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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 Shapiro9th 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


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 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 Organization

  • 1.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 Funds

  • 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

  • Use Payments Netting

  • 1.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 Investment

  • 1.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 Balances

  • 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 Budgeting


INTERNATIONAL CASH MANAGEMENT

  • Issue (#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 MANAGEMENT

  • A.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 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 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)

  • $10,00010,000

  • =11%


EFFECTIVE INTEREST RATE

  • Sample Problem #2Discounting 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)

  • $8,90010,000-1100

  • =1100

  • 8900

  • =12.4%


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)

  • $8,50010,000-1500

  • =1100

  • 8500

  • =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)

  • $7,40010,000-1100-1500

  • =14.9%


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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