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International Business > Ch 10 > Flashcards

Ch 10 Flashcards

1
Q

International Financial Management Tasks

A
  1. Choosing a capital structure
  2. Raising funds for the firm
  3. Managing working capital and cash flow
  4. Performing Capital Budgeting
  5. Managing Currency Risk
  6. Managing the Diversity of International Accounting and Tax Practices
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2
Q

Capital Structure

A

Mix of long term equity financing and debt financing that firms use to support their international activities

Obtain capital by: borrowing or selling shares of ownership in the firm

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3
Q

Equity Financing

A

The issuance of shares of stock to raise capital from investors and the use of retained earnings to reinvest in the firm

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4
Q

Debt Financing

A

The borrowing of money from banks or other finacial intermediaries or the sale of corporate bonds to individuals or institutions to raise capital

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5
Q

*High reliance on debt financing can arise if a country lacks a well-developed stock market or other systems for obtaining capital from equity sources

A
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6
Q

Global Money Market

A

The collective financial markets where firms and governments raise short-term financing

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7
Q

Global Capital Market

A

The collective financial markets where firms and governments raise intermediate and long-term financing

-Access to capital is one of the main criteria that businesses consider when deciding to expand abroad

-Concentrated in major financial centers

Advantages:
1. broader base from which to draw funds to finance company operations
2. ability to access funds at lower, competitive costs because of increased access to a larger pool of funding sources from around the world
3. greater variety of investment opportunities for MNEs, professional investment firms and indiviuals

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8
Q

Sources of Funds for International Operations

A

*Equity financing
*Debt financing
*Intra-corporate financing

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9
Q

Equity Financing

A

-Obtains capital by selling stock

-Firm obtains capital without debt

Global Equity Market: The worldwide market of funds for equity financing–stock exchanges around the world where investors and firms meet to buy and sell shares of stock

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10
Q

Debt Financing

A

Consists of international loans and the eurocurrency market as well as domestic and foreign bonds

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11
Q

Challenges of borrowing

A

-Differences in national banking regulations
-Poor banking infrastructure
-Capital shortages
-Economic Problems
-Fluctuating Currency Values

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12
Q

Eurodollars

A

U.S dollars held in banks outside the United States including foreign branches of U.S banks

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13
Q

Eurocurrency

A

Any currency deposited in a bank outside its country of origin

4 main:
*U.S Dollar
*Euro
*British pound
*Japanese Yen

-Banks typically offer higher interest rates on eurocurrency deposits and charge lower interest rates for eurocurrency loans

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14
Q

Bonds

A

A debt intrustment that enables the issuer to raise capital by promising to repay the principal on a specified date along with periodic interest payments

Global Bond Market: international market place in which bonds are bought and sold through bond brokers

Foreign Bonds: A bond sold outside the issuer’s country and denominated in the currency of the country where issued

Eurobond: A bond sold outside the issuer’s home country but denominated in its own currency

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15
Q

Intra-Corporate Financing

A

Funds from sources inside the firm such as equity, loans, and trade credits

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16
Q

Working Capital

A

-Current Assets of a company

-Firms manage all current accounts like cash, accounts receiveable, inventory, and accounts payable

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17
Q

Firms can transfer funds through

A

*Trade credit
*Dividend Remittances
*Royalty Payments
*Fronting Loans
*Transfer Pricing
*Multilateral Netting

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18
Q

Capital Budgeting

A

-Helps managers decide which international projects provide the best financial return

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19
Q
A
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20
Q

Net Present Value

A

-Difference between present value of a project’s incremental cash flows and its initial investment requirement

*Positive = projected earnings of proposed project will be greater than the expected costs

Can use in 2 ways:
1. Estimate incremental after-tax operating cash flows in the subsidairy’s local currency and then discount them at the project’s cost of capital
2. Estimate future cash flows from the project in the functional currency of the parent (spot exchange rates)

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21
Q

4 Complicated Factors of Capital Budgeting

A

*Project cash flows usually in a currency other than reporting currency of the parent firm

*Tax rules in the project location and the parent’s country usually differ

*Governments may restrict the trasnfer of funds from the project to the parent firm

*The project may be exposed to country risk, such as government intervention or adverse econmic conditions

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22
Q

Currency Risk

A

-Firms face currency risk when their cash flows and the value of their assets and liabilities change due to unexpected changes in foreign exchange rates

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23
Q

Currency Exposure

A

1.Transaction Exposure
2.Translation Exposure
3.Economic Exposure

24
Q

Currency Exposure

Transaction Exposure

A

Firms face when outstanding accounts receivable or payable are denominated in foreign currencies

25
Q

Currency Exposure

Translation Exposure

A

Results when a firm translates financial statements denominated in a foreign currency into the functional currency of the patent firm as part of consolidating international financial results

Consolidation: The process of combining and integrating the financial results of foreign subsidairies into the financial statements of the parent firm

Occurs because when exchange rates fluctuate, the functional currency values of exposed assets, liabilites, expenses, and revenues.

