth 2 Pharm-Italy shares. But, Pharm-USA also needs to pay a premium for gaining control of Pharm-Italy, so it pays an additional 10% over market. So, Pharm-USA pays: 10 million divided by 2 x (1 + 10% premium) 100,00,000 + 55,00,000 = 155,00,000

19. Slide 19 hasanzulfiqar@yahoo.co.uk b. What would be the consolidated earnings of the combined Pharm-USA and Pharm-Italy? Consolidated Earnings = Pharm-Italy earnings + Pharm-USA earnings = $ 20,000,000 c. Assuming the market continues to capitalize Pharm- USA's earnings at a P/E ratio of 40, what would be the new market value of Pharm-USA? New Market Value = P/E x Consolidated earnings = 40 x $20,000,000 = $800,000,000

20. Slide 20 hasanzulfiqar@yahoo.co.uk d. What is the new earnings per share of Pharm-USA? e. What is the new market value (price) of a share of Pharm-USA?

21. Slide 21 hasanzulfiqar@yahoo.co.uk Share price rose from $40.00 to $51.61. So, $ Change = $51.61 - $40.00 =$ 11.61 Percentage increase = 29.03% f. How much did Pharm-USA's stock price increase? g. Assume that the market takes a negative view of the acquisition and lowers Pharm-USA's P/E ratio to 30. What would be the new market price per share of stock? What would be its percentage loss? New market value = Total earnings x P/E = $20,000,000 x 30= $600,000,000 New market price per share = total market value/ shares outstanding = $38.71 Percentage loss to original Pharm-USA shareholders = ($38.71 - $40.00)/ ($40.00) = -$3.23%

22. Slide 22 hasanzulfiqar@yahoo.co.uk Practice 05: MNC’s P/E ratios and Acquisitions Pharm-USA wants to acquire Pharm-Italy. It offers 5,500,000 shares of Pharm-USA, with a current market value of $220,000,000 and a 10% premium on Pharm-Italy’s shares, for all of Pharm-Italy’s shares. Company P/E ratio Number of shares Market value per shareEarningsEPS Total Market Value Pharm-Italy2010,000,000 $ 25.00$10,000,000$ 1.00 $250,000,000 Pharm-USA 4011,000,000$ 40.00$11,000,000$ 1.00 $440,000,000 a.How many shares would Pharm-USA have outstanding after the acquisition of Pharm- Italy? b.What would be the consolidated earnings of the combined Pharm-USA and Pharm-Italy? c.Assuming the market continues to capitalize Pharm-USA's earnings at a P/E ratio of 40, what would be the new market value of Pharm-USA? d.What is the new earnings per share of Pharm-USA? e.What is the new market value of a share of Pharm-USA? f.How much did Pharm-USA's stock price increase? g.Assume that the market takes a negative view of the acquisition and lowers Pharm-USA's P/E ratio to 30. What would be the new market price per share of stock? What would be its percentage loss?

23. Slide 23 hasanzulfiqar@yahoo.co.uk Answers: Practice 05 630,000,000 38.18 -$4.55% g.Assume that the market takes a negative view of the acquisition and lowers Pharm-USA's P/E ratio to 30. What would be the new market price per share of stock? What would be its percentage loss? 27.28% f.How much did Pharm-USA's stock price increase? 50.91 e.What is the new market value of a share of Pharm-USA? 1.2727 d.What is the new earnings per share of Pharm-USA? 840,000,000 c.Assuming the market continues to capitalize Pharm- USA's earnings at a P/E ratio of 40, what would be the new market value of Pharm-USA? 21,000,000 b)What would be the consolidated earnings of the combined Pharm-USA and Pharm-Italy? 16,500,000 a.How many shares would Pharm-USA have outstanding after the acquisition of Pharm-Italy?

24. Slide 24 hasanzulfiqar@yahoo.co.uk a. How many shares would Pharm-USA have outstanding after the acquisition of Pharm-Italy? 11,000,000 + 5,500,000 = 16,500,000 b. What would be the consolidated earnings of the combined Pharm-USA and Pharm-Italy? Consolidated Earnings = Pharm-Italy earnings + Pharm-USA earnings = $ 21,000,000 c. Assuming the market continues to capitalize Pharm- USA's earnings at a P/E ratio of 40, what would be the new market value of Pharm-USA? New Market Value = P/E x Consolidated earnings = 40 x $21,000,000 = $840,000,000

25. Slide 25 hasanzulfiqar@yahoo.co.uk d. What is the new earnings per share of Pharm-USA? e. What is the new market value of a share of Pharm-USA?

26. Slide 26 hasanzulfiqar@yahoo.co.uk Share price rose from $40.00 to $50.91. So, $ Change = $ 10.91 Percentage increase = 27.28% f. How much did Pharm-USA's stock price increase? g. Assume that the market takes a negative view of the acquisition and lowers Pharm-USA's P/E ratio to 30. What would be the new market price per share of stock? What would be its percentage loss? New market value = Total earnings x P/E = $21,000,000 x 30= $630,000,000 New market price per share = total market value/ shares outstanding = $ 38.18 Percentage loss to original Pharm-USA shareholders = ($38.71 - $40.00)/ ($40.00) = -$4.55%

