17E00407 International Financial Management - 2.5 Units-II-MID-MATERIAL

BALAJI INSTITUTE OF
I.T AND MANAGEMENT

KADAPA
(17E00407)-INTERNATIONAL FINANCIAL
MANAGEMENT
ICET CODE: BIMK
SEMESTER-4 SECOND INTERNAL
ALSO DOWLOAD AT http://www.bimkadapa.in/materials.html
Name of the Faculty: SHAIK RIYAZ BASHA
Units covered: half of 3rd, 4th & 5th UNITS
E-Mail:[email protected]
IFM- FINANCE PAPER FINACE & MARKETING –FINANCE & HR
Syllabus
(17E00407)INTERNATIONAL FINANCIAL MANAGEMENT
(Elective VI)
Objective: The objective of the course is to provide students with a broad view of
International Monetary Systems and its understanding to enable a global manager to do
business in a global setting. The prerequisite for the course is Financial Accounting and
Analysis and Financial Management.
1. Introduction to International Financial management: IFM meaning, Difference

between FM & IFM, Nature ,Scope, Importance.
2. Foreign Exchange Market: Functions and Structure of the Forex markets, major
participants, types of transactions and settlements, Foreign exchange quotations, .
3. Management of foreign exchange exposure and risk: Types of Exposure, Economic
Exposure, Transaction Exposure, Operating Exposure.
4. Cross-border Investment Decisions: Capital budgeting, Approaches to Project
Evaluation, Risk in Cross-border Investment Decisions.
5. Financing Decisions of MNC`s & Working Capital Management: Introduction, the
cost of capital, capital structure, Cash management, management of receivables,
Inventory management.
Text Books:
 International Financial Management, V.K.Bhalla ,S.Chand

 International Financial Managemen, EphriamClark ,Cengage.
References:
 International Finance , Prakash .G.Apte, TMH

 International Financial Management, T.Siddaiah: Pearson.
 International Financial Management ,M.K.Rastogi
 International Financial Management, S.EunChoel and Risnick Bruce: TMH.
 International Financial Management, MachiRaju, HPH.
 international finance management, Jeff Madura, Cengage.
 International Financial Management, Sharan5th Edition, PHI.
 International Financial Management, MadhuVij: Excel, .
 International Financial Management, V. A Avadhani, Himalaya .
UNIT-3 MANAGEMENT OF FOREX EXPOSURE & RISK | BALAJI INST OF IT AND MANAGEMENT 1
UNIT-3
MANAGEMENT OF FOREIGN EXCHANGE
EXPOSURE AND RISK
1.3 MEASUREMENT OF ECONOMIC/OPERATING EXPOSURE

The degree of opera5ting exposure to exchange rate fluctuations is significantly higher for a
firm involved in international business than for a purely domestic firm. Assessing the
operating exposure of MNCs is difficult due to the complex interaction of funds that flow
into out of and within the MNCs operating exposure is crucial to operations of the firm in the
long run. If an MNC has subsidiaries around the world each subsidiary will be affected
differently by fluctuations in currencies. Thus attempts by the MNCs to measure its economic
exposure would be extremely complex.
One m4ethod of measuring a MNCs operating exposure is to classify the cash flows into
different items on the income statement and predict movement of each item in the income
statement based on a forecast of exchange rates. This will help in developing an alternative
exchange rate scenario and the forecasts for the income statement items can be revised. By
assessing how the earnings forecast in the income statement has changed in response to
alternative exchange rate scenarios the firm can assess the influence of currency movements
on earnings and cash flows.
Currency risk or uncertainty which represents random changes in exchange rates is not the
same as the currency exposure which measures what is at risk. Under certain conditions a
firm may not face any exposure at all i.e. nothing is at risk even if the exchange rates change
randomly. The British asset your company owns has an embedded hedge against exchange
risk rendering the dollar price of the assets insensitive to exchange rate changes.
Figure:1 channels of operating exposure

Consider an alternative situation in which the local price of your company’s British asset
barely changes. In this case the dollar value of the asset will be highly sensitive to the
exchange rate since the former will change as the latter does. To the extent that the dollar
price of the British asset exhibits sensitivity to exchange rate movements your company is
exposed to currency risk. Similarly if the businessman company’s operating cash flows are
sensitive to exchange rate changes the company is again exposed to currently risk.
Exposure to currency risk thus can be properly measured by the sensitivities of,
a. The future home currency values of the firm’s assets (and liabilities) and
b. The firms operating cash flows to random changes in exchange rates.
1.3.1 MANAGEMENT OF FOREIGN EXCHANGE EXPOSURE

AND RISK
Many methods area available to cover or hedge exposure to risk. Measurement and
management of foreign exchange risk/exposure are as follows.
Management of transaction exposure Management of translation exposure

Management of economic/operating
Exposure
1.4 MANAGEMENT OF TRANSACTION EXPOSURE

In the event of company chooses to manage/eliminate transaction exposure there are a
variety of hedging strategies available if the transaction will take place in less than one year.
Companies would up well to price or evaluate the costs of several techniques in order to
make an optimum choice.
There are two methods available to firm to hedge its transaction exposure which is discussed
below.
Management of transaction exposure
Natural hedges contractual hedges
Netting forward market hedging

Leading and lagging future market hedging
Cross-hedging options market hedging
Risk-sharing swaps market hedging
Pricing of transactions money market hedging
Parallel loans invoicing /billing in desired
Currency.
1. Assume that FASB 8 is still in effect instead of FASB 52. Construct a translation
exposure report for Centralia Corporation and its affiliates that is the counterpart to
Exhibit 10.6 in the text. Centralia and its affiliates carry inventory and fixed assets on
the books at historical values.
Solution: The following table provides a translation exposure report for Centralia
Corporation and its affiliates under FASB 8, which is essentially the temporal method of
translation. The difference between the new report and Exhibit 10.6 is that nonmonetary
accounts such as inventory and fixed assets are translated at the historical exchange rate if
they are carried at historical costs. Thus, these accounts will not change values when
exchange rates change and they do not create translation exposure. Examination of the table
indicates that under FASB 8 there is negative net exposure for the Mexican peso and the
euro, whereas under FASB 52 the net exposure for these currencies is positive. There is no
change in net exposure for the Canadian dollar and the Swiss franc. Consequently, if the euro
depreciates against the dollar from €1.1000/$1.00 to €1.1786/$1.00, as the text example
assumed, exposed assets will now fall in value by a smaller amount than exposed liabilities,
instead of vice versa. The associated reporting currency imbalance will be $239,415,
calculated as follows:
Reporting Currency Imbalance= - €3,949, 0000 €3, 949, 0000/
- =$239,415.
/€1.1786 / $1.00 - €1.1000 / $1.00
UNIT-3-AFTER 2.5 UNITS-IMPORTANT QUESTIONS

