JAWAHARLAL NEHRU TECHNOLOGICAL UNIVERSITY ANANTAPUR

MBA IV Semester LT P C

4 0 0 4

(17E00407) INTERNATIONAL FINANCIAL MANAGEMENT

(Elective VI)

Objective: The objective of the course is to provide students with a broad view of International
Monetary Systems and its understanding to enable a global manager to do business in a global setting.
The prerequisite for the course is Financial Accounting and Analysis and Financial Management.

1. Introduction to International Financial management: IFM meaning, Difference between FM &

IFM, Nature ,Scope, Importance.
2. Foreign Exchange Market: Functions and Structure of the Forex markets, major participants,
types of transactions and settlements, Foreign exchange quotations, .
3. Management of foreign exchange exposure and risk: Types of Exposure, Economic Exposure,
Transaction Exposure, Operating Exposure.
4. Cross-border Investment Decisions: Capital budgeting, Approaches to Project Evaluation, Risk in
Cross-border Investment Decisions.
5. Financing Decisions of MNC`s & Working Capital Management: Introduction, the cost of
capital, capital structure, Cash management, management of receivables, Inventory
management.
Text Books:

 International Financial Management, V.K.Bhalla ,S.Chand

 International Financial Managemen, EphriamClark , Cengage.
References:

 International Finance , Prakash .G.Apte, TMH

 International Financial Management, T.Siddaiah: Pearson.
 International Financial Management ,M.K.Rastogi
 International Financial Management, S.EunChoel and Risnick Bruce: TMH.
 International Financial Management, Machi Raju, HPH.
 international finance management, Jeff Madura, Cengage.
 International Financial Management, Sharan5th Edition, PHI.
 International Financial Management, MadhuVij: Excel, .
 International Financial Management, V. A Avadhani, Himalaya .
 NPTEL

Exchange Rate Arithmetic

https://www.youtube.com/watch?v=0TZUHuPdnKA
International financial environment https://nptel.ac.in/courses/110105057/1
Gold standard https://nptel.ac.in/courses/110105057/3
Purchasing power parity https://nptel.ac.in/courses/110105057/4
Exchange rate https://nptel.ac.in/courses/110105057/8

PPT

Unit - 1
International Financial Management
Unit -2 Structure of the Forex markets
Unit -3 Types of Exposure
Unit -4 Cross-border Investment Decisions
Unit -5 cost of capital

Text Books

S.No Name of the Text Book/Reference Book Name of the Author

International Financial management R1 V.K.BHASA, S.
1 Chand

2 International Financial management R2 T. Siddaiah, Pearson

International Financial management R3 V.A. Avadhani,

3 Himalaya
NARAYANA ENGINEERING COLLEGE::NELLORE
Permanently affiliated to JNTUA, Ananthapuramu
IFM LIST

Roll Student Name IFM

number
MADIRAPAKA 
PRATHIMA VIJAYA
16711E0093 LAKSHMI
18711E0001 AITHA THRIVENI 
18711E0009 BANDI ANKAIAH 
BOMMIREDDY 
18711E0011 VENKATESH
18711E0018 CHERUKURI JAGADISH 
CHINNI NAGA 
18711E0022 VALLISWARI
DANDU LAKSHMI 
18711E0025 MANASA
18711E0026 DEGA ASWITHA 
18711E0032 GADEKARI BHARGAV 
GANGISETTY HARI 
18711E0035 PRIYA
18711E0036 GANGODI VENKATESH 
18711E0040 GURRAM SRIKANTH 
JALADI 
18711E0045 MAHENDRAVARMA
18711E0046 JOHN KALAIVANI 
18711E0048 KAIPAKAM JAYANTHI 
18711E0049 KALISETTY MALLIKA 
18711E0050 KALLURU NAVEEN 
18711E0051 KANCHI SRINIVAS 
KATAKAM SIVA 
18711E0053 JYOSHNA
18711E0054 KOMARA AJAY BABU 
KONDISETTY SAI 
18711E0055 KAMAKSHI
18711E0057 LEBURU PAVAN KUMAR 
18711E0058 LOKKU SRAVAN 
18711E0060 MAKANA VAMSI 
18711E0063 MALLINENI VASAVI 
18711E0064 MANIKALA PAVANI 
MANNEPALLI MOHAN 
18711E0065 RAO
MOHAMMED 
18711E0070 KHAMRUDDIN
18711E0076 MUTHYALA LAVANYA 
18711E0087 PALLA HARSHA SRI 
18711E0091 PANDI PAVAN KUMMAR 
18711E0093 PATAN THAHER KHAN 
PELLURU CHENCHU 
18711E0097 HARIKA
18711E00B6 SHAIK SHARMILA 
SRIMANTH1ULA 
18711E00B8 BHARATH KUMAR
18711E00B9 SURAM LAVANYA 
18711E00C4 UPPALA SIVAKRISHNA 
18711E00C6 URDHALA MADHAVI 
VAKA 
VISHNUVARDHAN
18711E00C7 REDDY
18711E00C8 VANGALA BHARGAVI 
VEERAPUREDDY 
18711E00C9 VINEETHA
VELMIREDDY BHAGYA 
18711E00D0 LAKSHMI
18711E00D7 YENUGONDA NIROSHA 
 NARAYANA ENGINEERING COLLEGE: NELLORE

