UNIVERSITY OF ZIMBABWE

FACULT OF COMMERCE

DEPARTMENT OF ACCOUNTANCY

NAME: MASARA OWEN

REG NUMBER: R1810891

COURSE: INTERNATIONAL FINANCIAL MANAGEMENT

COURSE CODE: MACC 504

PROGRAMME: MASTER OF ACCOUNTANCY (MACCP)

LECTURER: MR JECHECHE

QUESTION
Discuss the significance of International Financial Management to a Multinational
Corporation of your choice highlighting the challenges it faces in different international
financial markets. Support your argument with concrete examples drawn from a
Multinational Corporation you have chosen

Lecturer Comment (s):

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University of Zimbabwe | MACC 504: International Financial Management

Introduction

The global economy is massive and growing (Thakor, 2016). As the world economy has
become more globally integrated, virtually every firm and individual is affected by
developments in the economies of countries other than their own. All business concern needs
finance to meet their requirements in the economic world. Hence, it is called as lifeblood of
business organization (Ehrhardt, 2011). As a result, finance is required to play an ever more
vital strategic role within the corporation. An MNC that expands internationally faces risks
related to the different countries and regions in which it plans to operate, including institutional
failures, crime, political instability and violence, as well as fluctuations in currency exchange
rates (Teeboom, 2019). Financial Management today covers the entire gamut of activities and
functions. Financial management has undergone fundamental changes as regards its scope and
coverage. The financial manager plays a dynamic role in a modern company’s development.
Heightened corporate competition, technological change, volatility in inflation and interest
rates, worldwide economic uncertainty, fluctuating exchange rates, tax law changes,
environmental issues, and ethical concerns over certain financial dealings must be dealt with
almost daily. Effective financial management, however, is more than the application of the
newest business techniques or operating more efficiently, there must be an underlying goal.
The finance manager should carry this activities from the perspective that the fundamental goal
of sound financial management, that is, shareholder wealth maximization (Tiwari, 2018).

Definition of Terms

Finance is defined as the art and science of managing money, that is, the procurement of funds
and their effective utilisation in business concerns as it includes financial service and financial
instruments which deals with financial analysis, planning and control, acquisition and effective
employment of funds in order to maximise the value of the firm (Kwesu and Zhanje, 2013;
Paramavan and Subramarian, 2009).

Financial management is concerned with how to optimally make various corporate financial
decisions, such as those pertaining to investment, capital structure (financing), dividend policy,
and working capital management, with a view to achieving a set of given corporate objectives
(Tiwari, 2018; Horne, 2009).

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International Financial Management (IFM) is the financial management in an international
business environment where there is different currencies of different countries, dissimilar
political situations, imperfect markets, and diversified opportunity sets as it requires an
understanding of the fundamental concepts and the tools necessary for effective global
financial managers (Tiwari, 2018; Otieno, 2016).

A multinational corporation (MNC) is a company engaged in producing and selling goods

or services in more than one country, ordinarily consists of a parent company located in the
home country and at least five or six foreign subsidiaries, typically with a high degree of
strategic interaction among the units (Shapiro, 2013).

The foreign exchange market is an over-the-counter (OTC) marketplace that determines the
exchange rate for global currencies where participants are able to buy, sell, exchange and
speculate on currencies. (Wild et al., 2003; Campbell, 1997).

Foreign exchange risk management

Changes in the exchange rates and the behaviour of foreign exchange markets have all
influence the corporate financial decisions. After identifying the types of exchange rate risk
and measuring the associated risk exposure, Delta Corporation Limited finance personnel
needs to decide whether to hedge or not these risks. In international finance, the issue of the
appropriate strategy to hedge the different types of exchange rate risk has yet to be settled
(Jacque in Papaioannou, 2006). In practice, however, corporate treasurers have used various
currency risk management strategies depending, ceteris paribus, on the prevalence of a certain
type of risk and the size of the firm. These sometimes wild fluctuations can wipe out economic
gains in a matter of days. Risk management in multinational corporations may involve
managing various factors differently than at home, including contract terms and project futures,
locking in exchange rates, collecting on transactions immediately and paying local
organizations to hedge the risks (Papaioannou, 2006).