1. Discuss in detail the significance of theory of purchasing power parity in
determining the rate of exchange.
2. Give a light on various exchange rate regimes and Central Bank interventions in
exchange rates.
3. Differentiate among Economic, Operating and Transaction exposures in foreign
exchange market.
4. What type of exchange exposures is a multinational enterprise subjected to.
Syllabus
(Elective VI)
Text Books:
 International Financial Managemen, EphriamClark , Cengage.
References:
 International Financial Management, Machi Raju, HPH.
UNIT-4 Cross-border Investment Decisions | BALAJI INST OF IT AND MANAGEMENT 1

UNIT-4
CROSS-BORDER INVESTMENT DECISIONS
1.1 INTRODUCTION TO CAPITAL BUDGETTING

The decision to invest abroad takes a concrete share when a figure project is evaluated in
order to ascertain whether the implementation of the project is going to add to the value of
the investing company. The evaluation of the long term investment project is known as
capital budgeting. The technique of capital budgeting is almost similar between a domestic
company and an international appear in the case of international capital budgeting. These
complexities influence the computation of the cash flow and the required rate of return
A MNCs decision to invest abroad which is often based on strategic economic or behavioral
motives may be defensive or aggressive aiming at strengthening the company position.
Although the decision to invest abroad may be taken for non financial reasons it is imperative
that the underlying project is financially viable because the MNC will not otherwise service
in the long run. Capital budgeting also called investment appraisal and project evacuation is
used for evaluating the financial viability of a project.
1.1.1 CONCEPT OF INTERNATIONAL CAPITAL BUDGETING

Capital budgeting for multinational firms uses the same framework as domestic capital
budgeting. However multinational firms engaged in evaluating foreign projects face a number
of complexities many of which are not there in the domestic capital budgeting process.
International capital budgeting is more complicated than domestic capital budgeting because
of MNCs are typically large and capital intensive and because the process involves a larger
number of parameters and decision variables. In general international capital budgeting
involves a consideration of more risk than domestic capital budgeting. But like domestic
capital budgeting international capital budgeting involves the estimation of some measures or
criteria that indicate the feasibility or otherwise of a project such as the net present value.
However certain factors that are not considered in domestic capital budgeting should be taken
into account in international capital budgeting because of the special nature of FDI projects.
The estimate of NPV and similar criteria requires
a. The identification of the relevant expected cash flows to be used for the analysis of
the proposed project and

b. The determination of the proper discount rate for finding the present value of the cash
flow.
1.1.2 FACTORS AFFECTING INTERNATIONAL CAPITAL

BUDGETING
1. BLOCKED FUNDS: if funds are blocked or otherwise restricted can be utilized in a
foreign investment the capital cost of the investor may be below the local project
construction costs. From the investors perspective there is a gain from activated funds
equal to the difference between the face value of these funds and the present’s value
of funds if the next best thing is done with them. This gain should be deducted from
the capital cost of the project to find the cost from the investor perspective.
2. AMENITIES AND CONCESSIONS GRANTED BY HOST COUNTRIES: while
government do offer special financial aid or other kinds of help for certain domestic
projects it is very common for foreign investments to carry sort of assistance.
However with the APV technique we can add a separate term to include the subsidy.
3. DIFFERING RATES OF NATIONAL INFLATION: Long-term inflation rates
different rates of national inflation and their potential effect on competiveness most be
considered. Inflation will have the following effects on the value of the project.
a. It will impact the local operating cash flows both in terms of the prices of inputs
and outputs, and also in terms of the sales volume depending on the price
elasticity of the product.
b. It will impact the parents cash flow by affecting the foreign exchange rates and
c. It will affect the real cost of financing choices between foreign and domestic
sources of capital.
4. POLIRICAL RISK INVOLVED IN FOREIGN INVESTMENT: political risk this
is another factor that can significantly impact the viability and profitability of foreign
projects. This can affect the future cash flows of a project in that country in a variety
of ways. Political development may also affect the life and the terminals value of
foreign investment.
5. EXCHANGE RATE FLUCTUATIONS: foreign currency fluctuations another
added complexity in multinational capital budgeting is the significant of effect that
fluctuating exchange rates can have on the prospective cash flows generated by the

investment. From the parents perspective future cash flows abroad have value only in
terms of the exchange rate at the date of repatriation.
6. SUBSIDIZED FINANCING: in order to attract foreign investments in key sectors
the governments of developing economies generally provide support in the form of
subsidy. Likewise international agencies entrusted with the responsibility of
promoting cross border trade sometimes offer financing at below market rates.
7. LOST EXPORTS: another factor affecting the international capital budgeting is the
issue of lost exports arising out of engaging in a project abroad. Profits form lost
exports represent a reduction from the cash flows generated by foreign project for
each year of is duration. This download adjustment in cash flows may be total partial
or nil depending upon whether the project will replace projected exports or none of
them.
8. INTERNATIONAL DIVERSIFICATION BENEFITS: dispersal of investment in
a number of countries is likely to produce diversification benefits to the parent
company’s shareholders. However it would be difficult to quantify such benefits as
can be allocated to a particular project.
9. HOST GOVERNMENT INCENTIVES: if the most government offers incentives
they should be included in the capital budgeting decisions. For example if the host
government offers tax incentives or provides loans at subsidized rates the amount of
gain on this account should be added to the operating cash flows.
10. DIFFICULTY IN ESTIMATING TEMINAL VALUE OF FOREIGN
PROJECTS: terminal values while terminal values of long term projects are difficult
to estimate even in the domestic context they become far more difficult in the
multinational context due to the added complexity from some of the factors discussed
above. An added dimension is that potential acquires may have widely divergent
perspectives’ on their value of acquiring the terminal assets.
1.2 APPROACHES TO PROJECT EVALUATION

The fundamental goal of the financial manager is to maximize shareholders wealth.
Shareholders wealth is maximized when the firm out of a list of prospective investments
selects a combination of those projects that maximize the company’s value to its
shareholders. This selection process requires the financial manager to discount the project
cash flows at the firms weighted average cost of capital or the projects required rate of return

to determine the net present value. There are several methods through which the projects can
be evaluated in capital budgeting like payback period internal rate of return profitability
index but finance managers generally believe that the criteria of net present value is the most
appropriate in capital budgeting since it will help the company to select only those
investments which maximize the wealth of the shareholders. The methods of capital of capital
budgeting is as follows.
Approaches to project evaluation
Discounted cash flow analysis (DCF) adjusted present value approach (APV)
Net present value
Internet rate of return
I.DISCOUNTED CASH FLOW ANALYSIS (DCF)

Discounted cash flow technique involves the use of the time value of money principle to
project evaluation. The two most widely used criteria of the discounted cash flow technique
are the net present value (NPV) and the internal rate of return (IRR). Both the techniques
discount the projects cash flow at an appropriate discount rate. The results are then used to
evaluate the projects based on two acceptance/rejection criteria developed by management.
1. NET PRESENT VALUE (NPV)
NPV is the most popular method and is defined as the present value of future cash
flows discounted at an appropriate rate minus the initial net cash outlay for the
projects. The discount rate used here is known as the cost of capital. The decision
criterion is to accept projects with a positive NPV and reject projects which have a
negative NPV.
The NPV can be defined as follows.
NPV = I0 + ∑n CFt
t=1 (I+k) t
Where,
I0 = initial cash investment
CFt= expected after – tax cash flows in year t.
K= weighted average cost of capital
n= life span of the project.

