Lecture 8: Finance

Question 1

International Financial Management

Answer 1

It is the acquisition and use of funds for cross-border trade, investment, and other commercial activities.

Question 2

Global money market:

Answer 2

financial markets where firms and governments raise short-term financing. It is the meeting point of those who want to invest money and those who want to raise funds.
-central banks, commercial banks: deposits, collateral loans

Question 3

Global capital market:

Answer 3

financial markets where firms and governments raise intermediate-term and long-term financing.
-stock market or bond market–>banks

Question 4

advantage of global capital markets vs domestic capital market

Answer 4

• Compared to being restricted to financial markets in the home country, the global market provides a broader base from which the firm can draw funds.
• Greater breadth of financing sources means firms can often access funds at substantially lower cost.
• The market provides a variety of investment opportunities for MNEs, professional investment firms, and individuals.

Question 5

advantage and disadvantage of equity financing

Answer 5

• advantage: don’t have to pay back funds

- disadvantage: diluted ownership

Question 6

global equity market

Answer 6

global equity market is the worldwide market of funds for equity financing – the stock exchanges worldwide where investors and firms meet to buy and sell shares of stock.

Question 7

world’s largest stock exchanges

Answer 7

1. NYSE
2. NASDAQ
3. Tokyo Stock exchange group

Question 8

debt financing and its advantage/disadvantge

Answer 8

The firm borrows money from a creditor in exchange for repayment of principal and interest.

• Debt financing is obtained from two sources: loans (usually from banks) and the sale of bonds.
• advantage: the firm does not sacrifice any ownership interests.
• disadvantage: have to pay back funds

Question 9

global bond market

Answer 9

The global bond market is the international marketplace in which bonds are bought and sold, primarily through banks and stockbrokers.

Question 10

Eurocurrency

Answer 10

The Eurocurrency Market, which represents money deposited in banks outside its country of origin, is a key source of loanable funds. U.S. dollars account for the largest share of such funds.

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

Question 11

Eurobonds

Answer 11

Eurobonds are sold outside the bond issuer’s home country and denominated in its own currency. For example, when Toyota sells yen-denominated bonds in the United States, it is issuing Eurobonds.

Question 12

Foreign bonds

Answer 12

Foreign bonds are sold outside the bond issuer’s country and denominated in the currency of the country in which they are issued. E.g. when Mexico’s Cemex sells dollar-denominated bonds in the United States, it is issuing foreign bonds.

Question 13

Intracorporate financing

Answer 13

Intracorporate financing: obtaining funds from within firm’s network of subsidiaries and affiliates.

-advantage: Minimizes transaction costs of borrowing from banks and avoids the ownership-diluting effects of equity financing.

Question 14

cash flow management

Answer 14

Cash flow management ensures cash is available where and when it is needed.

-Cash is generated from various sources and needs to be transferred from one part of the MNE to another.

Question 15

Multilateral netting:

Answer 15

Multilateral netting: strategic reduction of cash transfers within the MNE family through the elimination of offsetting cash flows.
-MNEs pool surplus funds into a central depository that functions either globally or for a region. The funds are then directed to needful subsidiaries or invested to generate income.

Question 16

Spot rate:

Answer 16

exchange rate based on the current rate of exchange.

Question 17

Forward rate

Answer 17

exchange rate applicable at some future date but specified at the time of a transaction.
-the primary function of the forward market is to provide protection against currency risk.

Question 18

Direct quote:

Answer 18

the number of units of the domestic currency needed to acquire one unit of the foreign currency. For example, ‘it costs $1.42 to acquire one euro.’

Question 19

Indirect quote:

Answer 19

the number of units of the foreign currency obtained for one unit of the domestic currency. For example, ‘for $1, I can receive 0.74 euros.’

Question 20

Transparency

Answer 20

Transparency: degree to which firms regularly and comprehensively reveal substantial information about their financial condition and accounting practices.
The more transparent a nation’s accounting systems, the more regularly and comprehensively its public firms report their financial results in a reliable way.
-Transparency improves the ability of investors to accurately evaluate company performance.

Question 21

International Accounting Standards Board (IASB)

Answer 21

aims to harmonize world accounting systems, particularly regarding measurement, disclosure, and auditing standards.

Question 22

Current rate method

Answer 22

-one of 2 methods for translation
Current rate method – all foreign currency balance-sheet and income statement items are translated at the current exchange rate – the spot exchange rate in effect on the day (in the case of balance sheets) or for the period (in the case of income statements) the statements are prepared.
This method is typically used when translating records of foreign subsidiaries that are considered separate entities, rather than part of the parent firm’s operations.

Question 23

Temporal method

Answer 23

-one of 2 methods for translation

Temporal method – the choice of exchange rate depends on the underlying method of valuation.

Assets and liabilities normally valued at historical cost are translated at historical rates, that is, the rates in effect when the assets were acquired.

Assets and liabilities normally valued at market cost are translated at the current exchange rate.

Thus, monetary items such as cash, receivables, and payables are translated at the current exchange rate. Non-monetary items such as inventory, property, plant, and equipment are translated at historical rates.

Question 24

direct tax

Answer 24

A direct tax is imposed on income derived from business profits, intra-corporate transactions, capital gains, and sometimes royalties, interest, and dividends.

Question 25

indirect tax

Answer 25

An indirect tax applies to firms that license or franchise products and services or who charge interest. The government withholds some percentage of royalty payments or interest charges as tax.

Question 26

sales tax

Answer 26

A sales tax is a flat percentage tax on the value of goods or services sold, and paid by the ultimate user.

Question 27

value-added tax

Answer 27

A value-added tax is payable at each stage of processing in the value chain of a product or service.
VAT is calculated as a percentage of the difference between the sale and purchase price of a good.

Question 28

Tax Havens

Answer 28

Tax havens are countries hospitable to business and inward investment because of their low corporate income taxes.

Bahamas, Luxembourg, Monaco, Singapore, and Switzerland are examples.

MNEs take advantage of tax havens either by establishing operations in them or by funeling business transactions through them.