Reynolds (2017) asserts that while price setting and payment methods are major considerations,
currency rate fluctuation is one of the most challenging international business problems to
navigate. Monitoring exchange rates must therefore be a central part of the strategy for all
international businesses. However, global economic volatility can make forecasting profit

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especially difficult, particularly when rates fluctuate at unpredictable levels. Major fluctuations
can seriously impact the balance of business expenses and profit. For instance, Delta
Corporation Limited is paying suppliers and production costs in U.S. dollars, but selling in
markets with a weaker or more unpredictable Zimbabwe RTGS dollar which is not acceptable
and recognised on the international financial market. Delta Corporation Limited is ending up
with a much smaller margin or even a loss. One way to protect yourself against large
fluctuations in currency is to pay suppliers and production costs in the same currency as the
one you’re selling in. This may mean switching to more local production where possible in
order to better balance your outgoings and sales revenue (Reynolds, 2017).

The financial of mangers for Delta Corporation Limited should be equipped with foreign risk
management strategies to hedge against these risks because of the uncertainties of exchange
rates so the corporations is not exposed to large losses as a result of use of multiple currencies.
Most of the raw materials or ingredients used by Delta Corporation Limited are imports and
they require foreign currency to acquire them and all of its domestic sales require forex. The
financial manager should guard against losses as a result these fluctuation of the unstable
Zimbabwe‘s RTGS dollar. Another option for mitigating the risk of unpredictable currency
rates can be setting up a forward contract and agreeing a price in advance for future sales. As
a results, this potentially means missing out on greater profit should rates shift in your favor.
However, it can protect your sales from the risk presented by unstable currency.

Investment decisions

The investment decisions is one of the key international financial decisions. It is concerned
with the selection of assets in which funds will be invested by a firm. This will be investment
in Non-Current Assets to increase operations of a company (Thakor, 2015). Long term assets
will yield a return over a period of time in future whereas short term assets are those assets
which are easily convertible into cash within an accounting period i.e. a year. The long term
investment decision is known as capital budgeting and the short term investment decision is
identified as working capital management. Capital Budgeting may be defined as long – term
planning for making and financing proposed capital outlay. In other words Capital Budgeting
means the long-range planning of allocation of funds among the various investment proposals.
Another important element of capital budgeting decision is the analysis of risk and uncertainty.
Since, the return on the investment proposals can be derived for a longer time in future, the

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capital budgeting decision should be evaluated in relation to the risk associated with it (Thakor,
2015).

In addition, making the decision to invest in such an operating asset requires numerous
estimations to be made. These would depend on factors such as the saleability of the product
and the costs which are likely to be incurred. The financial manager is required to collect and
evaluate such information, make estimations about cash flows related to the project, and decide
whether the investment should be made or not. Delta Corporation Limited’s decision to buy
vehicles, equipment, additional warehouses and even considerations relating to buying
inventory, are all investment decisions which are central in the day-to-day functioning of the
financial manager. The method used to evaluate investments is called capital budgeting. Both
decisions require the company to evaluation of the future cash-flows to decide whether or not
the Investment will increase the value of the company. Delta Corporation Limited finance
manager should aware of the risk and uncertainty visa-vis return over time. The economic
trajectory in Zimbabwe affects the corporation to invest in non-current assets. There is lack of
foreign currency in the domestic market for the acquisition of property, plant and equipment
for foreign suppliers since Zimbabwe does not produced these equipment’s and the space parts.
Companies regularly replace existing productive assets or purchase new assets to expand their
business operations and unavailability of foreign currency stops production.

On 20 February 2019 the Government of Zimbabwe through its central bank Reserve Bank of
Zimbabwe announces its monetary policy statement. RBZ sets a forex allocation committee
for the scarce foreign currency and the priority is given to sectors like Health and Transport.
Delta end up losing production due to machinery break down or shortage of spare parts and
critical equipment. Delta is now spending more time while sourcing foreign currency.
Government intervenes when the company suggested that all its sales should be in the United
States Dollars. The company is getting small amount of foreign currency allocation from the
central bank. The management of Delta Corporation Limited is continuously engaging the
government of Zimbabwe so that it will lay its ground to reduce the impediments as a result of
foreign currency deficiency prevailing in the country which is affecting company’s investment
decision. Delta Corporation Limited may decide to acquire some financial assets in form of
shares of a foreign company. The purchase always require foreign currency since Zimbabwe’s
RTGS is neither recognised nor accepted at international financial market. The investment in

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equity shares, preference shares and bonds as well as other financial instruments such as
derivatives and money market investments are classified as financial assets. The company will
definitely find it difficult to acquire the foreign shares this will eventually affects the growth
of the entity.

