Final Exam Questions Flashcards
What different forms of international equity financing exist?
Characteristics?
- Selling stock in domestic market
* Less uncertainty about the market - Global equity offering
- Can list in multiple markets to get access to a greater pool of money where barriers for international investors in the local market may have been occurring.
- Equity valuing may depend on the market regulations and wealth, it may not be beneficial for the company to list there.
- Private sale of equity (can be overseas)
- Lower transaction costs and reduced regulation.
- Pricing can be difficult
- Illiquidity of stock, may be at a discount.
- Significant holding in the organisation
- Subsidiary sale of stock
- Parent company may not be listed but that does not stop the subsidiary from getting listed in overseas markets with the approval of the parent company.
- Potential agency effects where decisions are made to benefit the subsidiary at the expense of the entire MNC.
What are the different forms of available international debt financing?
- Domestic bond offering
- Limited capital available depending on the size of the market which may lead to a higher rate having to be offered
- Familiarity of market for investors and regulation
- Global bond offering
- Selling bonds denominated in multiple currencies around the world
- Transaction costs
- Greater access to funds
- May be at a cheaper rate than domestically due to foreign investors valuing a foreign firm greater due to the diversification benefits
- Private placement of bonds
- Selling to private placement of bonds to a financial institution domestically or overseas.
- Private placement can have reduced transaction costs.
- May have difficulty finding investors and may need to be flexible on the terms of the bond.
- Loans from financial institutions
- Loan from a financial institution domestically or overseas may allow for additional services and interest from the institution.
- Can be a fixed or floating rate.
- Can be more flexible such as if the organisation needed a large amount of working capital that quickly flows in and out.
What are the potential benefits arising from swaps transactions?
Swap transactions create a benefit when two organisations engage in it and have a comparative advantage in something over the other organisation.
If the case of interest rate swaps. One organisation may have access to a comparatively lower fixed interest rate while the other has access to a comparatively lower floating interest rate.
If the two parties wish to pay interest in the other format (floating vs fixed), they can engage in a swap. Through the comparative advantage, both parties can benefit meaning that they both end up paying reduced rates compared to what they had access to on their own.
Swaps exist for multiple assets like currency exchange rates and commodity prices.
What is the difference between financial intermediation and disintermediation?
Financial intermediation refers to the use of an intermediary to facilitate transactions between another party. This can be beneficial to protect one’s self against default risk of the other party and remove some regulatory liability, however, this does come at the cost of fees.
Financial disintermediation is removing this middleman which will result in savings and dealing with the other party directly. This does expose the organisation to additional risk.
What are Eurocurrencies?
What are the advantages of using international money markets to raise capital?
Eurocurrencies are currencies that are different from your own.
Using international money markets to raise capital can be beneficial because there could be barriers for international investors to invest in your stock. You may be saturated in your domestic market but have a lot of people who want to invest in the stock in overseas markets.
If you are operating in that local market, the cash inflows in that currency can match the outflows and provides you reserves in that currency.
Other markets may have lower rates and regulations which make it advantageous to invest in OC markets.
Raising capital in OC markets may allow you to change your international capital structure while maintaining the same D/E ratio but at a lower cost of debt and with reduced tax rates.
What is Foreign Direct Investment?
FDI is the investment decision to conduct business in a different country. This can involve…
- Establishing real assets in foreign countries
- Acquiring or operating with foreign firms
- Forming foreign subsidiaries
This can be used to benefit revenue through: enter profitable markets, increase revenue, diversify internationally, exploit monopolistic advantages.
It can be used to benefit cost through: economies of scale, foreign factors of production, resources and tech. React to exchange rate movements,
What are the alternatives to Foreign Direct Investment?
How can government actions encourage or impede FDI?
The government can influence FDI through taxes, subsidies and barriers depending on the objectives of their economy.
If significant barriers are in place, the organisation may wish to seek alternatives to FDI
Alternatives include: Exporting / Importing, Licensing, Contracting, Portfolio investment
Why would a firm use Foreign Direct Investment when there are other forms of international expansion methods available?
- Revenue related benefits
- Greater revenue through new sources of demand
- Avoid trade restrictions
- Diversify internationally
- Enter profitable markets
- Cost related benefits
- Local labour factors of production
- Foreign raw materials
- Foreign technology
- Economies of scale
- Foreign exchange benefits - match inflows to outflows.
What are some of the benefits of Foreign Direct Investment to a multinational?
- Revenue related benefits
- Greater revenue through new sources of demand
- Avoid trade restrictions
- Diversify internationally
- Enter profitable markets
- Cost related benefits
- Local labour factors of production
- Foreign raw materials
- Foreign technology
- Economies of scale
- Foreign exchange benefits - match inflows to outflows.
What is the appropriate discount rate to use for evaluating FDI?
The risk associated with FDI relies on a number of factors and there is no fixed way of determining an appropriate discount rate.
However, considerations regarding political and country risk should be taken into account against the benefits that will be derived from FDI.
In a country where there is significant risk, the discount factor would be greater.
What is country risk?
How can we measure country risk?
What types of factors influence the level of country risk?
What are the different ways country risk can be incorporated into the capital budgeting process?
Country risk is broken down into political and financial factors.
Political risk: Political actions taken by the host government or the public the affects the MNC’s cash flows. Attitude of consumers, actions of host, block of fund transfers or inconvertability of currency, war, bureaucracy, corruption
Financial risk: Interest rate, exchange rate, inflation, market policies, exchange rate systems, fiscal policies.
Assessment: Once the probability of each of the risks have been assessed, the risks get assigned a weighting of importance to the firm. Multiplying this out for political risk factors and financial risk factors will produce political risk rating and financial risk rating. Both of these can be assigned a weighting by their importance to produce an overall country risk rating.
Countries can then be objectively compared on the specific risks to the organisation
Capital budgeting: Can adjust the discount rate and or cash flows according to the risk.
What makes investments likely to be expropriated?
Expropriation being the seizure of investments by the government for the benefit of the public.
FDI is often welcomed when it generates employment in the economy, but the government may attempt to expropriate the investment if it is resulting in an overall loss of employment through the work being outsourced overseas.
Environmental concerns can also lead to expropriation
What is political risk?
How can we measure political risk?
Political risks are risks an organisation faces from the government or public that may affect the MNC’s cash flows.
Political risks are hard to measure and can be subjective. While determining absolute probabilities may be difficult, it is easier to rank countries comparatively, assign it a score based on it relative to other countries and use score weightings to determine overall political risk in comparison to other countries.
What actions can firms take to alter the political risks that they face?
- Avoidance
-
Insurance
- Insurance can be taken out to protect from these issues but may be difficult to find
-
Control environment
- Negotiate with the government
- Structure the investment so that it’s at a reduced risk in the economy.
- Hire local labour
- Borrow local funds
- Short term horizon
*What is an International Capital Asset Pricing Model?
