12,14

Multinational Financial Management Alan Shapiro

9th Edition J.Wiley & Sons

Power Points by

Joseph F. Greco, Ph.D.

California State University, Fullerton

CHAPTER 19

Current Asset Management and Short-Term Financing

International Cash Management

PART 1

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

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

INTERNATIONAL CASH MANAGEMENT

Issue (#1): Centralize OrganizationIssue (#1): Centralize Organization1. Advantages:

a. Efficient liquidity levels

b. Enhanced profitability

c. Quicker headquarter

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

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

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

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.

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

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

INTERNATIONAL CASH MANAGEMENT

2. Requirements:a. Forecast of cash needs

b. Knowledge of minimum cash position

INTERNATIONAL CASH MANAGEMENT

3. Investment Selection Criteria:

a. Degree of Government regulations

b. Market structure

c. Leniency of Foreign tax laws

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

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

INTERNATIONAL CASH MANAGEMENT

Issue (#6) Cash Planning and Issue (#6) Cash Planning and BudgetingBudgeting

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

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

ACCOUNTS RECEIVABLE MANAGEMENT

II. ACCOUNTS RECEIVABLE MANAGEMENT

A. Trade Credits

extended in anticipation of profit by

1. expanded sales volume

2. retaining existing customers

ACCOUNTS RECEIVABLE MANAGEMENT

B. Credit Terms Should Consider

1. Sales force

customer selection criteria

2. Adjusting sales bonuses for cost of credit sales.

INVENTORY MANAGEMENT

III. INVENTORY MANAGEMENTA. Problems:

MNCs seem to have more difficulties due to

1. Long,variable transits

2. Lengthy customs procedures

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

INVENTORY MANAGEMENT

C. Subsidiary Practice known as: Advanced Inventory Purchases or inventory stockpiling

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.

CHAPTER 19 PART 2

Short-Term Financing

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

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

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.

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

SHORT-TERM FINANCING OBJECTIVES

C. Short-Term Financing Objectives

1. Possible Objectives:

a. Minimize expected cost

b. Minimize risk without regard to cost

SHORT-TERM FINANCING OBJECTIVES

D. Short-Term Financing Options

1. Three Possibilities

a. Inter-company loans

b. Local currency loans

c. Euro market

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

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

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%

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%

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%

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%

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