The NPV of a project is the present value of all cash inflows including those at the
end of the projects life minus the present value of all cash outflows.
The decision criteria is to accept a project if NPV>0 and to reject if NPV <0
For example, to set the stage let us assume that you are trying to decide whether to
undertake one of two projects. Project A involves buying expensive machinery that
produces a better product at a lower cost. The machines for project A cost 1.000 and if
purchased your anticipate that the project with produce cash flows of 500 per year for
the next five years. Projects B’s machines are cheaper costing 800 but they produce
smaller annual cash flows of 420 per for the next five years. We will assume that the
correct discount rate is 12%
Suppose we reply the NPC criterion to project A and B
year Two projects
Project A Project B
0 -1,00 -800
1 500 420
2 500 420
3 500 420
4 500 420
5 500 420
NPV 802.39 714.01
Discount rate – 12%

Both projects are worthwhile since each has a positive NPV. If we have to choose between
the projects then project A is preferred to project B because it has the higher NPV.
Example, a project involves initial investment for 5, 00,000. The net cash inflow during the
first second and the third year is expected respectively 3, 00,000 and 2, 000, 00.At the end of
the year the scrap value is indicated at 1,000,000. The risk-adjusted discount rate is 10%.
Calculate NPV.
Solution: = t1+t2+t3 – I0
3,000,000 3,500,000 2,000,000+1,000,000
= - 5,000,000
1.10 (1.10)2 (1.10)3
= 2,873,778

Project would be accepted because NPV is positive.

2. INTERNATIONAL RATE OF RETURN (IRR): IRR is calculated by solving for r
in the following equation.
CFt
∑n t=1 - I0=0
(I+r)
Where r is the internal rate of return of the project

The IRR method finds the discount rate which equates the present value of the cash flows
generated by the project with the initial investment or the rate which would equate the present
value of all cash flows to zero.
To illustrate this technique the study assumes a firm is considering investing in a project that
has the following cash flows.
Year Expected after-tax net cash flows, CF |$
(t)
0 (5.000)
1 800
2 900
3 1.500
4 1.200
5 3.200
CF = (5,000) represents the net cost or initial investment that is required to purchase the asset
the parentheses indicate that the cash flows is negative.
The IRR for above project is.
IRR = 12.5%
A project is acceptable using IRR if its IRR is greater than the firms required rate of return
i.e. IRR > r. remembers that the IRR represents the rate of return the firm will earn if the
project is purchased. So simply stated the project must earn a return that is greater than the
cost of the funds used to purchase it. In the example IRR =12.5% which is greater than
r=12%, so the project is acceptable.

3.ADJUSTAED PRESENT VALUE APPROACH (APV)

The APV approach is a value additively approach to capital budgeting i.e. each cash flow as a
source of value is considered individually. Also in the APV approach each cash flow is
discounted at a rate of discount consistent with the risk inherent in that cash flow. In equation
form the APV approach can be written as.
APV
Where the term I0 = present value of investment outlay.
Xt
= present value of operating cash flows
(1+k*) t
Tt
= present value of interest tax shields
(1+id) t
St
= present value of interest subsidies
(1+id) t
The various symbols denote

Tt = tax savings in year t due to financial mix adopted
St = before tax value of interest subsidies (on the home currency) in year t due to project
specific financing.
Id = before tax cost of dollar debt (home currency)
Example, A project costing 50 million is expected to generate after tax cash flows of 10
million a year forever. Risk free rate is 3% asset beta is 1.5 required return on market is 12%
cost of debt is 8% annual interest costs related to project are 2 million and tax rate is 40%.
Calculated the adjusted present value of the project.
Solution
Adjusted present = present value of cash flows + present value of value tax savings.
We need to find unearned cost of equity which is 3% + 1.5* (12% - 3%) = 16.5%. using this
rate other present value of cash flows = 10 million/0.165=60.61 million. Initial investment is

50 million no net present value of future cash flows using unearned cost of equity is 10.61
million (60.61 million + 50 million.)
Present value of tax savings = 2 million 0.4/0.08 =10 million adjusted
Present = present value of cash flows + present value of tax savings
= 10.61 million + 10 million = 20.61 million.
Decision rule
The decision rule for adjusted present value is the same as net present value – accept positive
APV projects and reject negative APV projects. The project discussed in the example has an
APV of 20.61 which is positive hence the company should undertake the project.
1.3 RISKS IN CROSS-BORDER INVESTMENT DECISIONS

Following are the various types of risks cross-border investment decisions.
Risk in cross border investment decisions
Political risk currency risk inflation risk/purchasing power

risk.
Macro political risk transaction risk/exposure

Micro political risk translation risk/exposure
Economic or operating risk/exposure
I. POLITICAL RISK
Political risk is defined as the whole of decisions conditions or events of political nature able
to trigger directly or indirectly a financial loss or a physical damage for an investment
project. In other words this is the risk of incurring losses when investing in a foreign country
as a result of changes in the country political structure or policies such as tax laws tariffs
expropriation of assets restrictions in repatriation of profits or episodes of political violence.
Following are the types of political risk.
1. Macro political risk: macro risk is a type of political risk company’s face when
conducting operations in foreign countries. Macro risk refers to adverse actions that
will affect firms such as expropriation or insurrection. A macro political risk affects
all international business in the same way. Ex-appropriation the seizure of assets by

government with little or no compensation to the owner is a macro political risk.

