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Multinational Financial Management Alan Shapiro 9 th Edition J.Wiley & Sons. Power Points by Joseph F. Greco, Ph.D. California State University, Fullerton. Current Asset Management and Short-Term Financing. CHAPTER 19. International Cash Management. PART 1.

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multinational financial management alan shapiro 9 th edition j wiley sons

Multinational Financial Management Alan Shapiro9th Edition J.Wiley & Sons

Power Points by

Joseph F. Greco, Ph.D.

California State University, Fullerton

international cash management1
INTERNATIONAL CASH MANAGEMENT
  • I. INTERNATIONAL CASH MANAGEMENT
  • A. Seven Key Areas Involve Issues about
  • 1. Organization
  • 2. Collection/Fund Disbursement
  • 3. Interaffiliate Payments
  • 4. Investment of Excess Funds
  • 5. Optimal Global Cash Balances
  • 6. Cash Planning/Budgeting
  • 7. Bank Relations
international cash management2
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 management3
INTERNATIONAL CASH MANAGEMENT
  • Issue (#1): Centralize Organization
  • 1. Advantages:
  • a. Efficient liquidity levels
  • b. Enhanced profitability
  • c. Quicker headquarter
international cash management4
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 management5
INTERNATIONAL CASH MANAGEMENT
  • Issue (#2): Collection/Disbursement of Funds
  • 1. Key Element: Accelerate collections
  • 2. Acceleration Methods:
  • a. Electronic fund transfers
  • b. Mobilization centers
international cash management6
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 management7
INTERNATIONAL CASH MANAGEMENT
  • Issue (#3): Interaffiliate Payments
  • Use Payments Netting
  • 1. Definition:
      • -offset payments of affiliate receivables/payables
      • -net amounts only are transferred.
international cash management8
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 management9
INTERNATIONAL CASH MANAGEMENT
  • Issue (#4): Excess Fund Investment
  • 1. Major task: a. determine minimum cash
  • balances
  • b. short-term investment of
  • excess balances
international cash management10
INTERNATIONAL CASH MANAGEMENT
  • 2. Requirements:
  • a. Forecast of cash needs
  • b. Knowledge of minimum cash position
international cash management11
INTERNATIONAL CASH MANAGEMENT
  • 3. Investment Selection Criteria:
  • a. Degree of Government regulations
  • b. Market structure
  • c. Leniency of Foreign tax laws
international cash management12
INTERNATIONAL CASH MANAGEMENT
  • Issue (#5) Optimal Global Cash Balances
  • 1. Establish centrally managed cash pool
  • 2. Require affiliates to hold minimum amounts
international cash management13
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 management14
INTERNATIONAL CASH MANAGEMENT
  • Issue (#6) Cash Planning and Budgeting
international cash management15
INTERNATIONAL CASH MANAGEMENT
  • Issue (#7) Bank Relations
  • 1. Good Relations Will Avoid
  • a. Lost interest income
  • b. Overpriced services
  • c. Redundant services
international cash management16
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
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 management1
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
INVENTORY MANAGEMENT
  • III. INVENTORY MANAGEMENT
  • A. Problems:
  • MNCs seem to have more difficulties due to
  • 1. Long,variable transits
  • 2. Lengthy customs procedures
inventory management1
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 management2
INVENTORY MANAGEMENT
  • C. Subsidiary Practice known as:
  • Advanced Inventory Purchases or inventory stockpiling
inventory management3
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

CHAPTER 19 PART 2

Short-Term Financing

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 financing1
SHORT-TERM FINANCING
  • B. Key Factors
  • 1. 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 financing2
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 financing3
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
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 objectives1
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 objectives2
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
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 rate1
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 rate2
EFFECTIVE INTEREST RATE
  • Sample Problem #2 Discounting the loan
  • Pro 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
  • = 1100
  • 8900
  • = 12.4%
effective interest rate3
EFFECTIVE INTEREST RATE
  • Sample Problem #3: Compensating Balances
  • Pro 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
  • = 1100
  • 8500
  • = 12.9%
effective interest rate4
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
COMMERCIAL PAPER
  • 4. Non-bank lending : Commercial Paper
  • a. Definition:
  • short-term unsecured promissory
  • note generally sold by large MNCs
  • on a discount basis.
  • b. Standard maturities
  • c. Bank fees charged for:
  • 1.) Backup line of credit
  • 2.) Credit rating service
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