MBA Knowledge Base

Incremental Cash Flow Analysis

admin — Fri, 14 Jun 2013 19:35:04 PDT

The most important and also the most difficult part of an investment analysis is to calculate the cash flow associated with the project; the cost of funding the project; the cash inflow during the life of the project; and the terminal, or ending value of the project. Shareholders are interested in how many additional rupees they will receive in future for the rupees they lay out today. Hence, what matters is not the project’s total cash flow per period, but the incremental cash flow for a variety of reasons. They include; Cannibalization: When a new product is introduced it may take away the sales of existing products. Cannibalization also occurs when a firm builds a plant overseas and winds up substituting foreign production for parent company exports. In this case company may...

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Centralized Cash Management Operations of Multinational Corporations

admin — Mon, 10 Jun 2013 20:44:36 PDT

International money managers attempt to attain on a worldwide basis the traditional domestic objectives of cash management: (1) bringing the company’s cash resources within control as quickly and efficiently as possible and (2) achieving the optimum conservation and utilization of these funds. Accomplishing the first goal requires establishing accurate, timely forecasting and reporting systems, improving cash collections and disbursements, and decreasing the cost of moving funds among affiliates. The second objective is achieved by minimizing the required level of cash balances, making money available when and where it is needed, and increasing the risk-adjusted return on those funds that can be invested. Restrictions and typical currency controls imposed by governments inhibit cash...

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Inventory Management Practices in Multinational Corporations

admin — Mon, 10 Jun 2013 19:27:01 PDT

Inventory in the form of raw materials, work in process or finished goods is held; to facilitate the production process by both ensuring that supplies are at hand when needed and allowing a more even rate of production and to make certain that goods are available for delivery at the time of sale. Although, conceptually, the inventory management problems faced by multinational firms are not unique, they may be exaggerated in the case of foreign operations. For instance, MNCs typically find it more difficult to control their overseas inventory and realize inventory turnover objectives. There are a variety of reasons: long and variable transit times if ocean transportation is used, lengthy customs proceedings, dock strikes, import controls, higher duties, supply disruption, and...

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Multinational Corporations and Accounts Receivable Management

admin — Sun, 09 Jun 2013 09:33:15 PDT

Multinational Corporations (MNC’s) grant trade credit to customers, both domestically and internationally, because they expect the investment in receivables to be profitable, either by expanding sales volume or by retaining sales that otherwise would be lost to competitors. Some companies also earn a profit on the financing charges they levy on credit sales. The need to scrutinize credit terms is particularly important in countries experiencing rapid rates of inflation. The incentive for customers to defer payment, liquidating their debts with less valuable money in the future, is great. Furthermore, credit standards abroad are often more relaxed than in the home market, especially in countries lacking alternative sources of credit for small customers. To remain competitive, MNCs...

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Definition of Forfaiting

admin — Sun, 09 Jun 2013 08:37:38 PDT

Forfaiting is a specialized form of trade finance that allows the exporter to offer extended credit to the importer. Under this mechanism, the importer gives the exporter a bundle of bills of exchange or promissory notes covering the principal amount as well as the interest. Each tranche of the notes fall due at different points of time in the future, e.g. every six months, extending up to several years. The notes are backed by an aval or guarantee provided by a reputed bank in the importer’s country. The exporter can then discount these notes without recourse with banks who specialize in the forfaiting business to generate an immediate cash flow. This means that if either the importer or the guaranteeing bank fails to pay when notes fall due, the forfaiter cannot ask the exporter for...

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Buyers Credit and Suppliers Credit

admin — Sun, 09 Jun 2013 07:48:23 PDT

Buyer’s Credit Buyer’s Credits are a form of Eurocurrency loans designed to finance a specific transaction involving import of goods and services. Under this arrangement, lending bank(s) pay the exporter on presentation of shipping documents. The importer works out a deferred payment arrangement with the lending bank, which the bank treats as a loan. Large loans are club loans or syndicated loans. Many provisions in the loan agreement are quite similar to a general purpose syndicated credit. However, a number of formalities have to be completed before the exporter can draw funds. The interest rate of the loan is linked to a market index such as LIBOR. In some cases, a state Export Credit Agency from the exporter’s country may pay a subsidy to the banks so that an attractive funding cost...

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Taxation Aspects of Multinational Corporations in India

admin — Sat, 01 Jun 2013 23:53:23 PDT

Foreign non-resident business entities may have business activities in a variety of ways. In its simplest form this can take the form of individual transactions in the nature of exports or import of goods, lending or borrowing of money, sale of technical know how to an Indian enterprise, a foreign air-liner touching an Indian airport and booking cargo or passengers, etc. various tax issues arise on accounts of such activities. The government wants to encourage foreign enterprises to engage in certain types of business activities in India, which in its opinion its desirable for achieving a balanced economic growth. This takes us to the last aspect of activities which enjoy tax incentives in India. The related issues about the taxation of the Multinational Corporations (MNCs) are as...