27. Slide 27 hasanzulfiqar@yahoo.co.uk Mini Case Practice 01 Bonanza is a Bangladeshi (hypothetical) multinational garments manufacturing firm, with wholly owned subsidiaries in United States (USA), Germany and United Kingdom (UK), in addition to domestic operations in Bangladesh. The basic operating characteristics of the various business units are shown in the below table: Bangladesh (Tk) USGermanyUK (Dollar, $)(euros, €)(Pound, £) Earnings Before Tax (EBT) 450,00,00062,500.0045000.0025000.00 Corporate Income Tax Rate35%25%40%30% Average exchange rate for period--- Tk/$:Tk/€:Tk/£: 82.7475108.3232121.2325 Number of Share 650,000 a. After deducting taxes in each country, what is Bonanza’s consolidated earnings per share in Bangladeshi Taka? b. What proportion of Bonanza’s consolidated earnings arises from each individual country? c. What proportion of Bonanza’s consolidated earnings arises from outside Bangladesh? d. What would be the impact on Bonanza’s consolidated earnings per share (EPS) if the Tk/$: 78.2525 with all other earnings and exchange rates remaining the same? e. What would be the impact on Bonanza’s consolidated earnings per share (EPS) if the Tk/$: 78.2525 and if the Earnings before Taxes in US fell to $58000 as a result of the recession? f. What is the total amount in Bangladeshi Taka that Bonanza is paying across its global business in corporate income taxes? g. What is the Effective Tax Rate on Global basis (Total Taxes paid as a percentage of pretax profits)? h. What would be impact on EPS and Global Effective Tax Rate if Germany instituted a corporate tax reduction to 28%, and Bonanza’s EBT in Germany rose to € 50000?

28. Slide 28 hasanzulfiqar@yahoo.co.uk Solution: Minicase 38175084.21 Consolidated Earnings of All Countries in BDT 2121568.752924726.403878789.06 29250000.00 Net Income in BDT- Country wise 909243.751949817.61292929.68815750000Corporate Income Tax Amount 30%40%25%35%Corporate Income Tax Rate 3030812.548745445171718.75 45000000.00 EBT in BDT 121.2325108.323282.7475 Tk/£Tk/€Tk/$--- Average exchange rate for period 25000.0045000.0062500.00 45000000.00 Earnings Before Tax (EBT) in Local Currency (Pound, £)(euros, €)(Dollar, $) UKGermanyUSBangladesh (Taka)

29. Slide 29 hasanzulfiqar@yahoo.co.uk Solution: Minicase a Consolidated Earnings per Share (EPS) = (Consolidated Earnings/Number of Common Stock) 58.73 bCountry Wise Earnings Proportion76.62%10.16%7.66%5.56% Total Earnings from outside Bangladesh8925084.21 c What proportion of Bonanza’s consolidated earnings arises from outside Bangladesh? 23.38%

30. Slide 30 hasanzulfiqar@yahoo.co.uk d. What would be the impact on Bonanza’s consolidated earnings per share (EPS) if the Tk/$: 78.2525 with all other earnings and exchange rates remaining the same? Bangladesh (Taka) USGermanyUK (Dollar, $)(euros, €)(Pound, £) Earnings Before Tax (EBT) in Local Currency 45000000.0062500.0045000.0025000.00 Average exchange rate for period ---Tk/$Tk/€Tk/£ 78.2525108.3232121.2325 EBT in BDT45000000.004890781.2548745443030812.5 Corporate Income Tax Rate35%25%40%30% Corporate Income Tax Amount157500001222695.3131949817.6909243.75 Net Income in BDT- Country wise29250000.003668085.942924726.402121568.75 Consolidated Earnings of All Countries in BDT 37964381.09 Consolidated Earnings per Share (EPS)=(Consolidated Earnings/Number of Common Stock) 58.41

31. Slide 31 hasanzulfiqar@yahoo.co.uk e. What would be the impact on Bonanza’s consolidated earnings per share (EPS) if the Tk/$:78.2525 and if the Earnings before Taxes in US fell to $58000 as a result of the recession? Bangladesh (Taka) USGermanyUK (Dollar, $)(euros, €)(Pound, £) Earnings Before Tax (EBT) in Local Currency 45000000.0058000.0045000.0025000.00 Average exchange rate for period ---Tk/$Tk/€Tk/£ 78.2525108.3232121.2325 EBT in BDT45000000.00453864548745443030812.5 Corporate Income Tax Rate35%25%40%30% Corporate Income Tax Amount157500001134661.251949817.6909243.75 Net Income in BDT- Country wise29250000.003403983.752924726.402121568.75 Consolidated Earnings of All Countries in BDT 37700278.90 Consolidated Earnings per Share (EPS)=(Consolidated Earnings/Number of Common Stock) 58.00

32. Slide 32 hasanzulfiqar@yahoo.co.uk h Bangladesh (Taka) USGermanyUK (Dollar, $)(euros, €)(Pound, £) Earnings Before Tax (EBT) in Local Currency 45000000.0062500.0050000.0025000.00 Average exchange rate for period ---Tk/$Tk/€Tk/£ 82.7475108.3232121.2325 EBT in BDT45000000.005171718.7554161603030812.5 Corporate Income Tax Rate35%25%28%30% Corporate Income Tax Amount157500001292929.6881516524.8909243.75 Net Income in BDT- Country wise29250000.003878789.063899635.202121568.75 Consolidated Earnings of All Countries in BDT 39149993.01 Total Tax 19468698.24 Effective Tax Rate on Global basis (Total Taxes paid as a percentage of pretax profits) i.e. Effective Tax rate = Total Tax / Total EBT in BDT 33.21% Consolidated Earnings per Share (EPS)=(Consolidated Earnings/Number of Common Stock) 60.23