Communist government in Eastern Europe and china expropriated private firms
following World War 2
2. Micro political risk: a micro political risk affects specific foreign business. Micro
political risks include industry regulations taxes kidnapping and terrorist threats.
India’s decision in 1975 to reduce foreign equity to 40% and Peru’s decision to
nationalize its copper mines are example is examples of micro political risks. The US
decisions to tax textile imports is another.
II.CURRENCY RISK
Foreign exchange risk is the possibility of a gain or loss to a firm that occurs due to
unanticipated changes in exchange rate. For example if an Indian firm imports gods and pays
in foreign currency its outflow is in dollar thus it is exposed to foreign exchange risk. If the
value of the foreign currency rises the Indian firm has to pay more domestic currency to get
the required amount of foreign currency.
There are mainly following types of currency risk.
1. Transaction risk/exposure: transaction exposure can be defined as the sensitivity of
realize domestic currency values of the firms contractual cash flows denominated in
foreign currencies to unexpected exchange rate changes. In other words this exposure
refers to the extent to which the future value of firm’s domestic cash flow is affected
by exchange rate fluctuations.
2. Translation risk/exposure: translation exposure relates to that change in accounting
income and balance sheet statements caused by the changes in exchange rates. In
other words translation exposure results from the need to translate foreign currency
assets or liabilities into the local currency at the time of finalizing accounts.
3. Economic or operating risk/exposure: operating exposure is a relatively broader
conception of foreign exchange exposure. The prime feature of operating exposure is
that it is essentially a long term multi transaction oriented way of looking at the
foreign exchange exposure of a firm involved in international business. The standard
definition of economic exposure is the degree to which fluctuations in exchange rates
will affect the net present value of the future cash flows of a company.
III.INFLATION RISK/PURCHASING POWER RISK

In economics inflation is a rise in the general level of prices of goods and services in an
economy over a period of time. When the price level raises each unit of currency buyers

fewer goods and services consequently inflation is also erosion in the purchasing power of
money a loss of real value in the internal medium of exchange and unit of account in the
economy. A chief measure of price inflation is the inflating rate the annualized percentages
change in a general price index over time.
Effects of purchasing power risk
General effect Negative effect
Positive effect
1. General effect: an increase in the general of prices implies a decrease in the
purchasing power of the currency. That is when the general level of prices raises each
monetary unit buyers fewer goods and services. The effect of inflation is not
distributed evenly in the economy and as a consequence there are hidden costs to
some and benefits to others from this decrease in the purchasing power of money.
Increases in payments to working and pensioners often lag behind inflation especially
for those with fixed payments.
2. Negative effect: high or unpredictable inflating rates are regarded as harmful to an
overall economy. They add inefficiencies in the market and make it different for
companies to budget or plan long term. And inflation can impose hidden tax increase
as inflated earnings push tax payers into higher income tax rates unless the tax
brackets are indexed to inflation.
3. Positive effect: debtors who have debts with a fixed nominal rate of interest will see a
reduction in the real interest rate as the inflation rate rises. The real interest on a loan
is the nominal rate minus the inflation rate (R=n-i)
For example, if you take a loan where the stated interest rate is 6% and the inflation
rate is at 3% the real interest rate that you are paying for the loan is 3%. It would also
hold true that if you had a loan at a fixed interest rate of 6% and the inflation rate
jumped to 20% you would have a real interest rate of -14%. Banks and other lenders
adjust for this inflation risk either by including an inflation premium in the costs of
lending the money by creating a higher initial stated interest rate or by setting the
interest at a variable rate.
1.3.1 INCORPORATING RISK IN INVESTMENT DECISIONS

Incorporating risk into the investment decision has fundamentally transformed the way
investments are made. Deferent technologies have different risk profiles thus factoring in risk
as a real cost element ultimately alters investment choices.

Risk analyzing is a useful tool in extending the depth of project appraisal and enhancing the
investment decision. Risk incorporating in the investment decision is important to such a
degree for the safeguarding a firm from becoming bankrupt and thus dysfunctional in future.
Where risk is not accounted for in the investment decision the firm may reach a position
where it is operating on no profit at all or in losses and therefore cannot support its activities
financially.
1.3.2 IMPORTANCE OF INCORPORATING RISK IN INVESTMENT DECISION

The importance of risk analyzing and incorporation can therefore be stated as below based on
the criteria used to analyze its magnitude for a particular project or firm.
1. It enhances decision making on marginal projects. A project whose single value NPV
is small may still be accepted flowing risk analyzing on the grounds that its overall
chances for yielding a satisfactory loss. Likewise a marginally positive project could
be rejected on the basis of being excessively risky or one with a lower NPV may be
preferred to another with a higher NPV because of a better risk/return profile.
2. It screens new project ideas and aids the identification of investment opportunities.
Very often a new project concept is formulated that needs to be developed into
business opportunity. A substantial investment of human and financial resources is
not incurred until the potential investors are satisfied that the preliminary risk return
profile of the project seems to be acceptable.
3. It highlights’ project areas that need further investigation and guides the collection of
information. Risk analysis can contain the costs of investigation and fieldwork project
at improving the accuracy of a forecast relating to particular project variables.
4. It also the reformulation of projects to suit the attitude and requirements of the
investor. A project may be re-designed to take account for the particular risk
predispositions of the investor.
5. It induces the careful re examination of the single value estimates in the deterministic
appraisal. The need to define and support explicit assumptions in the applications of
risk analysis therefore forces the analysis to also critically review and revise the base
case scenario.
6. It helps to reduce project evaluation bias through eliminating the need to resort to
conservative estimates as a means of reflecting the analysis risk expectations and
predispositions.

7. It facilitates the thorough use of experts who usually prefer to express their expertise
in terms of a probability distribution rather than having to compress and
their opinion in a single value.
8. It bridges the communication gap between the analyst and the decision maker. The
decision maker in turn welcomes his involvements in the risk analysis process as he
recognizes it do be an important management decision role which also improves his/
her overall understanding of the appraisal method.
9. It supplies a framework for evaluating protects result estimates. Unlike the prediction
of deterministic which is almost always refuted by the actual project result the
probabilities approach is a methodology which facilitates empirical testing.
10. It provides the necessary information base to facilitate a more efficient allocation and
management of risk among various parties involved in a project. Moreover it enables
the testing of possible contractual arrangements for the sale of the products or the
purchase of project inputs between various parties until a satisfactory formulation of
the project is achieved.
11. It makes possible the identification and measurement of explicit liquidity and
repayment problems in terms of time and probability that these may occur during the
life of the project. This becomes possible if the net cash flow figures or other
indicators of solvency included in a project appraisal model are monitored during the
simulation process.

Case study:1
To set the stage let us assume that you are trying to decide whether to undertake one of two
projects. Project A involves buying expensive machinery that produces a better product at a
lower cost. The machines for project A cost 1.000 and if purchased your anticipate that the
project with produce cash flows of 500 per year for the next five years. Projects B’s machines
are cheaper costing 800 but they produce smaller annual cash flows of 420 per for the next
five years. We will assume that the correct discount rate is 12%
Suppose we reply the NPC criterion to project A and B
year Two projects
Project A Project B
0 -1,00 -800
1 500 420
2 500 420
3 500 420
4 500 420
5 500 420
NPV 802.39 714.01
Discount rate – 12%

Both projects are worthwhile since each has a positive NPV. If we have to choose between
the projects then project A is preferred to project B because it has the higher NPV.
Example, a project involves initial investment for 5, 00,000. The net cash inflow during the
first second and the third year is expected respectively 3, 00,000 and 2, 000, 00.At the end of
the year the scrap value is indicated at 1,000,000. The risk-adjusted discount rate is 10%.
Calculate NPV.
Solution: = t1+t2+t3 – I0
3,000,000 3,500,000 2,000,000+1,000,000
= - 5,000,000
1.10 (1.10)2 (1.10)3
= 2,873,778
Project would be accepted because NPV is positive.