DEPARTMENT OF MANAGEMENT STUDIES

II MBA IV SEMESTER ACY: 2019-2020
INTERNATIONAL FINANCIAL MANAGEMENT
QUESTION BANK
Name of the staff: I.V.Girish Kumar

UNIT-I

1. What do you mean by International Financial Management? (May 2019)

(May 2017)
2. Explain the difference between Financial Management and International
Financial Management. (May 2018) (Dec 2017)
3. What is the Nature, Scope and Importance of IFM? (May 2019) (Nov 2018)
(May 2018) (May 2017)
4. Which kind of Risks affect IFM? (Nov 2018)
5. How International Financial Management affects our Indian Economy?
6. What are the challenges of International Financial Management?
7. Explain the Structure of Balance of Payments.
8. Explain about the developments of international monetary system?

UNIT-II

1. What do you know about foreign exchange market? (Dec 2017)

2. What is the use of a FEM? What are its Functions? (May 2019) (May 2018) (May 2017)
3. Who are the major participants in foreign exchange market? (May 2019) (May 2018)
4. Explain the different types of transactions in foreign exchange market. (Nov 2018) (Dec
2017)
5. Explain the process of Arbitrage. (Nov 2018)
6. Write about foreign exchange Quotations.
7. Explain the different types of settlements in foreign exchange market.
8. Explain the different types of Arbitrage?

UNIT - III

1. What do you mean by Translation exposure and Transaction exposure? (May 2018)
(May 2017)
2. Define exposure, differentiating b/w accounting and economic exposure? What role
does inflation play?
3. Describe at least 3 circumstances under which economic exposure is likely to exist.
(Nov 2018)
 4. What do you mean by an operational measure of exchange Risk? (May 2019) (Nov
2018)
5. Explain briefly where the firms can manage operating exposure. (May 2019)
6. What is the role of finance in protecting against exchange risk? (May 2018)
7. Explain the basic factors that determine the foreign exchange risk faced by a particular
company or project.

8. Differentiate between Transaction, Translation and economic exposure. (May 2017)

UNIT- IV

1. What Motivates corporations to invest abroad?

2. What are the four ways of incorporating political risk into the capital budgeting
decision?
3. What are the major cash outflows and cash inflows associated with a foreign project?
4. How will you evaluate a project, when there are restrictions on repatriations and when
there is a fear of devaluation of host currency? (Nov 2018)
5. Explain different types of Risks involved in Investment Decisions. (Nov 2018)
6. How cash inflows and cash out flows are evaluated in cross border investment
decisions? (May 2019) (May 2018) (Dec 2017)
7. Explain the factors affecting international Capital budgeting? (May 2019) (May 2018)
8. Explain the different approaches to evaluate of a project. (May 2017)

UNIT- V

1. What is cost of capital and how is this useful to get funds? (Nov 2018) (May
2018) (Dec 2017)
2. Explain about cash management. (May 2019)
3. Define and discuss indirect world systematic risk? (May 2019)
4. What do you understand by Receivables management? Discuss the factors which
influence the size of receivables?
5. What is meant by Inventory management? Why is it essential to a business
concern? (May 2018)
6. How would you determine the optimum level of current Assets? Illustrate your
Answer.
7. Explain in detail about various sources of capital? (May 2017)
8. What is meant by working capital? Explain the various factors which affect the
working capital? (Nov 2018)