26
Q

Economic Exposure

A

Results from exchange rate fluctuations affecting the pricing of products, the cost of inputs, and the value of foreign investments

27
Q

Foreign Exchange Rate

Spot Rate

A

The exchange rate applied when the current exchange rate is used for immediate receipt of a currency

28
Q

Foreign Exchange Rate

Forward Rate

A

The exchange rate applicable to the collection or delivery of a foreign currency at some future date

-Primary function of the forward market is to provide protection against currency risk

29
Q

Direct Quote

A

The number of units of domestic currency needed to acquire one unit of foreign currency; normal quote

30
Q

Indirect Quote

A

The number of units of foreign currency obtained for one unit of domestic currency

31
Q

Currency Traders

A

1.Hedgers
2.Speculators
3.Arbitrageurs

32
Q

Hedgers

A

Currency traders who seek to minimize their risk of exchange-rate fluctuations by entering into forward contracts or similar financial instruments

33
Q

Speculators

A

Currency traders who seek profits by investing in currencies with the expectation that their value will change in the future and then sell them at a different value

34
Q

Arbitrageurs

A

Currency traders who buy and sell the same currency in two or more foreign-exchange markets to profit from differences in the currencies exchange rate

35
Q

Technical analysis looks at recent movements in exchange rates, fundamental analysis studies macroeconomic data, and market-based forecasting uses forward rates to prredict future spot rates

A
36
Q

Hedging

A

Using financial instruments and other measures to reduce or eliminate exposure to currency risk by locking in guaranteed foreign exchange positions

Passive Hedging: exposure is hedged as it occurs and the hedge stays in place until maturity

Active Hedging: firm reviews total exposure and hedges only a subset of its total exposures

37
Q

4 most common hedging instruments

A

-Forward contracts
-Futures Contracts
-Currency options
-Currency swaps

38
Q

Forward Contract

A

A contract to exchange two currencies at a specified exchange rate on a set future date

39
Q

Futures Contract

A

An agreement to buy or sell a currency in exchange for another at a specified price on a specified date

-Standard amounts and maturity periods

40
Q

Currency Option

A

A contract that gives the purchaser the right but not the obliigation to buy a certain amount of foreign currency at a set exchange rate within a specified amount of time

Call option: Right but not the obligation to buy currency at a specified price within a specific period

Put option: Right to sell the currency at its specified price

41
Q

Currency Swap

A

An agreement to exchange one currency for another according to specified schedule

A swap is a spot and forward trasnaction

42
Q

Guidelines for minimizing currency risk

A
  1. Seek expert advice
  2. Centralize currency management within the MNE
  3. Decide on the level of risk the firm can tolerate
  4. Devise a system to measure exchange rate movements and currency risk
  5. Monitor changes in key currencies
  6. Be wary of unstable currencies or those subject to exchange controls
  7. Monitor long term economic and regulatory trends
  8. Distinguish economic exposure from transaction and translation exposures
  9. Emphasize flexibility in international operations
43
Q

Transperancy

A

The degree to which companies regularly reveal substantial information about their financial condition and accounting practices

-Facilitates better managerial decision making and lets investors accurately evaluate company performance

44
Q

Foreign Currencies are translated into the functional currency by using

A

1.Current Rate
2.Temporal Rate

45
Q

Current Rate Method

A

Translation of foreign currency balance sheet and income statements at the current exchange rate- the spot exchange rate in effect on the day or for the period when the statements are prepared

-Results in gains and losses

46
Q

Temporal Method

A

Translation of foreign currency balance sheet and income statements at an exchange rate that varies with the underlying method of valuation.

-Cash, receivables, and payables are translated at the current exchange rate

-Inventory, and PPE are translated at historical rates

47
Q

If the functional currency of the subsidairy is that of local operating environment… the company must use the current rate method

If the functional currency is the parent’s currency, the MNE must use the temporal method

A
48
Q

Taxes

A

-In countries where they operate, companies pay direct taxes, indirect taxes, sales taxes, value added taxes, and carbon taxes

49
Q

Direct Tax

A

Imposed on income from profits, capital gains, royalties, interest, and dividends

*Most common form: Corporate Income Tax

-Top marginal rate is the maximum tax rate that corporations should pay

50
Q

Indirect Tax

A

License or franchise products and services or that charge interest

51
Q

Sales Tax

A

Flat percentage tax on the value of goods or services sold

*consumption tax

52
Q

Value Added Tax

A

payable at each stage of processing in the value chain of a product or service

*consumption tax

53
Q

Carbon Tax

A

levied on the carbon content of fuels

54
Q

Tax Haven

A

A country hospitable to business and inward investment because of its low corporate income taxes

55
Q

Taxation effects managerial decisions about type of entry modes, legal form of foreign operations, transfer pricing, methods for obtaining capital, choice of target markets

A
56
Q

Global Firms Reduce Taxes By

A
  1. Defferal of affiliate income
  2. Transfer Pricing
  3. Royalty Payments
  4. Intra-Corporate Loans
  5. Tax Havens and Inversions

*Ethical issues

*Paying taxes help build roads, support education, and provide other public goods

International Business (12 decks)

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