Chap020 - Chapter 20 Financial Management in International...

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Chapter Financial Management in International Business 20
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Case: Global treasury management at 60% of P &G’s revenues from international sales Products sold in 130 countries Has centralized global treasury management function Management of all foreign exchange transactions P& G trades currency between subsidiaries, cutting out banks and saving on transaction costs P & G is pooling foreign exchange risks and buying an purchasing an umbrella option to cover risks associated with various currency options Subsidiaries can invest in and borrow money from other P &G entities instead of dealing with banks
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Scope of financial management Scope of financial management includes three sets of related decisions: Investment decisions Decisions about what activities to finance Financing decisions Decisions about how to finance those activities. Money management decisions Decisions about how to manage the firm’s financial resources most efficiently
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Investment decisions Capital budgeting: Quantifies the benefits, costs and risks of an investment Managers can reasonably compare different investment alternatives within and across countries Complicated process: Must distinguish between cash flows to project and those to parent Political and economic risk can change the value of a foreign investment Connection between cash flows to parent and the source of financing must be recognized
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Project and parent cash flows Project cash flows may not reach the parent: Host-country may block cash-flow repatriation Cash flows may be taxed at an unfavorable rate Host government may require a percentage of cash flows to be reinvested in the host country
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Adjusting for political and economic risk Political risk: Expropriation - Iranian revolution, 1979 Social unrest - after the breakup of Yugoslavia, company assets were rendered worthless Political change - may lead to tax and ownership changes Examples. Collapse of communism in Eastern Europe Attack on the world trade center Economic risk Inflation
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Financing decisions When considering options for financing a foreign investment, Int. businesses have to consider two factors Source of financing Financial structure
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Chap020 - Chapter 20 Financial Management in International...

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