STAFF HOD PRINCIPAL

 NARAYANA ENGINEERING COLLEGE::NELLORE
Permanently affiliated to JNTUA, Ananthapuramu
(Accredited by NAAC with “A+” Grade)
COURSE PLAN

Course Details
Class :Second Year, MBA Semester: IV Year: 2019-20
Course Title : International Financial Management Course Code: 17E00407 Credits: 4
Program/Dept.: MBA Batch : 2018-20
Regulation: R-17 Faculty: I.V.Girish Kumar

Teaching Textbook
Lectur Planned Unit Delivered Aid s/
Topics to be Covered
e No. Date No. Date Reference
s
UNIT – I International Financial Management

Introduction to International Chalk/Dust

1 17/12/19 1 R4
Financial management er
2 19/12/19 1 Definition of IFM, PPT R4
19/12/19 Difference between FM & IFM Chalk/Dust
3 1 R1&4
er
20/12/19 Nature of IFM Chalk/Dust
4 1 R1
er
20/12/19 Importance of IFM, Chalk/Dust
5 1 R2
er
24/12/19 Chalk/Dust
6 1 Scope of IFM R1
er
26/12/19 Objective of fm and IFM Chalk/Dust
7 1 R4&3
er
26/12/19 Factors affecting in international NPTEL
8 1 R1
environment through by IFM
27/12/19 Foreign exchange market Chalk/Dust
9 1 R2
er
27/12/19 Chalk/Dust
10 1 Quotations R2
er
31/12/19 Chalk/Dust
11 1 Balance of payments R1
er
02/01/20 Chalk/Dust
12 1 Monetary policy R2
er
02/01/20 Chalk/Dust
13 1 Investment desicion R1
er
03/01/20 Chalk/Dust
14 1 Case study R2
er
03/01/20 Chalk/Dust
15 1 Case study
er
Unit –II Foreign Exchange Market

07/01/20 2 Foreign Exchange Market: Need of Chalk/Dust

16 R2
Foreign exchange market er
09/01/20 2 Functions of Foreign exchange Chalk/Dust
17 R1
market er
18 09/01/20 2 Structure of the Forex markets PPT R3
10/01/20 2 Participants in Forex market Chalk/Dust
19 R1
er
2 types of transactions Chalk/Dust
20 10/01/20 R1
er
2 Foreign exchange quotations Chalk/Dust
21 17/01/20 R3
er
2 Development of Foreign exchange Chalk/Dust
22 17/01/20 R1
market er
23 21/01/20 2 Types of forex markets NPTEL R1
23/10/20 2 Settlements in foreign market Chalk/Dust
24 R2&3
er
23/10/20 Major participants in forex market Chalk/Dust
25 2 R2
er
24/10/20 Methods in the exposures Chalk/Dust
26 2 R3
er
24/10/20 Difference between transaction and Chalk/Dust R2
27 2
exchange er
28/01/20 Methods in the payments in foreign Chalk/Dust R2
28 2
currency er
30/01/20 Problems/ Case study Chalk/Dust R2
29 2
er
Problems/ Case study Chalk/Dust R2
30 30/01/20 2
er
31/01/20 Problems/ Case study Chalk/Dust
31 2
er
Unit III management of foreign exchange exposure and risk

3 Management of foreign exchange Chalk/Dust

32 31/01/20 R1
exposure and risk er
3 Management of Risk Chalk/Dust R2
33 04/02/20
er
3 Process of arbitrage Chalk/Dust R2
34 06/02/20
er
35 06/02/20 3 Types of Exposure PPT R1
3 Economic Exposure Chalk/Dust
36 07/02/20 R1
er
3 Transaction Exposure Chalk/Dust
37 07/02/20 R1
er
38 11/02/20 3 Operating Exposure. NPTEL R1
Mid Examination I 12-02-20 to 15-02-20
18/02/20 3 Problems/ Case study Chalk/Dust
39 R2
er
20/02/20 3 Problems/ Case study Chalk/Dust
40 R2
er
20/02/20 3 Problems/ Case study Chalk/Dust
41 R1
er
25/02/20 3 Chalk/Dust
42 Problems/ Case study R2
er
Unit IV cross border investment decisions