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Objectives of International Taxation

admin — Thu, 30 May 2013 09:25:20 PDT

The main objectives of the International Taxation are the Neutrality and Equity. Tax Neutrality A neutral tax is one that would not influence any aspect of the investment decision such as the location of the investment or the nationality or the investor. The basis justification for tax neutrality is economy efficiency. World welfare will be increase if capital is free to move from countries were the rate of return is low to those where it is high. Therefore, if the tax system distorts the after-tax profitability between two investments or between two investor leading to a different set of investments being undertaken, then gross world product will be reduced. Tax neutrality can be separated into domestic and foreign neutrality. Domestic neutrality is an compasses the equal treatment of...

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Double Taxation Relief

admin — Wed, 29 May 2013 10:58:10 PDT

One of the major risk in the International Business is the payment of taxes in both the countries i.e. the country in which the business is actually effected and in the country where the MNC is having its head office. This type of double taxation will definitely impede the growth and development of the MNCs in multiple ways. So the provisions are made to avoid the double taxation between the two countries through two types of relief namely Bilateral Relief and Unilateral Relief. Bilateral Relief Under this scheme, relief against the burden of double taxation is worked out on the basis of mutual agreement between two countries. There are two types of agreements. In one type, the two concerned countries agree that certain incomes which are likely to be taxed in both countries shall be taxed...

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International Payments Using Drafts

admin — Wed, 29 May 2013 10:19:33 PDT

Commonly used in international trade, a draft is an unconditional order in writing - usually signed by the exporter (seller) and addressed to the importer (buyer) or the importer’s agent – ordering the importer to pay on demand, or at a fixed or determinable future date, the amount specified on its face. Such an instrument, also known as a bill of exchange, serves three important functions: To provide written evidence, in clear and simple terms, of financial obligation. To enable both parties to potentially reduce their costs of financing. To provide a negotiable and unconditional instrument (that is, payment must be made to any holder in due course despite any disputes over the underlying commercial transaction.) Using a draft also enables an exporter to employ its bank as a...

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Short-Term Financing of Multinational Corporations

admin — Mon, 27 May 2013 22:30:23 PDT

Financing the working capital requirements of a multinational companies foreign affiliates poses a complex decision problem. This complexity stems from the large number of financing options available to the subsidiary of an MNC. Subsidiaries have access to funds from sister affiliates and the parent, as well as external sources. This article focuses on developing policies for borrowing from either within or without the companies when the risk of exchange rate changes is present and different tax rates and regulations are in effect. There are four aspects of short-term overseas financing strategy namely; Identifying the key factors, Formulating and evaluating objectives, Describing available short-term borrowing options and Developing a methodology for calculating and comparing the...

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Syndicated Euro Credits

admin — Mon, 27 May 2013 04:02:00 PDT

History of Euro Credit Syndicates Syndicated Euro Credits are in existence since the late 1960s. The first syndicate was organized by Bankers Trust in an effort to arrange a large credit for Austria. During the early seventies, Euromarkets saw the demand for Euro credits increasing from non-traditional and hitherto untested borrowers. The period after first oil crisis was marked by a boom phase. To cope with the increasing demand for funds, lenders expanded their business without undertaking due credit appraisal of their clients or the countries thus financed. Further, the European banks had short-term deposits while bulk of borrowers required long-term deposits. These landings were at fixed rates thus exposing these banks to interest rate risks. The banks evolved the concept of lending...

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Types of Foreign Bonds

admin — Thu, 23 May 2013 20:10:41 PDT

Yankee Bonds Yankee Bonds are US dollar denominated issues by foreign borrowers (usually foreign governments or entities, supranationals and highly rated corporate borrowers) in the US bond markets. Yankee bond has certain peculiar features associated with the US domestic market. SEC regulates the international bond issues and requires complete disclosure documents in detail than the prospectus used in Eurobond issues. Foreign borrower will have to adopt the US accounting practices and the US credit rating agencies will have to provide rating for these bonds. These bonds are sponsored by a US domestic underwriting syndicate and require SEBI (Securities and Exchange Board of India) registration prior to selling them in the domestic US market. Reliance Industries Ltd. has been the most...