Dividend decision

The major function of IFM is the dividend policy decision. Dividend policy decisions are
concerned with the distribution of profits of a firm to the shareholders. The percentage of the
profits should be paid as dividend, that is, dividend pay-out ratio. The decision will depend
upon the preferences of the shareholder, investment opportunities available within the firm and
the opportunities for future expansion of the firm. The dividend pay-out ratio is to be
determined in the light of the objectives of maximizing the market value of the share. The
dividend decisions must be analysed in relation to the financing decisions of the firm to
determine the portion of retained earnings as a means of direct financing for the future
expansions of the firm (Thakor, 2015). Delta Corporation Limited in Zimbabwe is facing some
difficulties in paying dividends to its foreign shareholders. According to the information
released, the company as at 15 November 2018 owe about US$30 000 000.00 to both our
shareholders and some of our creditors, Chief Executive Officer, Pearson Gowero told analysts
in the capital, Harare. The company was continuously engaging the government through the
central bank to clear some of the impediments in accessing foreign currency. In addition, as of
23 December 2018, the company reported that it owes foreign suppliers US$41 000 000.00 and
that it was also unable to remit dividends to its foreign shareholders.

Furthermore, the company is unable to pay for licenses and royalties in foreign currency for
trade marks to Coca Cola International. The company indicated in its 2017 Annual Report
under section 11.4 on contingencies that the Zimbabwe Revenue Authority has raised tax
assessments of US$27 800 00.00 for the period 2009 to 2014 based on disallowing expenditure
on royalties and technical assistance fees. Based on legal advice received to date, the Board is
of the view that the Company has acted within the confines of existing statutes. Consequently,
no provision has been made pending the resolution of the matter which is now before the courts
(Annual Report, 2017). In addition, the holding up of payments to foreign shareholders has
delayed the commissioning of sorghum beer plants in Masvingo and Kwekwe, which should

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now begin producing in December 2018. The plants were due to be commissioned by October
to increase volumes of the Chibuku Super brand, the Harare-based Source website reported in
July 2018. In an interview Chief Executive Officer Pearson Gowero told analysts in the capital,
the company currently owe about US$30 000 000.00 to both our shareholders and some of our
creditors,”, Harare, on Wednesday. The brewer has set aside RTGS$120 000 000.00 in cash to
repay debt and the company will continue to engage the authorities.

Financing decisions

International financial decision is not a simple one and it is mainly characteristic to

multinational companies or to companies located in countries with a reduced saving rate that
is not sufficient to cover all internal financing needs (Paun, 2012). Financial management
guides companies in financing divisions and achieving business financing goals IFM requires
any corporate investments to be properly equipped. In this way the financial organizer must
highlight the proper mix of capital structures and financing, which can lead to a maximum
value (Ankitha, 2018). The sources for generating financial resources usually have a
combination of debt and equity financing. If a business is determined to be financed by a loan,
it will increase the obligation to pay, so the project's goal of success consists of cash flow
problems independently. Second choice equity financing. However, equity financing is less
dangerous for cash flow payments, but results in reduction in control, management and
earnings.

The cost of equity financing is more than the cost of debt financing, and in this way the equity
financing method can result in an appreciative hurdle rate to compensate for any reduction in
cash flow risk. Management of International Financial Management helps to keep balance
between two options to avoid cost burden (Ankitha, 2018) The financing decision is concerned
with capital – mix, financing – mix or capital structure of a firm. The term capital structure
refers to the proportion of debt capital and equity share capital. Financing decision of a firm
relates to the financing – mix. This must be decided taking into account the cost of capital, risk
and return to the shareholders. Employment of debt capital implies a higher return to the
shareholders and also the financial risk. There is a conflict between return and risk in the
financing decisions of a firm. So, the Delta Corporation Limited financial manager has to bring
a trade – off between risk and return by maintaining a proper balance between debt capital and

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equity share capital. On the other hand, it is also the responsibility of the financial manager to
determine an appropriate capital structure (Thakor, 2015).