27/02/20 Cross broader investment decisions Chalk/Dust

43 4 R1
er
44 27/02/20 4 Capital budgeting Chalk/Dust R1&3
 er
4 Capital budgeting Chalk/Dust
45 28/02/20 R1&3
er
4 Approaches to project evaluation Chalk/Dust
46 28/02/20 R1&3
er
4 Problems /Case study Chalk/Dust
47 03/03/20 R1
er
4 Problems /Case study Chalk/Dust
48 05/03/20 R1
er
4 Problems /Case study Chalk/Dust
49 05/03/20 R2
er
4 Problems /Case study Chalk/Dust
50 06/03/20 R1&4
er
51 06/03/20 4 Risks in cross boarder decisions PPT R1
4 Risks in cross boarder decisions Chalk/Dust
52 12/03/20 R2
er
4 Incorporate risk Chalk/Dust
53 12/03/20 R1&3
er
54 13/03/20 4 Risks in incorporate risk NPTEL R1

Unit – V financing decisions

Introduction Chalk/Dust
55 13/02/20 5 R3
er
56 17/03/20 5 Cost of Capital PPT R1&4
5 Cost of Capital Chalk/Dust
57 19/03/20 R2
er
5 Problems on Cost of capital Chalk/Dust
58 19/03/20 R1&4
er
5 Problems on Cost of capital Chalk/Dust
59 20/03/20 R1&4
er
5 Capital structure Chalk/Dust
60 20/03/20 R1&4
er
5 Capital structure Chalk/Dust R1&4
61 24/03/20
er
5 Cash management Chalk/Dust R2
62 26/03/20
er
5 Cash management Chalk/Dust R2
63 26/03/20
er
5 Receviables management Chalk/Dust
64 27/03/20 R2
er
5 Receviables management Chalk/Dust R1&4
65 27/03/20
er
5 Inventory management Chalk/Dust R1&4
66 31/03/20
er
5 Inventory management Chalk/Dust R1&4
67 03/04/20
er
68 03/04/20 Case Study
69 07/04/20 Case Study
70 09/04/20 Revision
71 09/04/20 Revision
Mid Examination II 13-04-20 to 17-04-20
END EXAMINATIONS: 30-04-20 to 11-05-20
 S.No Name of the Text Book/Reference Book Name of the Author
International Financial management R1 V.K.BHASA, S. Chand
1
2 International Financial management R2 T. Siddaiah, Pearson
International Financial management R3 V.A. Avadhani, Himalaya
3

SIGNATURE OF STAFF HOD

International Financial management(17E00407)

 Unit – I

Syllabus: Introduction to International Financial management: IFM meaning, Difference between FM &
IFM, Nature , Scope, Importance

International Financial management

Concept

International Financial management. 3. The essence of international financial management S IFM- is a

popular concept which means management of finance in an international business environment, it
implies, doing of trade and making money through the exchange of foreign currency.

Definition

International Financial Management is a well-known term in today's world and it is also known as
international finance. It means financial management in an international business environment. ... The
resultant of liberalization and technology advancement is today's dynamic international business
environment.

Financial management

Concept

“Financial management may be defined as that area or set of administrative function in an organization

which relate with arrangement of cash and credit so that organization may have the means to carry out
its objective as satisfactorily as possible."

Definition

Financial management focuses on ratios, equity and debt. Financial managers are the people who will
do research and based on the research, decide what sort of capital to obtain in order to fund the
company's assets as well as maximizing the value of the firm for all the stakeholders.

Foreign exchange risk

Concept
Foreign exchange risk describes the risk that an investment's value may change due to changes in the
value of two different currencies. Translation exposure refers to when foreign exchange rates change,
affecting the figures that a multinational company reports to its shareholders.

Definition

Foreign exchange risk is a financial risk that exists when a financial transaction is denominated in a
currency other than that of the base currency of the company. 

Market imperfections

Concept

A market where information is not quickly disclosed to all participants in it and where the matching of
buyers and sellers isn't immediate. Generally speaking, it is any market that does not adhere rigidly to
perfect information flow and provide instantly available buyers and sellers.

