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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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