...CHAPTER 17 CAPITAL BUDGETING FOR THE MULTINATIONAL CORPORATION This chapter focuses on three aspects of foreign investment analysis that are infrequently considered in evaluating domestic projects: the difference between project and parent cash flows; incorporating political risks such as expropriation and currency controls; and factoring in inflation and exchange rate changes in cash flow estimates. It also evaluates the various methods used to incorporate in the investment analysis the additional risks encountered overseas. These points are brought out in the process of working through the International Diesel Corporation Case. The ability to perform a capital budgeting analysis is one of the most valuable skills we can provide our students; this case is designed to make them aware of many of the intricacies involved in doing such an analysis. At the back of the chapter I have included a set of questions (2-13) that students should bear in mind while reading the case. Addressing these questions will help them to get more out of the case. I have found that a quick review of capital budgeting basics, given in the first section, is useful for most students. The key point made in Appendix 17A is that a firm's exposure to political risk is a function of government actions and the impact of those actions on the firm's cash flows. The corollary is that a firm can take actions, preferably before making an investment, to reduce its susceptibility to political risk. Thus, much...
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...Foreign Subsidiary Investment Plan Case: Multinational Capital Budgeting China & Australia Hypothetical Incorporated MBA AF 626 Fall 2011 International Financial Management Professor XX XX XX XX XX Table of Contents PART I – Analysis: Australia vs. China A. Country Analysis 1. Economic Environment 3 2. Social Environment 10 3. Political Environment 12 B. Industry Analysis 1. Aluminum Industry in Australia 17 2. Airline Industry in China 18 PART II-Capital Budget Analysis 1. Weighted Average Cost of Capital 19 2. Net Present Value 20 3. Scenario Analysis 21 PART III – Conclusion: Investment Decision 23 References 24 Appendixes 26 PART I – Analysis: Australia vs. China A. Country Analysis I. Economic Environment Australia Australia is a market oriented financial system which includes the world’s 13th largest economy and the 9th highest per capita Gross Domestic Product (GDP), with almost two consecutive decades of growth and the unemployment rate falling to a generational low. As a result of nearly three decades of structural and policy reforms, Australian’s economy has proven to be a competitive player in the increasingly integrated global markets. In terms of country risk, Australia’s favorable attitude towards private enterprise and its well-protected property...
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...DOI:10.12691/jfe-2-3 Rethinking Multinational Enterprises’ Capital Budgeting in the Globalized New Millennium Fabio Pizzutilo* Department of Business and law studies, University of Bari *Corresponding author: fabio.pizzutilo@uniba.it A strict interpretation of the Ricardian assumptions on international trade leads to a conclusion in favour of the impossibility of a firm investing abroad. Even extending the Ricardian model by including capital among the factors of production, it has to be supposed that, from a purely economic and financial perspective, the choice between directly investing abroad and not doing so is totally indifferent. It is the existence of imperfections in the real and/or financial markets that give rise to the convenience for a firm to exploit its competitive advantages through foreign direct investment (FDI). In a broad sense, a multinational enterprise (MNE) can be intended as a company that holds controlled firms, producing branches, divisions, establishments, subsidiaries, etc., in a foreign country. The reasons that can persuade a firm to become multinational are manifold. First of all, it can be the sole action in order to conduct a specific business. Think about the activity of the extraction of raw materials: it cannot be conducted anywhere other than the mine’s location. Many firms are seeking greater production efficiency, and are thus investing in countries where one or more of the factors of production, capital included, are undervalued given...
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...Capital Budgeting: Capital budgeting is the process of determining whether or not an investment is worthwhile. Often companies will have several opportunities and must measure each one's potential in order to make a comparison and choose just one or a few. It is the process in which a business determines whether projects such as building a new plant or investing in a long-term venture are worth pursuing. Oftentimes, a prospective project's lifetime cash inflows and outflows are assessed in order to determine whether the returns generated meet a sufficient target benchmark. Ideally, businesses should pursue all projects and opportunities that enhance shareholder value. However, because the amount of capital available at any given time for new projects is limited, management needs to use capital budgeting techniques to determine which projects will yield the most return over an applicable period of time. On the other hand capital budgeting is the planning process used to determine whether an organization's long term investments such as new machinery, replacement machinery, new plants, new products, and research development projects are worth the funding of cash through the firm's capitalization structure (debt, equity or retained earnings). It is the process of allocating resources for major capital, or investment, expenditures. One of the primary goals of capital budgeting investments is to increase the value of the firm to the shareholders. Capital budgeting involves allocating...
