- •Introduction
- •Investment Decisions
- •Capital Budgeting
- •Project and Parent Cash Flows
- •Economic Risk
- •Table 20.1
- •Financial Structure
- •Table 20.2
- •Global Money Management: the Tax Objective
- •Table 20.3
- •Reducing Transaction Costs
- •Moving Money Across Borders: Attaining Efficiencies and Reducing Taxes
- •Dividend Remittances
- •Royalty Payments and Fees
- •Transfer Prices
- •Benefits of Manipulating Transfer Prices
- •Problems with Transfer Pricing
- •Fronting Loans
- •Figure 20.1
- •Multilateral Netting
- •Figure 20.2a
- •Managing Foreign Exchange Risk
- •Translation Exposure
- •Economic Exposure
- •It may make sense to accelerate dividend payments from subsidiaries based in countries with weak currencies.
- •Reducing Economic Exposure
- •Developing Policies for Managing Foreign Exchange Exposure
- •Chapter Summary
- •Critical Discussion Questions
- •Closing Case
- •Accounts Receivable
- •Case Discussion Questions
Critical Discussion Questions
How can the finance function of an international business improve the firm's competitive position in the global marketplace?
What actions can a firm take to minimize its global tax liability? On ethical grounds, can such actions be justified?
You are the CFO of a US firm whose wholly owned subsidiary in Mexico manufactures component parts for your US assembly operations. The subsidiary has been financed by bank borrowings in the United States. One of your analysts told you that the Mexican peso is expected to depreciate by 30 percent against the dollar on the foreign exchange markets over the next year. What actions, if any, should you take?
You are the CFO of a Canadian firm that is considering building a $10 million factory in Russia to produce milk. The investment is expected to produce net cash flows of $3 million each year for the next 10 years, after which the investment will have to close down because of technological obsolescence. Scrap values will be zero. The cost of capital will be 6 percent if financing is arranged through the eurobond market. However, you have an option to finance the project by borrowing funds from a Russian bank at 12 percent. Analysts tell you that due to high inflation in Russia, the Russian ruble is expected to depreciate against the Canadian dollar. Analysts also rate the probability of violent revolution occurring in Russia within the next 10 years as high. How would you incorporate these factors into your evaluation of the investment opportunity? What would you recommend the firm do?
Closing Case
A multinational corporation with operating companies in more than 80 countries and sales in excess of $23 billion, Motorola is one of the world's leading providers of wireless communications equipment, semiconductors, and advanced electronics systems and services. Separate Motorola companies act autonomously and trade with each other on an arm's-length basis, often across national borders. Historically, each operating company managed its own payments with other Motorola subsidiaries and with independent suppliers and executed its own foreign exchange dealings. By the mid-1990s, however, Motorola had built a global cash management system that not only managed transactions between Motorola operating companies, but also between Motorola companies and key suppliers.
The evolution of Motorola's global cash management system dates to 1976 when the company decided to develop a foreign currency netting system for transactions between Motorola companies. The objective of this system was to achieve cost savings by reducing both cash flows and the amount of foreign exchange deals required to execute cross-border payments. Under this system, all foreign currency transactions between Motorola companies are managed with a single payment or invoice from a London-based treasury management center to each Motorola company once every week. Figures C.1, C.2, and C.3 show how this system reduces organizational complexity, while the follow ing table gives a numerical example using the exchange rates detailed in Figure C3.
Using the table, the net payments for each operating company can be easily calculated. Specifically,
Company A ( £550 - £50 = £500).
Company B ($100 - $140 = - $40).
Company C (¥10,000 - ¥125,000 = - ¥115,000).
Company D (Kr200 - Kr400 = - Kr200).
Before netting, the total amount of cash flows was the sum of all payments, which in dollar terms amounted to $1,320. The netted cash for each company is the sum of its payables less the sum of its receivables. In local currency, company A will receive £500, B will pay $40, C will pay ¥115,000, and D will pay Kr200. The netted cash flow in dollars is now $1,000. The center receives three different types of currencies, makes one payment to company A, and has a neutral cash position.
The benefits of this system are a reduction in cash flows and in the volume of foreign exchange dealings. Moving from localized treasury management to one centralized system realized an estimated annual financial saving from lower transaction costs (bank fees and foreign exchange commissions) of about $6.5 million. However, this figure does not include administrative