Financing MNC

Unit 3
 International financing
• Financial decision taken by a multinational
corporation in the area of international business
Benefits
1. Access to capital
2. Promotes domestic investments
3. Worldwide cashflow
4. Healthy competition
5. Integration of economies
 Sources of funds
1. Internally generated cash- cash mgt, debtors
mgt, stock mgt, retain profit
2. Short term external funds- bank OD, bank
loans, debt factoring, lease back
3. Long term external funds- leasing, share
capital, long term borrowing
 National capital market
1. Money market
2. Capital market
3. Foreign exchange market
4. Central bank
 International financial market
Functions:
1. Price setting
2. Asset valuation
3. Arbitrage
4. Raising capital
5. Commercial transaction
6. Risk management
 Instruments in IFM
1. Floating rate note
2. Euro commercial papers
3. Foreign currency options
4. Foreign currency futures
5. International equities
6. Euro bonds
7. Foreign bond
8. Fully hedge bonds
 Development banks
Is promotional agency which promotes,
encourages, and stimulates entrepreneurial in
all sector of economy
1. World bank group
2. Regional development bank
3. National development bank
 1. World bank group
1. International bank for reconstruction and
development (IBRD)- Dec 27, 1945
2. International finance corporation (IFC)- July
1956-loan to industry
3. International development association (IDA)-
1960- soft loans countries
4. Multilateral investment guarantee
agency(MIGA)- FDI in developing countries 1988
5. International centre for settlement of
investment disputes (ICSID)- national
settlements & disputes
 2. Regional development banks
1. Inter American development bank (IDB)- 1959 –
Latin American countries
2. European bank for Reconstruction and
development (EBRD) – 1990
3. African development bank(AFDB) – 1963
4. Arab fund for economic & social development–
2003
5. Asian development Bank - (ADB) 1966
6. European investment bank - 1958
 3. National development banks
1. IDBI- 1964 development bank of India act
under RBI, 1976 ownership transfer to central
govt. now public ltd company
2. IFCI- industrial finance corporation of India-
1948- manufacturing, mining, shipping,
hotel, electricity
3. ICICI- industrial credit & investment
corporation of India – 1955
4. SIDBI- small industrial development bank of
India – 1990
5. NABARD- national bank for agriculture & rural
development - 1982
 Project finance
• Raising of funds required to finance an
economically separable capital investment
proposal with estimated cashflow
Characteristics
1. Capital intensive
2. Highly leveraged
3. Long term
4. Finite life – BOT
5. Limited recourse financing
6. Many participants
 EURO markets
• International capital markets for currencies
and securities held outside the country of
origin

1. Eurocurrency market
2. Eurobond market
3. Euronotes
4. Euro commercial papers
 Euro currency market
Features
1. Coins & bank notes
2. Payment clearing, electronic funds transfer
3. Currency sign
4. Regulatory authorities
5. Provide free access to new entrants
6. Floating interest rate
 Eurodollar creation
• Photo form page 191
 Euro market interest rates
Interest rate is determined by various factor
1. Volume of global trade
2. Domestic monetary policy
3. Domestic government regulations
4. Political & economic conditions
5. Domestic interest rate
6. Strength of currency
 Eurobond market
Bonds which are initially sold outside the country of the
borrowers
Types:
1. Straight Euro Bond
2. Convertible Euro Bond
3. Bond with warrants
4. Currency option bonds
5. Currency basket bonds
6. Yankee bonds
7. Samurai bonds
8. Floating rate bonds
 Euro Notes issuance facilities
Euro banks created a new instrument in
response to competition with Eurobond
market
Drawdown flexibility, timing flexibility, choice of
maturities
 Euro commercial paper
• Short term euro notes
• Papers are unsecured
• Negotiable by endorsement & delivery
• Highly safe & liquid
• Simple flexible instrument
 Cost of capital foreign investment
• Expected rate of return that the market
requires in order to attract funds to
investment
Components of cost of capital
1. Cost of equity
2. Cost of debt
 Cost of equity

Ke  D1 g
D1= dividends expected in one year
Po
Po= current market price of the firms stock
g= compounded annual rate of growth
 Cost of debt
Kd= amount of interest / amount of loan x 100

Cost of debt = interest amount / (amount of

debenture + amount of premium) x 100
 Weighted average cost of capital
• K = (1-Wd)Ke + Wd (1-T)I
Ke= cost of equity for levered firm
i= before tax borrowing cost
T= applicable marginal corporate tax rate
Wd= debt to total market value ratio
 Country difference in cost of debt
1. Difference risk free rate : tax laws ,
demographics, monetary policy, economic
conditions
2. Differences risk premium: economic
condition, relationship between creditor &
corporations, government intervention,
degree financial leverage
 Cost of capital for MNC
1. Size of the firm
2. Foreign exchange risks
3. Access to international capital market
4. International diversification effect
5. Political risk
6. Country risk
7. Tax concessions
 Worldwide capital structure
1. Determine the cost of individual sources of
funds employed
2. Determining the proportion in which
different sources of funds are employed
3. Computing the weighted average cost of
capital
Factors affecting MNC capital structure
1. Stability of MNC cash flow
2. MNC credit risk
3. MNC access to retained earnings
4. MNC guarantees on debt
5. MNC agency problems
Foreign subsidiary capital structure
1. Conform to capital structure of parent
company
2. Reflect capitalization norms in each foreign
country
3. Vary to take advantage of opportunities to
minimize the MNC cost of captial
 Feature of foreign subsidiary capital
structure
1. Political risk management
2. Currency risk management
3. Leverage tax credit
4. Leasing
5. Tax laws- tax credit, depreciation rules, tax
rate, alternative minimum tax(AMT)
 Joint ventures
• Two parties incorporate a company in India
 characteristics
1. Critical driving forces
2. Strategic synergy
3. Create chemistry
4. Operational integration
5. Growth opportunity
6. Sharpe focus
 Reasons for Joint ventures
1. Cost saving
2. Risk sharing
3. Access to technology
4. Expansion of customer base
5. Entry into emerging economies
6. Entry into new technical market
7. Pressures of global competition
8. Leveraged joint venture