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...paper will examine the benefits and limitations of ratio analysis, explain what factors impact the meaningfulness of such measures and what new practices or theories may be emerging regarding the application of ratio and financial statement. The paper concludes that ratio and financial statements is an essential tool used in analyzing a company’s profit. Close your eyes and think about all of the products you have consumed today. You purchased lunch from McDonald’s, used Google to help you find directions, drove your Toyota to work and grabbed your Nike sneakers as you headed to the gym. What do all of these brands have in common? They are well known market leaders and multinational organizations. Consumers are unaware of how many multinational brands they come into contact with daily, however, these organizations mass-produce goods and services internationally in order to meet the needs of their consumers. With billions of...
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...Name: Professor’s name: Dr. Wright Course: AF 211 Accounting for Planning and Control Managers in making investment decisions are faced with the problem of limited resources. This, therefore, necessitates an understanding of the topic of capital budgeting. Capital budgeting is the process of determining and pursuing investments which cash flows are expected in the future period usually more than a year. It entails the decision on the acquisition of new assets or equipment that is to be utilized by the business to increase its future cash flows and profitability. Managers are, therefore, faced with the challenge of determining which project to invest in order to avert the adverse effect on the financial performance. In making investment decisions, various factors must be considered. Managers have to know that the success of the business entirely depends on how best the investments are analyzed before they are undertaken. First, capital budgeting requires large capital outlay (Dugdale 16). Most of the capital budgeting decisions require a large proportion of business funds. It, thus, implies that failure to make proper investment decisions will lead to losses for the organization. Secondly, investment decisions are irreversible. After deciding on what projects to invest in, managers will lack the ability to reverse their decisions, i.e., equipment once acquired cannot be easily disposed of. The managers must therefore be careful before settling on a particular investment...
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...| | |FACULTY OF ACCOUNTANCY AND MANAGEMENT | | | | | |Bachelor of International Business (Hons) | | | | | |Unit Code & |UKFF4024 | | |Unit Title: |MULTINATIONAL FINANCE | | |Course of Study: |Bachelor of International Business (Hons) | | |Year of Study: |Year Three, Trimester Two | | |Trimester Year |Jan 2016 | | |Credit Hour: |4 credit hours | | |Lecturing hours and |3 hours lecture per week for the...
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...and challenges for CFOs. Rather than simply make aggregate capital-structure and dividend decisions, for example, they also have to wrestle with the capital structure and profit repatriation policies of their companies’ subsidiaries. Capital budgeting decisions and valuation must reflect not only divisional differences but also the complications introduced by currency, tax, and country risks. Incentive systems need to measure and reward managers operating in various economic and financial settings. The Globally Competent Finance Function The existence of what amounts to internal markets for capital gives global corporations a powerful mechanism for arbitrage across national financial markets. But in managing their internal markets to create a competitive advantage, finance executives must delicately balance the financial opportunities they offer with the strategic opportunities and challenges presented by operating in multiple institutional environments, each of which has it own legal regime and political risks. There is also a critical managerial component: What looks like savvy financial management can ruin individual and organizational motivation. As we’ll see in the following pages, some of the financial opportunities available to global firms are affected by institutional and managerial forces in three critical functions: financing, risk management, and capital budgeting. Financing in the Internal Capital Market Institutional differences across a company’s operations...