UNIT-4-IMPORTANT QUESTIONS
1. What is capital budgeting? Discuss various methods in capital budgeting for a
project evaluation.
2. Explain the methods under non-discounting criteria with their advantages and
disadvantages which are used to evaluate the financial viability of a project.
3. Briefly explain about NPV and IRR methods
4. Give a note on investment decisions, risks and opportunities in investment decisions.
5. What risks are associated with cross-border investment decisions – Give an example
for risks involved in a project evaluation?
6. Enumerate the various problems and issues in foreign investment analysis.

Syllabus
(Elective VI)
Text Books:

 International Financial Managemen, EphriamClark ,Cengage.
References:

 International Financial Management, MachiRaju, HPH.
UNIT-5 Financing Decisions of MNC`s & Working Capital Management | BALAJI INST OF IT AND MANAGEMENT 1
UNIT-5
FINANCING DECISIONS OF MNC`S & WORKING
CAPITAL MANAGEMENT
1.1 INTRODUCTIONS TO FINANCING DECISIONS OF MNC’S

Financial decisions in the international field are complex and risky. Exchange rate
flections different accounting systems and government intervention often complicate
financial planners in making objective financing and investment choices.
As technology and computers play a key role in financial decisions, the need fo4r fast
information turnaround becomes a necessity.
Thus to complete in a complex global financial market international companies need
to invest in information system’s international companies which have more options
for acquiring funds than domestic companies can borrow form financial institutions in
the countries where they have operations.
Because of the number of choices available for acquiring funds information becomes
crucial in selecting the most cost efficient funding source.
The many options available to international companies also force them to obtain the
most current information to minimize their coat of capital and remain efficient in the
management of their funds.
Some of the factors that affect financial decisions are unpredictable and may undergo
dynamic shifts.
A case in point is the recent exchange rate volatility observed in Latin America Russia
and Southeast Asian countries.
Exchange rate fluctuations along with a rise in inflation increase both the cost and the
risk associated with financial decisions.
1.1.1 INTERNATIONAL COST OF CAPITAL

Cost of capital is the expected rat of retune that the market requires in order to attract funds to
a particular investment. In economic terms the cost of capital for a particular investment is an
opportunity cost the cost of forgoing the next best alternative invest5ment. In this sense it
relates to the economic principle of substitution i.e. an investor will not invest in a particular
asset if there is a more attractive substitute.
1.2 INTRODUCTION TO CAPITAL STRUCTURE

A MNC’s capital structure decision involves the choice of debt versus equity financing
within all of its subsidiaries. Thus its overall capital structure is essentially a combination of
all of its subsidiaries capital structures. MNC’s recognize the tradeoff between using debt and
using equity for financing their operations. The advantages of using debt as opposed to equity
vary with corporate characteristics specific to each MNC and specific to the countries where
the MNC has established subsidiaries.
1.2.1 SITUATIONS DETERMINING MULTINATIONAL FIRMS

CAPITAL STRUCTURE
The MNCs operate in economies where diverse regulations exist for the mobilization of
resources by companies. These regulations may be discriminatory for MNCs. Therefore the
question of target capital structure has to be analyzed in the light of these regulations. There
may be following types of situations existing in various economies which are the important
determines of capital structure of MNC’S
 When a country does not allow the MNCs having headquarters elsewhere to list their
stock on its local stock exchange under these conditions MNCs would decide to
borrow funds through debt instruments such as bonds and so it may deviate from the
target capital structure.
 In the second situation when the country allows the listing of stock at the local stock
exchange then in heat case the nature of the project will decide the financing pattern.
If the project is not generating net cash flows for some years say five years or more
then the equity financing is more appropriate. Because of in the case one can avoid
net cash out flows by not paying dividends in the initial years of operation.
 If a country is facing political turmoil the use of local banks will be more appropriate
because these banks may be able to prevent MNC’s operations in that country being
affected by the political conditions.
1.2.2 FACTORS AFFECTING MNCs CAPITAL STRUCTURES

1. STABILITY OF MNCs CASH FLOWS: MNCs with more stable cash flows can
handle more debt because there is constant stream of cash inflows to cover periodic
interest payments. Conversely MNCs with erratic cash flows may prefer less debt
because they are not assured of generating enough cash in each period to make largest
interest payments on debt.
2. MNCs CREDIT RISK: MNCs that have lower credit risk have more access to credit.
Any factors that influence credit risk can affect MNCs choice of using debt versus
equity. For example if a MNCs management is thought to being strong and competent
the MNCs credit risk may be low allowing for easier access to debt.
3. MNCs ACCESS TO RETAINED EARNINGS: highly profitable MNCs may be
able to finance most of their investment with retained earnings and therefore use an
equity intensive capital structure. Conversely MNCs that have levels of retained
earnings may rely on debt financing.
4. MNCs GUARANTEES ON DEBT: if the parent backs the debt of its subsidiary the
subsidiary borrowing capacity might be increased. Therefore the subsidiary might
need less equity financing. At the same time however the parents borrowing capacity
might be reduced as creditors will be less willing to provide funds to the parent if
those funds might be needed to rescue the subsidiary.
5. MNCs AGENCY PROBLEMS: if a subsidiary in a foreign country cannot easily be
monitored by investors from the parents country agency costs are higher. To
maximize the firm’s stock price the parent may induce the subsidiary to issue stock
rather than debt in the local market so that its managers there will be monitored.
1.2.3 OPTIMAL FINANCIAL/CAPITAL STRUCTURE OF MNC

