Flashcards
IB: Financial Management
Cards in this deck (16)
- 1the Goal of Management for Publicly traded companies- stockholder wealth maximization
o not seeking to build value or wealth for the other stakeholders in the multinational enterprise
o extremely short-run in focus - 2Goal of Management for Continental European and Japanese firms- corporate wealth maximization
- Objective: the financial and social health of all stakeholders (consider and balance short-term financial goals against long-term societal goals of continued employment, community citizenship and public welfare needs) - 3Global Financial Goals- Seeking balance between three primary financial objectives
o maximization of consolidated, after-tax, income;
o minimization of the firm’s effective global tax burden;
o correct positioning of the firm’s income, cash flows and available funds.
- The pursuit of one goal may result in a less desirable outcome in regard to another goal.
- Management must make decisions about the proper trade-offs between goals - 4Multinational InvestingAny investment is financially justified if the present value of expected cash inflows is greater than the present value of expected cash outflows; in other words, if it has a positive net present value (NPV)
- 5Construction of a capital budget- A capital budget is composed of three primary cash flow components:
¥ Initial Expenses and Capital Outlays
¥ Operating Cash Flows
¥ Terminal Cash Flows - 6Risk in International Investments- Cross-border risk
- An international investment is within the jurisdiction of a different government
- The viewpoint or perspective of the parent and the project are no longer the same - 7International Cash Flow Management- Cash management is the financing of short-term or current assets but the term is used here to describe all short-term financing and financial management of the firm
- Even a small multinational firm will have a number of different cash flows moving throughout its system at one time
- The maintenance of proper liquidity, the monitoring of payments and the acquisition of additional capital when needed all require a great degree of organization and planning in international operations. - 8Operating cash flowso from the everyday business activities of the firm (paying for materials or resources, i.e., accounts payable, or receiving payments for items sold, i.e., accounts receivable)
o Indirect cash flows: licence fees paid to the owners of particular technological processes and royalties to the holders of patents of copyrights - 9Financing cash flows- arise from the funding activities of the firm
o servicing of existing funding sources, interest on existing debt and dividend payments to shareholders - 10Intrafirm Cash Flows- Cash flows between a parent company and a subsidiary will be both operational and financial in nature
- 11Transfer pricingprice at which multinational firms sell their products to their own subsidiaries and affiliates
- 12Foreign Exchange ExposureThree types of foreign currency exposure: transaction exposure; economic exposure and translation exposure.
- 13Transaction exposureOnly two conditions are necessary for a transaction exposure to exist:
(1) a cash flow that is denominated in a foreign currency; and
(2) the cash flow will occur at a future date
Management of transaction exposures is usually accomplished by either natural hedging or contractual hedging
- Risk management and speculation
- Currency risk sharing - 14Economic ExposureAlso called operating exposure, is the change in the value of a firm arising from unexpected changes in exchange rates.
- emphasizes that there is a limit to a firm’s ability to predict cash flows or exchange rate changes in the medium to long term
- measuring economic exposure is subjective
- dependent on the degree of internationalization present in the firm’s cost and revenue structure - 15Countertrade- Used when economic circumstances made it more acceptable to exchange goods directly rather than to use money as an intermediary
- Permit the covert reduction of prices and therefore allows the circumvention of price and exchange controls
- Advantages and disadvantages of countertrade - 16Bartera direct exchange of goods of approximately equal value between parties, with no money involved
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- Final International Business Flashcards on IB: Financial Management, created by dorota.ziakova on 26/04/2016.
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- dorota.ziakova
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