FINANCIAL MANAGEMENT OF MULTINATIONALS

Presented By GROUP 2(Section ‘D’)

Suhani Kanungo.
Vaishnavi Vadake.
Shrishti Sharma.
Hemraj Bhatt.
Sohrab Ali Chodhary.
Shashank Brahmwanshi.
Tanvir shaikh.

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 Overview

• International Financial Management Is The Art Of

Managing Money On A Global Scale.
• A Corporation That Operates In Two Or More
Countries. 
• The Main Objective Of International Financial
Management Is To “Maximize Shareholder Wealth”.
• 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.
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 History

• Liberalization
• Freedom to conduct business
• Financial Innovations

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 Expansion In Other Countries

• To Seek New Markets.

• To Seek New Supplies Of Raw Materials. 
• To Gain New Technologies.
• To Gain Production Efficiencies.
• To Avoid Political And Regulatory Obstacles. 
• To Reduce Risk By Diversification.

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Goal Of Financial Management Of Multinational

1.Maximize Profits 
Maximize Profits A company's most important goal is to make money.
• Gross Profit Margin 
Gross Profit Margin = (Sales - Cost of Goods Sold)/Sales

• Operating Profit Margin

Operating Profit Margin = EBIT/Sales

• Net Profit Margin

Net Profit Margins = Net Profits after Taxes/Sales

2.Maximize Market Share

3.Minimize Costs
 Conflicts With Goals

• For Corporations With Shareholders Who Differ From Their

Managers, A Conflict Of Goals Can Exist - The Agency Problem.
• Agency Costs Are Normally Larger For Mncs Than For Purely
Domestic Firms.
1. The Share Size Of The Mnc.
2. The Scattering Of Distant Subsidiaries.
3. The Culture Of Foreign Managers.
4. Subsidiary Value Versus Overall Mnc Value

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 Conflicts With Goals

• As MNC Managers Attempt To Maximize Their Firm's Value, They

May Be Confronted With Various Constraints.
1. Environmental Constraints.
2. Regulatory Constraints.
3. Ethical Constraints
• A Recent Study Found That Investors Assigned A Higher Value To
Firms That Exhibit High Corporate Governance Standards And Are
Likely To Obey Ethical Constraints.

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 IMPACT OF FMM

 Exposure To The International Environment.

 Exposure Of Foreign Exchange.
A. Transaction
B. Translation
C. Exchange Rate Risk
 Capital Budgeting

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 CENTRALIZATION AND DECENTRALIZATION IN FMMs

 The Degree To Which Authority Is Delegated Determines Centralization

And Decentralization.
 Depends On The Amount Of Standardization Or Customization Required
In Products.
 The Ability To Respond Faster To Changes In Market Demand Can Be A
Source Of Competitive Advantage To The Firm.
 It Is Easier For Firm To Achieve This In A Decentralized Environment.
 The SBUs Facilitate Decentralized Decision-making.
 International Division And Functional Structures Facilitate Centralized
Decision Making.
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 Centralized Multinational Financial Management
for an MNC with two subsidiaries, A and B

Cash Financial Cash

Management Managers Management
at A of Parent at B

Inventory and Inventory and

Accounts Accounts
Receivable Receivable
Management at A Management at B

Financing at A Financing at B

Capital Expenditures Capital Expenditures

at A at B
 Decentralized Multinational Financial Management
for an MNC with two subsidiaries, A and B

Cash Financial Financial Cash

Management Managers Managers Management
at A of A of B at B

Inventory and Inventory and

Accounts Accounts
Receivable Receivable
Management at A Management at B

Financing at A Financing at B

Capital Expenditures Capital Expenditures

at A at B
THE MOTIVATIONS FOR INTERNATIONALIZATION OF A
FIRM
• Market Opportunities

• Risk Diversification 

• Economies Of Scale

Proactive Reasons:

• Profit Seeking

• Sales Expansion

• Uniqueness And Exclusivity

• Resource Seeking 12
 Reactive Reasons

• Market Opportunities - The Company Is Responding To Demand

It Discovers Abroad.

• Overproduction, Declining Domestic Sales, Or Excess Capacity.

• Competitive Strike

• Governmental Reasons

• Economic & Political Changes

  BENEFITS OF INTERNATIONAL EXPANSION

• New Markets
• Diversification
• Access To Talent
• Competitive Advantage 
• Foreign Investment Opportunities
 Valuation Model For An MNC

• Domestic Model

n
E  CF$, t 
Value = 
t =1 1  k  t

• E (Cf$,t ) = Expected Cash Flows To Be Received At The End Of

Period T.
• N = The Number Of Periods Into The Future In Which Cash
Flows Are Received.
• K = The Required Rate Of Return By Investors.
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 Valuation Model For An MNC

•Valuing International Cash Flows

 m 
  E  CF j , t   E  ER j , t   
n
 j 1 
Value =   
t =1  1  k  t


 


•E (Cfj,t ) = Expected Cash Flows Denominated In Currency J To Be Received

By The U.S. Parent At The End Of Period T
•E (Erj,t ) = Expected Exchange Rate At Which Currency J Can Be Converted
To Dollars At The End Of Period T
•K = The Weighted Average Cost Of Capital Of The MNC
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 CONCLUSION

• Mncs Are Beneficial For India And It Also Give Disadvantages

To India.

• They Give Us Employment, Growth, Development Etc. But

They Also Create Monopoly In Market Thus Small Sectors

Which Exists In Market Are Getting Closed .

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 YO U
A N K
TH
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