The optimal financial structure of multinational firm takes into account the following.
 Availability of capital which may affect debt rates.
 Can financial risk of a multinational be reduced through international diversification?
 What should be the financial structure of foreign subsidiary?
There is no conclusive opinion whether an optimal financial structure exists for a firm. There
is a compromise between the traditional school and th5e Modigliani and miller school of
thought which states that when taxes and bankruptcy costs are considered firm has an optimal
capital structure determined by that particular mi of debt and equity which minimizes the
firms cost of capital for a given level of business risk. If the business risk of existing projects
the optimal mix of debt and equity would change to recognize tradeoffs between business and
financial risk. The figure 5.3 shows how the cost of capital varies with the amount of debt
employed.
The debt ratio is measured along horizontal axis and the cost of capital along vertical axis.
Key is the curve describing cost of equity kd is the curve describing behavior of cost of debt
and kiwi represents weighted cost of capital. The 5.3 shows how the cost of capital varies
with the amount of debt employed. As the debt ratio increases the overall cost of capital
decreases because the heavier weight of low cost dept (kp 1-) to high cost of equity.
The low cost of debt usually is because as debt deductibility of interest as shown by k d (1-).
Overall costs of capital continue to decline as debt. Ratio increases until financial; risk
becomes serious that investors and management perceive a real danger of insolvency. This
result in sharp increase in cost of debt. This results in U-shape. Cost of capital curve as
shown by Ke. The optimal capital structure is given by the lowest point of the marginal cost
of capital curve. This point gives the optimum debt ratio associated with the lowest cost of
capital. In the figure 5.3 the optimum debt ratio is given by DR* and the associated lowest
cost of capital by Kd.
3. INTRODUCTION TO WORKING CAPITAL MANAGEMNET

Working capital management deals with stock and flow perspective of working capital assets.
In flow perspective we try to study the positioning of liquid funds. In stock perspective we try
to determine appropriate levels and short term debt. Thus in the working capital management
we deal with.
1. Cash management
2. Management of receivables and

3. Inventory management.
3.1 CASH MANAGEMENT

Cash management means optimization of cash flows and the investment of excess cash. Since
firms operate in multinational financial environment therefore cash management is very
complex because of different legal environment prevailing in various countries in respect of
cross border cash transfer. In addition the exchange rate fluctuations affect the value of these
cross border transfer
3.1.1 OBJECTIVES OF INTERNATIONAL CASH MANAGEMENT
1. Minimize the currency exposure risk
2. Minimize the country and political risk.
3. Minimize the overall cash requirement of the c company as a hole without disturbing
the smooth operations of the subsidiary or its affiliate.
4. Minimize the transaction costs.
5. Full benefits of economics of scale as well as the benefits of superior knowledge.
Long term
Source of Parent projects&
investments
Debt.
Loans loans interest/fess & royalties investments
Interest cash sales return

Accounts
Subsidiary Accounts
receivable
payables
Payments payments
Cash flows Production cash purchases

Raw material
Investments supplies
Figure: cash flows of a subsidiary
After accounting for inflows and outflows the subsidiary would find itself with either excess
cash or deficient cash. Thus it will need either to invest or to borrow cash periodically. If the
cash is in excess it has to be invested. Investment market has to be determined. Foreign

exchange fluctuations make the return uncertain.
3.1.2 IMPORTANT OF INTERNATIONAL CASH MANAGEMENT

Following are the importance of international cash management
1. Increased treasury efficiency.
2. Achievement of economics of scale in the treasury function (by improving the group
overall credit standing through a reduction in its exposure to the banking system and
thereby obtaining the test possible commercial terms for all members transactions)
3. Reduction of banking charges.
4. Management of the volatility of group liquid cash resources on a daily monthly or
annual basis.
5. Maximization of interest returns/minimization of interest expends by offsetting cash
shortages and surpluses within the pooling system (thus avoid a banking spread)
3.1.3 PROBLEMS OF INTERNATIONAL CASH MANAGEMENT

The problems of international cash management are as follows.
1. PROBLEMS IN RECOGNIZING THE PRINCIPLE AND PRACTICES OF
OTHER COUNTRIES: Thought the principles of domestic and international cash
management are the same international cash management is wider in scope and is
more complicated because it needs to recognize the principle and practices of other
borders a number of factors constrains the working of the money manager.
2. MULTIPLE TAX JURISDICTIONS AND CURRENCIES AND TH6E
RELATIVE ABSENCE OF INTERNATIONALLY INTEGRATED
INTERCHANGE FACILITIES: other important complicating factors in
international cash management include multiplex tax jurisdictions and currencies and
the relative absence of internationally integrated interchange the relative absence of
internationally integrated interchange facilities as are available domestically in the
unit states and in other western nations for moving cash swiftly from one location to
another. Thus in spite of various restrictions and complicating factors MNCs has
significant opportunities for improving their global cash management.
3. IMPROPER REPORTING SYSTEM: international cash management also needs a
god reporting system. In fact a good reporting system is a crucial aspect of global
determination of cash needs. However there are other reasons why foreign affiliates
are often reluctant to provide good quality information to the parent which are as
follows.
a. language problems and local resistance: language problems are obvious and
local resistance is often cultural in the sense that the subsidiary many times
perceives the requires or information as a threat to its independence
b. Technical problems: technical problems arise in cross border data flows. For
example, developing counties may sometimes face a problem of lack of god
communications infrastructures.
c. Government regulations: Government regulations may range from simple rules
about transferring information to rules about actually transferring funds.
4. COMPANY RELATED CHARACTERISTICS: in some cases optimizing cash
flow can become complicated due characteristics of the MNC. If one of the
subsidiaries delays payments to other subsidiaries for supplies received the other
subsidiaries may be forced to borrow until the payments arrive. A centralized
approach that monitors all inter subsidiary payments should be able to minimize such
problems.
5. GOVERNMENT RESTRICTIONS: the existence of government restrictions can
disrupt a cash flows optimizing policy. Some governments prohibit the use of a
netting system. In addition some countries periodically prevent cash from leaving the
country thereby preventing net payments from being made. These problems can arise
even for MNCs that do not experience any company related problems. Countries in
lain America commonly impose restrictions that affect an MNCs cash flows.
4.1 MANAGEMENT OF RECEIVABLES

Accounts receivables are simply extensions of credit to the firm’s customers allowing
them a reasonable period of time in which to pay for the goods. Most firm treat account
receivables as a marketing tool to promote sales and profits. The receivables constitute a
significant portion of the working capital and s an important element of it. The
receivables emerge whenever goods are sold on credit and payments area defined by
customers. As against the ordinary type of loan the trade credit in the forms of receivables
is not profit making service but an inducement or facility to the buyer customer of the
firm.
According to HAMPTON receivables area asset accounts representing amount owned to

firm as a result of sale of goods or service in ordinary course of business.
Thus receivable are forms of investment in any enterprise manufactures and selling goods
on credit basis large sums of funds are tied up in trade debtors. Hence great deal of
careful analysis and proper management is exercised for effect and efficient management
of receivables to ensure a positive contribution towards increase in turnover and profits.
4.2 CONCEPT OF INTERNATIONAL RECEIVABLES