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Euro Notes and Euro Commercial Paper

admin — Sun, 19 May 2013 08:25:32 PDT

Euro Notes Euro Notes are like promissory notes issued by companies for obtaining short term funds. They emerged in early 1980s with growing securitization in the international financial market. They are denominated in any currency other than the currency of the country where they are issued. They represent low cost funding route. Documentation facilities are the minimum. They can be easily tailored to suit the requirements of different kinds of borrowers. Investors too prefer them in view of short maturity. When the issuer plans to issue Euro notes, it hires the services of facility agents or the lead arranger. On the advice of the lead arranger, it issues the notes, gets them underwritten and sells them through the placement agents. After the selling period is over the underwriter buys...

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International Bonds

admin — Thu, 16 May 2013 10:18:34 PDT

International bonds are a debt instrument. They are issued by international agencies, governments and companies for borrowing foreign currency for a specified period of time. The issuer pays interest to the creditor and makes repayment of capital. There are different types of such bonds. The procedure of issue is very specific. All these need some explanation here. Types of International Bonds 1. Foreign Bonds and Euro Bonds International bonds are classified as foreign bonds and Euro bonds. There is a difference between the two, primarily on four counts. First, in the case of foreign bond, the issuer selects a foreign financial market where the bonds are issued in the currency of that very country. If an Indian company issues bond in New York and the bond is denominated in a currency...

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International Money Market

admin — Wed, 15 May 2013 09:20:38 PDT

A money market is a market for instruments and a means of lending (or investing) and borrowing funds for relatively short periods, typically regards as from one day to one year. Such means and instruments include short term bank loans. Treasury bills, bank certificates of deposit, commercial paper, banker’s acceptances and repurchase agreements and other short term asset backed claims. As a key elements of the financial system of a country, the money market plays a crucial economic role that if reconciling the cash needs of so called deficit units (such as farmers needing to borrow in anticipation of their later harvest revenues), with the investment needs of surplus units (such as insurance companies wanting to invest cash productively prior to making long term investment choices)....

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The Development of the Eurodollar Market

admin — Wed, 15 May 2013 00:17:42 PDT

Euro Markets are unregulated Money and Capital markets. These markets are spread over Europe, Middle East and Asia. Short-term Euro markets are called as “Euro- currency Markets”. Any currency held outside to home country is referred to as Euro-currency. For example when a Dollar is held as a deposit outside the U.S. is referred to as Euro-Dollar, Similarly a deposit in Marks, outside Germany is called as a Euro-Mark deposit. The Dollar was and still is widely used to settle the international payments. Although there is an increase in European Deposits, denominated in Euro, Pound sterling, Yen etc., by far the U.S. Dollar still remains the most popular Euro-currency. The preference for Dollars can be attributed to the relative political stability and the absence of severe restrictions in...

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Gold Backed Currency System

admin — Tue, 14 May 2013 22:47:12 PDT

If the monetary authority holds sufficient gold to convert all circulating money, then this is known as a 100% reserve gold standard, or a full gold standard. Some believe there is no other form of gold standard, since on any “partial” gold standard the value of circulating representative paper in a free economy will always reflect the faith that the market has in that note being redeemable for gold. Others, such as some modern advocates of supply-side economics contest that so long as gold is the accepted unit of account then it is a true gold standard. In an internal gold-standard system, gold coins circulate as legal tender or paper money is freely convertible into gold at a fixed price. In an international gold-standard system, which may exist in the absence of any...

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The Benefits of a Single Currency System – Euro

admin — Mon, 13 May 2013 09:36:25 PDT

The euro is the result of the most significant monetary reform in Europe since the Roman Empire. Although the euro can be seen simply as a mechanism for perfecting the Single European Market, facilitating free trade among the members of the Euro-zone, it is also regarded by its founders as a key part of the project of European political integration. The euro is administered by the European System of Central Banks (ESCB), composed of the European Central Bank (ECB) and the Euro-zone central banks operating in member states. The ECB (headquartered in Frankfurt am Main, Germany) has sole authority to set monetary policy; the other members of the ESCB participate in the printing, minting and distribution of notes and coins, and the operation of the Euro-zone payment system. The introduction...

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International Equity Investments – Euro Equities

admin — Sun, 12 May 2013 20:30:14 PDT

International equities or the Euro equities do not represent debt, nor do they represent foreign direct investment. They are comparatively a new financial instruments representing foreign portfolio equity investment. In this case, the investor gets the dividend and not the interest as in case of debt instruments. On the other hand, it does not have the same pattern of voting right that it does have in the case of foreign direct investment. In fact, international equities are a compromise between the debt and the foreign direct investment. They are the instruments that are presently on the preference list of the investors as well as the issuers. Benefits to Issuer/ Investor The issuers issue international equities under certain conditions and with certain objectives. First, when the...

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