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...I agree the statement "Budgeting is a key component in management short and long term planning.". A budget is defined as a plan of operations based on a given estimate of expected income and expense in the future. As such, it is thought of as an action plan, outlining an organization's financial and operational goals. The budget expresses the quantitative arrangement of the entity's management, in terms of allocating the business resources, performance evaluation, and formulating prospective plans. Businesses alike hold this as an annual undertaking, putting into account the company's past year's budget and subsequently previewing projections for the next couple of years (however often occurring short-term, in about a year or less.) Budgets provide control over the instantaneous environment, help to master the financial aspects of the job and department, while at the same time administering solutions to problems before they occur. They focus on the importance of assessing alternative actions before decisions are actually implemented. Budgeting serves as a means of systematically planning and control. This will require a realistic financial documentation of the company's goals and performance objectives. Upon formulation, the analysis provides adequate development throughout the fiscal year. Consequently, monthly performance reports compare budgeted results against actual stats. The management then examine these and set out to take necessary corrective actions against significant...
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...Office: Finance House, 85 Beechmont Drive, New Rochelle, NY Phone: 914 637 2733 Fax: 914 633 2286 Email: jmanley@iona.edu Office Hours: half hour before class and by appointment Prerequisite: MBA 550 – Finance for Managers Course Objective: Upon completion of this course, the student should have an understanding of 1. governance issues of the firm [chap. 1 & lecture] 2. valuation concepts and processes [chap. 3, 5, 8, 9, 29] 3. capital budgeting estimation and decision methods [chap.6, 7] 4. debt, equity and lease financing issues [chap. 14, 20, 21] 5. risk defined and measured in a CAPM setting [chap. 10, 11] 6. variations in the calculation of cost of capital [chap. 13, 18] 7. capital structure and dividend policy decisions [chap. 15, 16, 17, 19] Suggested Other Courses: FIN 644 concerns of short-term financial planning and financing FIN 625 concerns of risk management with derivative securities FIN 620 concerns of multinational financial management Required Text: Ross, S., R. Westerfield, and J. Jaffe, Corporate Finance, current edition, Irwin. Recommended Supplemental Reading: The Wall Street Journal Barron's Value Line Investment Survey Financial Times Major Units of Instruction: Weeks Topics 1 Corporate Governance (extension of concepts from MBA 550) chap. 1 & lecture (Students review Chap. 2 Accounting Statements and Chap...
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...for arbitrage across national financial markets as capital markets open up within them. CFO has to balance the traditional question with new questions which arises due to the globalization. By exploiting their internal capital markets, CFO can create value in 3 functions: 1. Financing the internal capital market. 2. Managing Risk Globally, 3. Global Capital Budgeting. 1. Financing the internal capital market – A CFO can significantly reduce a groups overall tax bill by borrowing disproportionately in countries with high tax rates and lending the excess cash to operations in countries with lower rates. But the global CFO needs to be aware of downside of getting strategic about financing in these ways. Saddling the mangers of subsidiaries with debt can cloud their profit performance. 2. Managing Risk Globally – The existence of an internal capital market also broadens a firms Risk management options. Instead of managing all currency exposures through the financial market, global firm can offset natural currency exposures through their worldwide operations. Given this potential for minimizing risk, it might seem perverse that many multinationals let local subsidiaries and regions manage their risks separately. Doing so, however, can obscure the performance of local units, making it harder for headquarters to assess local managers and easier for financial managers to take purely speculative positions. 3. Global Capital Budgeting - CFOs can add value by getting smarter about valuing...
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...ORGANIZATION & CULTURE FINANCE & ACCOUNTING HUMAN RESOURCES COMPETITIONCompetitive Edge Finance Function in a Global Corporation The H 108 Harvard Business Review | by Mihir A. Desai HISTORICALLY, the finance functions in large U.S. and European firms have focused on cost control, operating budgets, and internal auditing. But as corporations go global, a world of finance opens up within them, presenting new opportunities and challenges for CFOs. Rather than simply make aggregate capital-structure and dividend decisions, for example, they also have to wrestle with the capital structure and profit repatriation policies of their companies’ subsidiaries. Capital budgeting decisions and valuation must reflect not only divisional differences but also the complications introduced by currency, tax, and country risks. Incentive systems need to measure and reward managers operating in various economic and financial settings. The existence of what amounts to internal markets for capital gives global corporations a powerful mechanism for arbitrage across national financial markets. But in managing their July–August 2008 | hbr.org John Hersey Honing Your Competitive Edge FINANCE & ACCOUNTING internal markets to create a competitive advantage, finance executives must delicately balance the financial opportunities they offer with the strategic opportunities and challenges presented by operating in multiple...
