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1、1 Chapter8 Short TermFinancing 2 Objectives Thischapterexplainsshort termliabilitymanagementofMNCs apartofmultinationalmanagementthatisoftenneglectedinothertextbooks Fromthischapter weshouldlearnthatcorrectfinancingdecisionscanreducethefirm scostsandmaximizethevalueoftheMNC Whileforeignfinancingcost
2、scannotusuallybeperfectlyforecasted firmsshouldevaluatetheprobabilityofreducingcoststhroughforeignfinancing Thespecificobjectivesare 3 Objectives toexplainwhyMNCsconsiderforeignfinancing toexplainhowMNCsdeterminewhethertouseforeignfinancing andtoillustratethepossiblebenefitsoffinancingwithaportfolio
3、ofcurrencies 4 Pre classDiscussion Ifafirmconsistentlyexportstoacountrywithlowinterestratesandneedstoconsistentlyborrowfunds explainhowitcouldcoordinateitsinvoicingandfinancingtoreduceitsfinancingcosts Whatistheriskofborrowingalowinterestratecurrency AssumethatforeigncurrenciesX Y andZarehighlycorre
4、lated Ifafirmdiversifiesitsfinancingamongthesethreecurrencies willitsubstantiallyreduceitsexchangerateexposure Explain 5 InternalFinancingbyMNCs BeforeanMNC sparentorsubsidiarysearchesforoutsidefunding itshoulddetermineifanyinternalfundsareavailable ParentsofMNCsmayalsoraisefundsbyincreasingtheirmar
5、kupsonthesuppliesthattheysendtotheirsubsidiaries 6 SourcesofShort TermFinancing Euronotesareunsecureddebtsecuritieswithtypicalmaturitiesof1 3or6months Theyareunderwrittenbycommercialbanks MNCsmayalsoissueEuro commercialpaperstoobtainshort termfinancing MNCsutilizedirectEurobankloanstomaintainarelati
6、onshipwiththebankstoo 7 WhyMNCsConsiderForeignFinancing AnMNCmayfinanceinaforeigncurrencytooffsetanetreceivablespositioninthatforeigncurrency AnMNCmayalsoconsiderborrowingforeigncurrencieswhentheinterestratesonsuchcurrenciesareattractive soastoreducethecostsoffinancing 8 DeterminingtheEffectiveFinan
7、cingRate Theactualcostoffinancingdependsontheinterestrateontheloan andthemovementinthevalueoftheborrowedcurrencyoverthelifeoftheloan Example howtocomputetheeffectivefinancingrate 9 Howtocomputetheeffectivefinancingrate Example Dearborn Inc basedinMichigan obtainsaone yearloanof 1 000 000inNewZealand
8、dollars NZ atthequotedinterestrateof8percent WhenDearbornreceivestheloan itconvertstheNZ toUS topayasupplierformaterials Theexchangerateatthattimeis 50 sotheNZ 1 000 000isconvertedto 500 000 1 000 000 50 Oneyearlater DearbornpaysbacktheloanofNZ 1 000 000plusinterestofNZ 80 000 8 NZ 1 000 000 Thus th
9、etotalamountinNewZealanddollarsneededbyDearbornisNZ 1 080 000 1 000 000 80 000 AssumetheNewZealanddollarappreciatesfrom 50to 60bythetimetheloanistoberepaid Dearbornwillneedtoconvert 648 000 10 Howtocomputetheeffectivefinancingrate Example 1 080 000 60 tohavethenecessarynumberofNewZealanddollarsforlo
10、anrepayment Tocomputetheeffectivefinancingrate firstdeterminetheamountinU S dollarsbeyondtheamountborrowedthatwaspaidback ThendividebythenumberofU S dollarsborrowed afterconvertingtheNewZealanddollarstoU S dollars GiventhatDearbornborrowedtheequivalentof 500 000andpaidback 648 000fortheloan theeffec
11、tivefinancingrateinthiscaseis 148 000 500 000 29 6 11 DeterminingtheEffectiveFinancingRate Effectivefinancingraterf 1 if 1 St 1 S S 1whereif theinterestrateontheloanS beginningspotrateSt 1 endingspotrateTheeffectiveratecanberewrittenasrf 1 if 1 ef 1whereef the Dinthespotrate 12 CriteriaConsideredfor
12、ForeignFinancing TherearevariouscriteriaanMNCmustconsiderinitsfinancingdecision includinginterestrateparity theforwardrateasaforecast andexchangerateforecasts 13 CriteriaConsideredforForeignFinancing InterestRateParity IRP IfIRPholds foreignfinancingwithasimultaneoushedgeofthatpositionintheforwardma
13、rketwillresultinfinancingcostssimilartothosefordomesticfinancing 14 CriteriaConsideredforForeignFinancing TheForwardRateasaForecastIftheforwardrateisanaccurateestimateofthefuturespotrate theforeignfinancingratewillbesimilartothehomefinancingrate Iftheforwardrateisanunbiasedpredictorofthefuturespotra
14、te thentheeffectivefinancingrateofaforeignloanwillonaveragebeequaltothedomesticfinancingrate Summaryoftheimplicationsofavarietyofscenariosrelatingtointerestrateparityandforwardrate 15 ImplicationsofIRPforFinancing IRPholds ScenarioTypeoffinancingFinancingcostsYesCoveredSimilarYesForwardrateaccuratel
15、yUncoveredSimilarpredictsfuturespotrateYesForwardrateoverestimatesUncoveredLowerfuturespotrateYesForwardrateunderestimatesUncoveredHigherfuturespotrateNoForwardpremium discount CoveredHigherexceeds islessthan interestratedifferentialNoForwardpremium discount CoveredLowerislessthan exceeds interestra
16、tedifferential 16 CriteriaConsideredforForeignFinancing ExchangeRateForecastsFirmsmayuseexchangerateforecaststoforecasttheeffectivefinancingrateofaforeigncurrency ortheymaycomputethebreak evenexchangeratethatwillequatethedomesticandforeignfinancingrates Example Sarasota Inc needsfundsforoneyearandisawarethattheone yearinterestrateofU S dollaris12percentwhiletheinterestratefromborrowingSwissfrancsis8percent SarasotaforecaststhattheSwissFrancwillappreciatefromitscurrentrateof 45to 459 orby2percent
