1. Multinational business
Tutorial/workshop week 3
FINANCING THE OPERATIONS OF THE MULTINATIONAL ENTERPRISE

2. Agenda
Revision

3. Revision question Explain the meaning of capital structure.
From a managerial perspective, what are the advantages and disadvantages of financing obtained from each of the following: equity, debt, and intra-corporate sources?
What are the major tasks involved in managing working capital and cash flow for international operations? 
What are the major steps involved in capital budgeting? For what types of ventures do internal managers typically need to engage in capital budgeting? 
Compare and contrast the different types of techniques used in evaluating capital investment projects. 
What are the types of currency exposure? Why is currency exposure potentially harmful to the firm’s international operations? What steps can firms take to minimise currency exposure? 
Who are the major players involved in foreign exchange trading? 
As an international tax consultant to an MNE, what steps would you take to minimise tax obligations around the world?

4. Equity financing Advantages and disadvantages of equity finance
Equity finance can sometimes be more appropriate than other sources of finance, eg bank loans, but it can place different demands on you and your business.
The main advantages of equity finance are:
You will not have to keep up with costs of servicing bank loans or debt finance, allowing you to use the capital for business activities.
Outside investors expect the business to deliver value, helping you explore and execute growth ideas.
The right business angels and venture capitalists can bring valuable skills, contacts and experience to your business. They can also assist with strategy and key decision making.
In common with you, investors have a vested interest in the business' success, ie its growth, profitability and increase in value.
Investors are often prepared to provide follow-up funding as the business grows.

5. Equity financing The principal disadvantages of equity finance are:
Raising equity finance is demanding, costly and time consuming, and may take management focus away from the core business activities.
Potential investors will seek comprehensive background information on you and your business. They will look carefully at past results and forecasts and will probe the management team. Many businesses find this process useful, regardless of whether or not any fundraising is successful.
Depending on the investor, you will lose a certain amount of your power to make management decisions.
You will have to invest management time to provide regular information for the investor to monitor.
There can be legal and regulatory issues to comply with when raising finance, eg when promoting investments.

6. Debt financing Advantages: Disadvantages: Utilization of resources
Short term needs
Tax advantage
No future lender claims
Not dilutive
Simple loan repayment
Future impact forecasting
Disadvantages:
Regular monthly payments of principal and interest
Severe penalties for late or missed payments
Affect credit rating in case of failure to pay loan
Loan easily available only to established business
For small business they might not get enough loan so might have to look for other sources

7. Intra-corporate financing
Advantages:
Interest payments are often tax deductibles: borrowing subsidiaries income tax burden is reduced
Has little effect on the parents balance sheet when financial results are consolidated
Saves transaction cost of borrowing funds from banks
Avoids dilution of ownership compared to equity financing
Disadvantages:
Might not have enough money to finance the borrowing company
Government might put restriction

8. Working capital and cash flow management
Ensuring that cash is available where and when it is needed
Various strategies of transferring funds within the firms worldwide
Trade credit
Dividend remittances
Royalty payments
Fronting loan
Transfer pricing
Multilateral netting

9. Capital budgeting Steps: Proposals generation Review and analysis
Decision making
Implementation
Follow up