Chapter 19 HW Source

Chapter 19 HW Source - 261 CHAPTER 19 CURRENT ASSET...

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261 CHAPTER 19 CURRENT ASSET MANAGEMENT AND SHORT-TERM FINANCING This chapter discusses the management of cash, accounts receivable and inventory in the multinational corporation, as well as the financing of these current assets. The chapter's first section provides important institutional material on international cash management, an area which accounts for a sizable amount of a multinational treasurer's time. I go over this material quickly, emphasizing only the unique international aspects, particularly the tax and currency control factors, netting, and the different money market instruments available. My main objective is to have students think of money management from a global perspective. I then point out the various ways in which multinational banks can aid in international money management. Most of the large banks provide such services and have brochures describing their efforts. I discuss the next two sections quickly as well, emphasizing only the more international aspects of inventory and receivables management. These include the element of currency risk, the possibility of shortages due to exchange controls and dockworker strikes, and the use of factoring. The section on short-term financing discusses the alternative financing options available to companies. It emphasizes how exchange rate changes affect the home currency costs of borrowing in different currencies. The domestic analogy is calculating real borrowing costs, factoring in inflation and nominal interest rates. In this edition, I have deleted discussion of how taxes affect relative borrowing costs. This material will stay in Multinational Financial Management . The key points on short-term financing include the following: 1. In formulating a borrowing strategy, the key factors and objectives associated with that strategy must be consistent with our understanding of the way in which financial markets work. 2. If forward contracts exist, then the only valid objective of a borrowing strategy is to minimize covered after-tax interest costs. 3. In the absence of forward contracts, firms can either attempt to minimize expected costs or establish some trade-off between reducing expected costs and reducing the degree of cash flow exposure. The latter goal involves offsetting operating cash inflows in a currency with financing cash outflows in that same currency. In general, the borrowing decision should be integrated with the hedging decision. SUGGESTED ANSWERS TO CHAPTER 19 QUESTIONS 1. High interest rates put a premium on careful management of cash and marketable securities. a. What techniques are available to an MNC with operating subsidiaries in many countries to economize on these short-term assets? A NSWER . Some of the techniques are available to an MNC with operating subsidiaries in many countries to economize on cash and marketable securities include cash pooling, bilateral and multilateral netting, multinational cash
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Chapter 19 HW Source - 261 CHAPTER 19 CURRENT ASSET...

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