Lecture 11 Flashcards
What are some of the revenue related motives for foreign direct investment?
Attracting new sources of demand, entering markets where superior profits are possible, exploit monopolistic advantages, react to trade restrictions, diversify internationally.
What are some of the cost related motives for foreign direct investment?
Full benefits of economies of scale, allows user of foreign factors of production, allows using foreign raw materials, allows use of foreign technology, allows reaction to exchange rate movements.
How are the benefits of foreign direct investments analysed?
Capital budgeting analysis using cash flows and initial investment, assessing corporate control within the company and potential corporate control targets in foreign countries that could be acquired, country risk analysis, capital structure for financing investment, and out sources of long-term funds in foreign countries.
Why is it useful for a firm to be diversified with reference to risk and return?
The efficient frontier of risk and return provides more return for less risk for firms which have multiple products and multiple markets, compared with a less diversified firm.
What are some of the barriers to foreign direct investment?
- Protective barriers, these restrict foreign ownership
- ‘Red tape’ barriers, procedural and documentation requirements make FDI difficult.
- Industry barriers, local industry may argue against the competition
- Environmental barriers, like tough anti-pollution laws, or building codes etc.
- Regulatory barriers, such as the regulation of currency conversion.
- Ethical differences
- Political instability.
What is international corporate control?
International corporate control refers to the power that managers in a firm have and whether they are balanced?
What does the market for corporate controls do for inefficient multinational corporations?
The market for corporate controls correct inefficient multinational corporation. Managers who decrease firm value can force the MNC to be the subject of a takeover or acquisition.
Why are international takeovers useful for companies?
These international acquisitions increase market shares, capitalize on economies of scale and are an easy strategy for expansion because the target is already in place.
How do takeovers occur relative to shareholder rights?
A takeover can occur via cash if the acquirers shareholder rights are weak, but shares can instead be used if the shareholder rights are strong.
What are some of the barriers to international corporate control takeovers?
anti takeover amendments implemented by the target, this will force a larger proportion of shareholders to approve the takeover, poison pills implemented by the target, or host government barriers acting to limit foreign companies taking control of local firms.
What is the terminal value of a company?
This is estimated as (free cash flow at terminal time * (1+growth rate))/(WACC - growth rate).
What is the net present value of a company?
all of its future discounted free cash flows, including the discounted terminal value.
What are Gross profit, EBIT, EBT, Net proft, and free cash flow given by?
Gross profit: revenue-cost of goods sold
EBIT(Earnings before interest and tax): gross profit - other fixed expenses - depreciation - selling and administration expenses.
EBT (Earnings before tax): EBIT - interest.
Net profit: EBT-tax
Free cash flow: EBIT*(1-tax) + depreciation - change in net working capital - capital expenditure + salvage value
or free cash flow = net profit + depreciation + interest * (1-tax) - change in net working capital - capital expenditure + salvage value after tax.
Are company valuations constant?
No, they go up and down all the time, as such the cost of acquisition can change often.
What is a partial acquisition?
A partial acquisition involves purchasing a controlling interest in the company (over or equal to 51%) this allows the MNC to influence management and complete the acquisition in the future.