MANAGEMENT
Firms grant trade credit to customers both domestically and international because they
accept the investment in receivables to be profitable either by expanding sales volume or
by retaining sales that otherwise would be lost to competitors. Some companies also earn
a profit on the financing charges they levy on credit sales.
The need to scrutinize credit terms is particularly important in countries experiencing
rapid rates of inflation. The incentive for customers to defer payment liquidating their
debts with less valuable money in the future is great.
Furthermore credit standards abroad are often mor4e relaxed than in the home market
especially in countries lacking alternative sources of credit for small customers. To
remain completive MNCs may feel compelled to loosen their own credit standards.
Finally the compensation system in many companies tends to reward higher sales more
than it penalized an increased investment in accounts receivable.
To effort to better manage receivables overseas will not get are if finance and marketing
don’t co-ordinate their efforts. In many companies finance and marketing work at rose’s
purposes. Marketing thinks about selling and finance thinks about speeding up cash
flows. One way to ease the tensions between finance and marketing is to educate the sales
force on how credit and collection affect company profits. Another way is to tie bonuses
for salespeople to collected sales or to adjust sales bonuses for the interest coasty of credit
sales.
Credit sales lead to the emergent of account receivables. The management of receivable
focuses on two important facts.
 The cost of the credit sale should into exceed the benefit from the credit sales.
 Whether the sale is confined within different units of the firm or it is an inter firm
sale.
4.3 FACTOS CONSIDERED IN RECEIVABLES MANAGEMENT

Once credit has been granted to a customer responsibility for the billing and collection from
the customer usually passes to the accounting department. The ability of the accounting staff
to reliably invoice and collect in a timely manner has a major impact on the amount o
working capital invested in accounts receivable. The treasure does not have direct control
over these functions but should be aware of the following factors which can seriously extend
customer payment interval unless careful managed.
1. INVOICING DELAY: invoices should be issued immediately after the related goods
or service has been provided. If the accounting staff is billing only at stated intervals
then receivable are being extended just because of an internal accounting work policy.
2. INVOICING ERRORS: if invoices are being continually re issued due to errors then
additional controls are needed to increases the accuracy of initial invoices. This can be
a serious issue since invoicing errors are usually found by the customer which may be
several weeks after they were originally issued
3. INVOICE TRANSMISSION: there is a multi day mailing delay when invoices are
delivered through the postal service. Instead the accounting system should be
configured to issue invoices by email or electronic data interchange or the accounting
staff should manually e mail invoices.
4. LACK OF RECEIPT: if cheques are received at the company at the company
location and then sent to the bank this creates this creates a delay of potentially
several days before the cheques are processed internally deposited and then clear the
bank. Instead customers should send all cheques to a lock box so that checks are
deposited in the minimum amount of time thereby increasing the availability of funds.
5. COLLECTION MANAGEMENT: there should be a well trained collection staff
that assign responsibility for specific accounts focuses on the largest overdue accounts
balances first begins talking to customers immediately after payment of due dates are
reached and is supported by collection software systems. The group should use a
broad array of collection techniques including dunning letters on site visits attorney
letters payment commitment letters credit holds and collection agencies..
6. INTERNAL ERROR FOLLOW-UP: if payments are being delayed due to service
problems by the company or product flaws the collection staff should have a tracking
system in place that stores the details of these problems and the accounting manager
should follows up with managers elsewhere in the company to have them resolved.
The treasure can periodically inquire of the controller if these collection issues are being
managed properly. Another approach is to obtain an accounts receivable aging report and
determine the reasons why overdue receivable have not yet been paid. At a minimum the
treasure should track the days receivables outstanding on a timeline ad follow up with the
controller or chief financial officer if the metric increases over time.
5. INTERNATIONAL INVENTORY MANAGEMENT

Inventory accounts for the biggest share of the current assets. At the same time it is th6e
least liquid asset. This is why its management deserves sufficient care. To some extent the
management of inventory in an internationally firm is similar as in case of a domestic
firm. But some additional factors are important in the case of an international firm. They
are,
1. An international firm has to maintain inventory simultaneously in different countries.
2. Transit time is quite longer
3. Customer procedures are quite lengthy
4. Political risk along with exchange rate risk is there
Based on these problems there are some deviations from the simple norm of inventory
management which is practiced in a domestic firm.
5.1 PRODUCTION LOCATION AND INVENTORY CONTROL

Now a day’s companies are producing overseas to reap the advantage of low labor costs tax
holidays low interest loans and other subsidies provided by governments attracting foreign
direct investment. These strategy advantages will provide competitive edge only if close
contact with domestic customers is maintained. The result is larger costs on foreign
operations in the form of larger inventory costs and the costs of disruptions in supply.
Additional interest cost incurred on larger inventory holding is calculated as follows.
Added interest expense = opportunity cost added time costs of funds in transit per unit.
For example, an American company is producing in India and the transit time first India to
America is five weeks excluding work in process and inventory than would parts
manufactured domestically.
Added interest expense = 0.15 (5/52) 10 = 0.1442
5.2 ADVANCE INVENTORY PURCHASES

In many developing countries forward contracts for foreign currency are limited in
availability or are nonexistent. In addition restrictions often preclude free remittance making
it difficult if not impossible to convert excess funds into a hard currency. The trade of
involves owing goods for which local currency price may be increased thereby maintaining
the dollar value of the asset even if devaluation occurs versus forgoing the return on local
money market investments.
5.3 STOCKPILLING
Possessing a bigger stock than the EOQ which is often known as stockpiling because of long
delivery lead times the often limited availability of transport for economically sized
shipments and currency restrictions the problem of supply failure is of particular importance
for any firm that is dependent on foreign sources.
An adequate inventory gives a firm a certain amount of flexibility in its purchase programme.
However sometimes additional purchases may be made to take advantage of quantity
discounts. The concept of economic order quantity for a particular item of inventory can e
handy in this respect. The data needed are forecasted usage of the item ordering cost which is
supposed to be constant and the carrying cost.
2A OC
The formula is EOQ =
CC UC
Where,
A – Annual requirements in units
OC – ordering cost per order
CC – carrying cost (%)
UC – unit cost ()
FACTORS AFFECTING MANAGEMENT OF INVENTORY