Working capital management

Working capital management is also one of the important parts of the international financial
management. It is concerned with short-term finance of the business concern which is a closely
related trade between profitability and liquidity. Efficient working capital management leads
to improve the operating performance of the business concern and it helps to meet the short
term liquidity (Thakor, 2015). Hence, study of working capital management is not only an
important part of financial management but also are overall management of the business
concern. Working capital is described as the capital which is not fixed but the more common
uses of the working capital is to consider it as the difference between the book value of current
assets and current liabilities (Paramavan and Subramarian, 2009). Working Capital is an
essential part of the business concern. Every business concern must maintain certain amount
of Working Capital for their day-to-day requirements and meet the short-term obligations.
Delta Corporation Limited need working Capital is needed for the following purposes
(Paramavan and Subramarian, 2009): Purchase of raw materials and spares, that is, the basic
part of manufacturing process is, raw materials. It should purchase frequently according to the
needs of the business concern. Hence, every business concern maintains certain amount as
working capital to purchase raw materials, components and Spares. The Corporation also
require foreign currency for the payment of payment of wages and salary. The next part of
working capital is payment of wages and salaries to labour and employees.

Periodical payment facilities make employees perfect in their work. So a business concern
maintains adequate the amount of working capital to make the payment of wages and salaries.
Delta need working capital to finance it day-to-day expenses. A business concern has to meet
various expenditures regarding the operations at daily basis like fuel, power and office
expenses. Provide credit obligations: A business concern responsible to provide credit facilities
to the customer and meet the short-term obligation. So the concern must provide adequate
working capital. Delta as Zimbabwe’s largest beverages manufacturer Delta Beverages is
struggling to settle payments amounting to US$53 000 000.00 to external suppliers due to the
acute foreign currency shortage crippling the economy. However, the company says it is

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banking on the outcome of talks with the Reserve Bank of Zimbabwe (RBZ) aimed at settling
the arrears by H1 2019. The country is currently facing severe shortages of hard currency that
has seen banks defer foreign payments by as much as six months. Ordinarily, the repatriation
of foreign exchange for securities-related transactions is given top preference on the central
bank’s list for the allocation of foreign currency. Supply of Coca-Cola concentrate and other
imported materials remains critical for the Delta business, but securing them had proven
difficult due to delays in foreign currency allocations. Government of Zimbabwe in January
blocked Delta Corporation’s decision to price its products in United States dollars, in a clear
indication that authorities are opposed to re-dollarisation of the economy. Delta, the country’s
largest beverages manufacturer, announced a new pricing system pegged in United States
dollars in January 2019, in a strategic move to keep itself afloat in the face of foreign currency
shortages. Industry minister Mangaliso Ndlovu, described the move as illegal, saying he was
looking forward to discuss the issues bedevilling the company today with a view of finding a
lasting solution.

Assess political and business landscape

Economics cannot be separated from politics. An obvious risk for international business is
political uncertainty and instability. Political risk is even greater in developing nations like
Zimbabwe, where regime change can lead to abrupt transformations in the legal and security
environments. The political climate like policy inconsistence prevail in Zimbabwe which the
current regime tries to correct. The political climate of a particular Zimbabwe or geographic
region like SADC can greatly affect the very ability of an MNC to do business in that country
or area. Countries and emerging markets that may offer considerable opportunities for
expanding global businesses may also pose challenges, which more established markets do not.
Before considering expansion into a new or unknown market, a risk assessment of the
economic and political landscape is critical (Reynolds, 2017). Issues such as ill-defined or
unstable policies and corrupt practices can be hugely problematic in emerging markets.