Definition

An imperfect market is one in which there is not full disclosure, or in which there are barriers to entry or
exit or perhaps some form of manipulation.

Expanded opportunity sets

Concept

When firms go global, they get benefited from the expanded opportunities available globally. They can
locate production in any country or region to maximize their performance and raise funds in any capital
market where the cost of capital is the lowest.

Definition

The set of all possible portfolios that one may construct from a given set of assets. One may construct
both high- and low-risk portfolios from an opportunity set. Presenting an investor with an opportunity
set may help him/her in making investment decisions.

Employment Outlook
Concept

A statement that conveys the projected rate of growth or decline in employment in an occupation over
the next 10 years; also compares the projected growth rate with that projected for
all other occupations.

Definition

Employment Outlook is a forecast of the change in the number of people employed in a particular
occupation over a set period, for example, two years, five years or ten years. ... They describe an
occupation's projected job outlook by saying it will: grow much faster than average (an increase of 14%
or more)

Unit –II Foreign Exchange Market

Foreign Exchange Market: Functions and Structure of the Forex markets, major participants, types
of transactions and settlements, Foreign exchange quotations,

Foreign exchange market

Concept:The foreign exchange market is a global decentralized or over-the-counter market for the
trading of currencies. This market determines the foreign exchange rate. It includes all aspects of buying,
selling and exchanging currencies at current or determined prices. 

Definition: Foreign exchange market  is the  market  in which  foreign currencies  are bought and sold. The
buyers and sellers include individuals, firms,  foreign exchange  brokers, commercial banks and the
central bank.

Forex market

Concept: The foreign exchange market (Forex, FX, or currency market) is a global decentralized or over-

the-counter (OTC) market for the trading of currencies. This market determines the foreign
exchange rate. It includes all aspects of buying, selling and exchanging currencies at current or
determined prices.
Definition: The foreign exchange market is the market in which participants are able to buy, sell,
exchange and speculate on currencies. Foreign exchange markets are made up of banks, commercial
companies, central banks, investment management firms, hedge funds, and retail forexbrokers and
investors.

Spot Rate transactions

Concept: Spot rate is the price quoted for immediate settlement on a commodity, a security or a

currency. The spot rate, also called “spot price,” is based on the value of an asset at the moment of the
quote.

Definition  Spot contract, spot transaction, or simply spot, is a contract of buying or selling a commodity,
security or currency for immediate settlement (payment and delivery) on the spot date, which is
normally two business days after the trade date. The settlement price (or rate) is called spot
price (or spot rate).

Forward rate transactions

Concept: The forward exchange rate (also referred to as forward rate or forward price) is the exchange

rate at which a bank agrees to exchange one currency for another at a future date when it enters into
a forward contract with an investor.

Definition: A forward rate is an interest rate applicable to a financial transaction that will take place in

the future. It may also refer to the rate fixed for a future financial obligation, such as the interest rate on
a loan payment.

Futures transactions

Concept: A futures contract is a legal agreement to buy or sell a particular commodity or asset at a
predetermined price at a specified time in the future. The buyer of a futures contract is taking on the
obligation to buy the underlying asset when the futures contract expires.

Definition In finance, a futures contract (more colloquially, futures) is a standardized forward contract, a

legal agreement to buy or sell something at a predetermined price at a specified time in the future,
between parties not known to each other. The asset transacted is usually a commodity or financial
instrument.
Swaps transactions

Concept:An interest-rate swap is a transaction between two so-called counterparties in which fixed and

floating interest-rate payments on a notional amount of principal are exchanged over a specified term.
One counter party pays interest at a fixed rate and receives interest at a floating rate (typically three-
month Libor).

Definition: A swap is a derivative contract through which two parties exchange the cash flows or
liabilities from two different financial instruments. The most common kind of swap is an interest rate
swap. Swaps do not trade on exchanges, and retail investors do not generally engage in swaps.

Options transactions

Concept

 A stock option is a contract between two parties in which the stock option buyer (holder) purchases the
right (but not the obligation) to buy/sell 100 shares of an underlying stock at a predetermined price
from/to the option seller (writer) within a fixed period of time

Definition:

Options are contracts through which a seller gives a buyer the right, but not the obligation, to buy or sell
a specified number of shares at a predetermined price within a set time period. Options are derivatives,
which mean their value is derived from the value of an underlying investment.