Operations in inflationary devaluation prone economics sometimes force management to
modify its normal approach to inventory management. In some cases management may
choose to maintain inventory and reorder levels far in excess of what would be called for in
an economic order quantity model
1. ANTICIPATING DEVALUATION: under conditions in which local currency

devaluation is likely management must decide whether to build up inventory of
imported items in anticipation of the expected devaluation. This freeze would prevent
the imparted inventory from being sold for an appropriate mark up above its now
higher replacement value. Still worse the devaluation may not occur as anticipated
living management holding an excessive level of inventory until it can be worked
down.
2. ANTICIPATING PRICE FREEZES: to circumvent an anticipated price freeze
management can establish the local currency price of an imported item a high level
with actual sales being made at a discount from this posted price. In any event it
provides no protection against competitive price squeezes. An alternative is to sell at
the posted price but increase selling promotion or other marketing mix activities
which can letter be reduced.
3. FREE TRADE ZONES AND FREE INDUSTRIAL ZONES: a free trade zone
combines the old idea of duty ports with legislation that reduces or eliminates customs
duties to retails or manufacturers who structure their operations to benefit from the
technique. Income taxes may also be reduced for operations in a free trade zone. The
old duty free ports were typically in the dock area of major seaports, where goods
were held duty free until the owner was ready to deliver them within the country.
Modern free trade zones by compensation are often located away from a port area.
For example the Italian firm of Olivetti has such a zone in Harrisburg Pennsylvania.
Free trade zones functions in several ways. There may be a place a offload
merchandise for subsequent sale within the country when the zone is located. An
example is a storage area for imported. Toyota automobiles in the port of loss angels.
A third type of zone is a fully fledged manufacturing center with major portion of its
output re exported out of the country. Two examples are Penang. Malaysia and
Madagascar where such zones are officially designed free industrial zones. In Penang
companies as diverse as dell computers national semiconductor. Sony borsch and trine
air conditioning manufacturing final products.
CASE STUDY:1
Jason owns a fish shop where he sells an exotic variety of tuna fish which he imports
from Japan.
Jason refrigerates the fish in a cold storage facility near his shop that charges him a
fixed annual fee of $1000 and variable charge of $5 per day for each fish container that
is stored.
Every morning, Jason brings fish from the cold storage to his shop for sale. Jason
estimates that he incurs $10,000 electricity cost each year on refrigerating the fish inside
his own shop.
Jason incurs the following ordering costs:
Delivery charges of $10,000 per delivery
Import duties of $300 per carton
Custom fees of $200 per order
Import license fee of $150 per annum
Jason currently imports fish by placing one order of 20 cartons every month. Each
carton costs $2,000.
Jason is wondering if he can save inventory costs by adopting EOQ model.
a) Calculate the current annual total inventory costs
b) Calculate the economic order quantity
c) Calculate the annual total inventory costs if EOQ is used
UNIT-5-IMPORTANT QUESTIONS
1. Define cost of capital. Explain about determination of cost of preference share and
equity share capitals.
2. Explain the objectives, advantages, importance and limitations of cash management.
3. Briefly explain the capital structure policies in practice in India with some examples.
4. What are the components of short term assets? Explain the importance of
international inventory management.
5. What is capital structure? Distinguish between international capital structure and
domestic capital structure.
Prepaid by S.Riyaz basha

Associate professor
Balaji institute of IT and management

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BALAJI INSTITUTE OF

I.T AND MANAGEMENT

Name of the Faculty: SHAIK RIYAZ BASHA

Units covered: half of 3rd, 4th & 5th UNITS

1. Introduction to International Financial management: IFM meaning, Difference

 International Financial Management, V.K.Bhalla ,S.Chand

 International Finance , Prakash .G.Apte, TMH

1.3 MEASUREMENT OF ECONOMIC/OPERATING EXPOSURE

Figure:1 channels of operating exposure

1.3.1 MANAGEMENT OF FOREIGN EXCHANGE EXPOSURE

Management of transaction exposure Management of translation exposure

1.4 MANAGEMENT OF TRANSACTION EXPOSURE

Natural hedges contractual hedges

Netting forward market hedging

UNIT-3-AFTER 2.5 UNITS-IMPORTANT QUESTIONS

UNIT-4 Cross-border Investment Decisions | BALAJI INST OF IT AND MANAGEMENT 1

1.1 INTRODUCTION TO CAPITAL BUDGETTING

1.1.1 CONCEPT OF INTERNATIONAL CAPITAL BUDGETING

UNIT-4 Cross-border Investment Decisions | BALAJI INST OF IT AND MANAGEMENT 2

1.1.2 FACTORS AFFECTING INTERNATIONAL CAPITAL

UNIT-4 Cross-border Investment Decisions | BALAJI INST OF IT AND MANAGEMENT 3

1.2 APPROACHES TO PROJECT EVALUATION

UNIT-4 Cross-border Investment Decisions | BALAJI INST OF IT AND MANAGEMENT 4

I.DISCOUNTED CASH FLOW ANALYSIS (DCF)

UNIT-4 Cross-border Investment Decisions | BALAJI INST OF IT AND MANAGEMENT 5

Discount rate – 12%

UNIT-4 Cross-border Investment Decisions | BALAJI INST OF IT AND MANAGEMENT 6

Project would be accepted because NPV is positive.

Where r is the internal rate of return of the project

UNIT-4 Cross-border Investment Decisions | BALAJI INST OF IT AND MANAGEMENT 7

3.ADJUSTAED PRESENT VALUE APPROACH (APV)

The various symbols denote

UNIT-4 Cross-border Investment Decisions | BALAJI INST OF IT AND MANAGEMENT 8

1.3 RISKS IN CROSS-BORDER INVESTMENT DECISIONS

Risk in cross border investment decisions

Political risk currency risk inflation risk/purchasing power

Macro political risk transaction risk/exposure

UNIT-4 Cross-border Investment Decisions | BALAJI INST OF IT AND MANAGEMENT 9

government with little or no compensation to the owner is a macro political risk.

III.INFLATION RISK/PURCHASING POWER RISK

UNIT-4 Cross-border Investment Decisions | BALAJI INST OF IT AND MANAGEMENT 10

1.3.1 INCORPORATING RISK IN INVESTMENT DECISIONS

UNIT-4 Cross-border Investment Decisions | BALAJI INST OF IT AND MANAGEMENT 11

1.3.2 IMPORTANCE OF INCORPORATING RISK IN INVESTMENT DECISION

UNIT-4 Cross-border Investment Decisions | BALAJI INST OF IT AND MANAGEMENT 12

UNIT-4 Cross-border Investment Decisions | BALAJI INST OF IT AND MANAGEMENT 13

Discount rate – 12%

Project would be accepted because NPV is positive.

UNIT-4 Cross-border Investment Decisions | BALAJI INST OF IT AND MANAGEMENT 14

6. Enumerate the various problems and issues in foreign investment analysis.

UNIT-4 Cross-border Investment Decisions | BALAJI INST OF IT AND MANAGEMENT 15

(17E00407)INTERNATIONAL FINANCIAL MANAGEMENT

 International Financial Management, V.K.Bhalla ,S.Chand

 International Finance , Prakash .G.Apte, TMH

1.1 INTRODUCTIONS TO FINANCING DECISIONS OF MNC’S

1.1.1 INTERNATIONAL COST OF CAPITAL

1.2 INTRODUCTION TO CAPITAL STRUCTURE

1.2.1 SITUATIONS DETERMINING MULTINATIONAL FIRMS

1.2.2 FACTORS AFFECTING MNCs CAPITAL STRUCTURES