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...Miss. Karen LEE Room 1155, Department of Finance, CYT 3943 7840 karenlee@baf.cuhk.edu.hk By Appointment B. Class Schedule Session FINA3020A FINA3020B Day Thursday Monday Time 14:30 – 17:15 14:30 – 17:15 Venue CKB UG04 WMY 406 C. Course Overview Businesses are operating in an increasingly competitive environment. Managing businesses either directly or indirectly exposed to international competition requires an understanding of currency markets, foreign exchange derivatives, exchange risk, exposure and risk management. This course assumes the viewpoint of the financial manager of a multinational corporation (MNC) with investment or financial operations in more than one country. Managers encounter new opportunities as they extend their operations into international markets, as well as new costs and risks. The challenge facing the multinational financial manager is to successfully develop and execute business and financial strategies in more than one national business environment. The aim of this course is to provide you a framework for analyzing financial decisions relating to risk management, financing and investments. These issues cannot be viewed in isolation. For instance, a U.S. corporation may be unwilling to accept a positive-NPV EUR export contract or to borrow JPY unless the exchange risk can be hedged; or a corporate loan can simultaneously serve as a hedge. Hedging is even used to facilitate asset valuation and NPV-analysis. Because...
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...Abstract Financial planning and budgeting has become a powerful tool of any company’s financial management. Planning and budgeting is an issue that should be solved in a complex. Therefore, this final English research paper highlights three main approaches absorbed: theoretical, practical, and analytical. Theoretical knowledge cannot be applied to practice without clear understanding of business, a feeling about the actual circumstances. Practical knowledge cannot be applied to professional tasks without analytical approach. This skills and approaches are presented and proven in this research. Having faced planning and budgeting process of middle-sized company, it has been noted that some issues of this important activity absence clarity, confidence, and flexibility. In order to optimize planning and budgeting process a thorough examination has been prepared in this research paper. The Company where experience has taken place is Levi’s XX that stands for Levi’s Vintage Clothing. Therefore, the industry examined is apparel, and as a market is taken the whole Globe. Table of Contents Abstract 2 Introduction 4 • The purpose of the study 4 • The main conceptual problem 5 Methodology 6 1. Essence and role of financial planning and budgeting 7 1.1 Planning and budgeting role in company’s structure 7 1.2 Purpose of budgeting 7 2. Company profile, industry and market description 10 2.1 Levi’s XX story 10 2.2 Company’s structure 10 3. Principles and objectives...
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...of two multinational companies applying “beyond budgeting” ideas by Anatoli Bournistrov and Katarina Kaarboe (2013), Sociological perspective The article by Bournistrov and Kaarboe can be seen using the sociological perspective on studying the budgeting, since the focus of the research is aimed at the organizational level and how applying beyond budgeting ideas in its management control systems (MSC) has influenced the decision making of the managers. The research was conducted as a field study in two multinational companies who recently rejected the traditional budgeting process in favor of beyond budgeting to better respond the ever-changing business environment. The basic premise of study was that introducing a new MSC without budgets, the decision maker in company are moved from “comfort zone” to the “stretch zone” thus creating a new organizational structures and supply and demand of information. For OilCo, the other company in the research that the main reasons for adopting new practices, was that the traditional budgeting was seen as a restriction to innovating and reacting to changing environment, as it set up boundaries for employees to operate instead of utilizing emerging opportunities that would need resources. New “from ambition to action” system allowed managers to start up new projects and gain resources when seen profitable opportunities emerged. For TelCo the new MCS was also brought to better respond changes is the market. Also traditional budgeting was creating...
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