Spot market

Concept: The spot market or cash market is a public financial market in which financial instruments or
commodities are traded for immediate delivery. It contrasts with a futures market, in which delivery is
due at a later date. A spot market can be through an exchange or over-the-counter (OTC).

Definition

The spot market or cash market is a public financial market in which financial instruments or
commodities are traded for immediate delivery. It contrasts with a futures market, in which delivery is
due at a later date.
Forward Market

Concept: Market dealing in commodities, currencies, and securities for future (forward) delivery at
prices agreed-upon today (date of making the contract). In commodity and
currency markets, forward trading is used as a means of hedging against sharp fluctuations in their
prices. See also futures market.

Definition: The forward market is the informal over-the-counter financial market by which contracts for
future delivery are entered into. Standardized forward contracts are called futures contracts and traded
on a futures exchange.

Unit – III Management of foreign exchange exposure and risk

Management of foreign exchange exposure and risk: Types of Exposure, Economic Exposure,
Transaction Exposure, Operating Exposure.

Foreign Exchange Exposure

Concept: Foreign exchange exposure refers to the risk a company undertakes when making financial
transactions in foreign currencies. All currencies can experience periods of high volatility which can
adversely affect profit margins if suitable strategies are not in place to protect cash flow from
sudden currency fluctuations.

Definition: Foreign Exchange Exposure refers to the risk associated with the foreign exchange rates that
change frequently and can have an adverse effect on the financial transactions denominated in
some foreign currency rather than the domestic currency of the company.

Foreign Exchange Risk

Concept: Foreign exchange exposure is the risk associated with activities that involve a global firm in
currencies other than its home currency. Essentially, it is the risk that a foreign currency may move in a
direction which is financially detrimental to the global firm.

Definition: Foreign exchange risk is a financial risk that exists when a financial transaction is
denominated in a currency other than that of the base currency of the company.

Translation exposure
Concept:  Translation exposure is the risk that a company's equities, assets, liabilities or income will
change in value as a result of exchange rate changes. This occurs when a firm denominates a portion of
its equities, assets, liabilities or income in a foreign currency.

Definition:

Translation exposure is the risk that a company's equities, assets, liabilities or income will change in
value as a result of exchange rate changes. This occurs when a firm denominates a portion of its
equities, assets, liabilities or income in a foreign currency. It is also known as "accounting exposure.”

Economic exposure

Concept: Economic exposure, also known as operating exposure refers to an effect caused on a

company's cash flows due to unexpected currency rate fluctuations. Economic exposures are long-
term in nature and have a substantial impact on a company's market value.

Definition:  Economic exposure, also known as operating exposure\refers to an effect caused on a

company's cash flows due to unexpected currency rate fluctuations. Economic exposures are long-term
in nature and have a substantial impact on a company's market value.

Operating Exposure:

Concept: The change in a firm's future cash-flows (or the present value of those cash-flows) caused by
an unexpected change in exchange rates.

Definition :The Operating Exposure refers to the extent to which the firm's future cash flows gets
affected due to the change in the foreign exchange rates along with the price changes.
 UNIT – IV
Cross-border Investment Decisions
Cross-border Investment Decisions: Capital budgeting Approaches to Project Evaluation, Risk in Cross-
border Investment Decisions.

Cross border investment

Concept:The buying and selling of goods and services between businesses in neighboring countries, with
the seller being in one country and the buyer in the other country, for example, a company in the United
States selling to a company in Canada.

Definition: “Cross-border investment refers to the net inflows of investment to acquire a lasting

management interest (10 percent or more of voting stock) in an enterprise operating in an economy
other than that of the investor.”

Inward Investment

Concept: An inward investment (the opposite of an outward investment) involves an external

or foreign entity either investing in or purchasing the goods of a local economy. A common type
of inward investment is a foreign direct investment (FDI).

Definition: An inward investment refers to a decision by an external organization in one country to

invest in business in another country. The foreign organization may invest in the outside country or
purchase the goods of the external economy or a company merges with another company in the other
country.