Changes in governments can bring changes in policy, regulations, and interest rates that can
prove damaging to foreign business and investment. Policy inconsistent prevails in Zimbabwe.
The change of the government in November 2017 has brought some changes politically and
economically. The country has gone through policy inconsistence which exposed companies
to incur some losses. In addition, the RBZ Exchange Control Directive to Authorised Dealers

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RU28/2019 of 22 February 2019 retention on foreign Export Retention Threshold of
Manufacturing companies in which Delta Corporation Limited is 20% to RBZ. This means for
every exports to foreign countries RBZ will get 20% from the sale proceeds from
manufacturing companies. This is not favourable to a company like Delta Corporation Limited
as it struggles to acquire foreign currency. The company is selling all its products in RTGS
dollars. The company will then need to source foreign currency from the domestic market
where foreign currency is very scare. This will increase the cost since the rate will be always
higher due to demand of the foreign currency especially the United States dollar.

Commodity price risk management

With recent price shifts in commodities and their ongoing volatility, the front line for
companies to improve their earnings is radically changing, making it impossible for companies
to stick to their old playbook and remain competitive. Managing the impact of raw material
costs across a company’s value chain has become a key driver of financial performance. To
successfully manage the rising impact of raw material costs on margins, Delta Corporation
Limited must play a bigger role in managing companies’ margins, with involvement across the
broader organization as a whole. The fundamental reason for this change is that raw material
costs have climbed to become many packaged consumer goods companies’ biggest expense,
accounting for about half of their costs. Yet their ability to pass through price increases in a
timely manner to customers is low, particularly in highly competitive mature Western markets.
As a result, the company, has become more vulnerable to rising material costs in the past few
years. Commodity risk is the risk that a business’s financial performance or position will be
adversely affected by fluctuations in the prices of commodities (Ankitha, 2018). It is risk as a
result price uncertainty that adversely impacts the financial results of those who both use and
produce commodities. Commodity price risk can equally impact producers of a commodity,
not just users. Producers of agricultural like wheat, sugar malting barley, maize and sorghum
including key agricultural raw materials such as sugar and juicing fruits. Delta Corporation
Limited may miss some profits as a result of the price fluctuations. This is commodity price
risk. Commodity production inputs include raw materials like corn, wheat, oil, sugar, soybeans,
malting barley, maize and sorghum. Factors that can affect commodity prices include political
and regulatory changes, seasonal variations, and weather, technology and market conditions.

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Commodity price risk is often hedged by major player like Delta Corporation. One way to
implement these hedges is with commodity futures and options contracts traded on major
exchanges like the London Stock Exchange Derivatives Market. These contracts are equally
beneficial to commodity users and producers by reducing price uncertainty (Ankitha, 2018).
Commodity price risk stems from unexpected changes in beverage prices that can reduce a
producer's profit margin and make budgeting difficult. For example, in 2018, beverages
ingredients jumped by all most 100% and this could see a materially negative impact on Delta
Corporation Limited profit margins for the full financial year. Futures markets are not the only
choice for hedgers. They can also use forward markets, fixed price pre-export finance
transactions and swaps to hedge. These markets entail principle-to-principle transactions with
each party assuming the credit and performance risk of the other. However, these tailor-made
transactions often meet the specific needs of consumers or producers concerning the
commodities at risk. Hedging is an important tool when it comes to running a business from
many perspectives. A hedge will guaranty a consumer supply of a required commodity at a set
price. A hedge will guaranty a producer a known price for commodity output. Hedging is a
mechanism that aids raw material suppliers and buyers so that they can plan and cover the costs
of running their business.

Conclusion

Therefore, the basic financial decisions now involve cross-border complexities. Choices about
raising capital, investment, risk management, acquisition activity, restructuring, and other
aspects of financial policy typically involve international considerations. When making these
choices, managers must analyse exchange rates, differences in tax rules, country risk factors,
and variation in legal regimes. Today’s financial managers should have a foundations on how
finance works in this rich cross-border setting. Multinational corporations are mostly affected
by the risks which have been discussed in the above scenario. It is also the duty of the financial
managers to create the value for the shareholders hence there is need to assess the entire
business environment as checks and balances whether it will be suitable for their own business
thus international financial management significance. The strongest of company’s financial
management the greater the opportunity Delta Corporate Limited has to maximise your profits
in the short term and to grow your capital value in the long term at a global level.

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References

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