Outward Investment
Concept: An outward direct investment (ODI) is a business strategy in which a domestic firm
expands its operations to a foreign country. Employing outward direct investment is a natural
progression for firms if their domestic markets become saturated and better business
opportunities are available abroad.
Definition: Investment whereby the property or company invested in is based in a country other than
that from which the capital originates and to which the profit or income returns.

Capital budgeting
Concept: Capital budgeting is a planning process that is used to determine the worth of long-term
investments of an organization. Selection of a project is a major investment decision for an organization.
Therefore, capital budgeting decisions are included in the selection of a project.

Definition: Capital budgeting, and investment appraisal, is the planning process used to determine
whether an organization's long term investments such as new machinery, replacement of machinery,
new plants, new products, and research development projects are worth the funding of cash through
the firm's capitalization structure. 

Payback period

Concept: The payback period is the length of time required to recover the cost of an investment.
The payback period of a given investment or project is an important determinant of whether to
undertake the position or project, as longer payback periods are typically not desirable for investment
positions.

Formula:

Cash outlay  or  original cost of project

Pay  back period =
Annual cash inflow

Net Present Value

Concept: In finance, the net present value or net present worth is the summation of the present value of
a series of present and future cash flows. 

Formula

NPV= Present value of cash inflows – investment.

Accounting Rate of Return

Concept: The accounting rate of return (ARR), also known as the simple or average rate of return,
measures the amount of profit, or return, expected on an investment. It divides the average profit by
the initial investment to derive the ratio or return that can be expected.

Formula:
 Average net income after taxes
ARR  100
Average Investment

Total Income after taxes

Average net income after taxes 
No.of Years

Total Investment
Average investment 
2
Cross border risk

Concept: The volatility of returns on international investments caused by events associated with a
particular country as opposed to events associated solely with a particular economic or financial agent.

Definition: Country cross-border risk is the risk that we will be unable to obtain payment from our
customers or third parties on their contractual obligations as a result of certain actions taken by foreign
governments, chiefly relating to convertibility and transferability of foreign currency.

UNIT – V

Financing Decisions of MNC`s & Working Capital Management

Financing Decisions of MNC`s & Working Capital Management: Introduction, the cost of capital, capital
structure, Cash management, management of receivables, Inventory management.

Working capital management

Concept: The goal of working capital management is to ensure that a firm is able to continue its
operations and that it has sufficient ability to satisfy both maturing short-term debt and upcoming
operational expenses. The management of working capital involves managing inventories, accounts
receivable and payable, and cash

Definition: Working capital management refers to a company's managerial accounting strategy designed

to monitor and utilize the two components of working capital, current assets and current liabilities, to
ensure the most financially efficient operation of the company.
Capital

Concept: Cost of capital is the rate of return that a firm must earn on its project investments to maintain
its market value and attract funds. It is the required rate of return on its investments which belongs to
equity, debt and retained earnings.

Definition: Cost of capital refers to the opportunity cost of making a specific investment. It is the rate of
return that could have been earned by putting the same money into a different investment with equal
risk. Thus, the cost of capital is the rate of return required to persuade the investor to make a given
investment.

Receivable management

Concept: Receivable management is the process of making decisions relating to investment in trade
debtors. Certain investment in receivables is necessary to increase the sales and the profits of the firm.
But at the same time investment in this asset involves cost consideration also.

Definition: Receivable management is the process of making decisions relating to investment in trade
debtors. Certain investment in receivables is necessary to increase the sales and the profits of the firm.
If trade receivables are allowed to rise too high, the business will have to wait a long time before it
receives cash from its customers.

Capital structure

Concept Capital structure refers to a company's outstanding debt and equity. It allows a firm to

understand what kind of funding the company uses to finance its overall activities and growth. In other
words, it shows the proportions of senior debt, subordinated debt and equity (common or preferred) in
the funding.

Definition: In finance, particularly corporate finance capital structure is the way a corporation finances
its assets through some combination of equity, debt, or hybrid securities. 

Inventory management

Concept: As an element of supply chain management, inventory management includes aspects such as

controlling and overseeing ordering inventory, storage of inventory, and controlling the amount of
product for sale. The definition of Inventory Management is easy to understand.
Definition: Inventory or stock is the goods and materials that a business holds for the ultimate goal of
resale. Inventory management is a discipline primarily about specifying the shape and placement of
stocked goods.