Term
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Definition
| controls the company’s cash payments. This involves handling both the domestic and foreign financial functions including cash and exposure management, capital expenditure, and foreign-currency processing. |
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Term
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Definition
| evaluates the financial results of a busines |
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Term
| The Role of Financial management |
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Definition
| ... is to is to maintain and create economic value or wealth by maximizing shareholder wealth(which is the market value of existing shareholders’ common stock.) |
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Term
| The Corporate Finance Function |
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Definition
| acquires and allocates financial resources among the company’s activities and projects. |
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Term
| The four key functions of the Corporate Finance Function |
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Definition
| : Capital Structure(determining the proper mix of equity and debt), Long-term financing(selecting, issuing, and managing long-term debt and equity capital, inlcuding location (in the compnay’s home country or elsewhere) and currency (the company’s home currency or foreign currency)), Capital Budgeting(analyzing investment opportunities), and Working Capital Management(managing the company’s currency assets and liabilities (cash, receivables, marketable securities, inventory, trade receivables and payables, short-term bank debt)). |
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Term
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Definition
| acquires financial resources and allocates them among the company’s activities and projects. When a ...’s company is global he has to deal with foreign -exchange risk, currency flows and restrictions, political risk, different tax rates and law pertaining to the determination of taxable income, and regulations on access to capital in different market |
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Term
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Definition
| The act of determining the proper mix of equity and debt. |
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Term
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Definition
| The degree to which a firms funds the growth of the business through debt (versus equity capital). The greater the ......... the greater the financial risk and therefore the return to investors. In some markets consistent and unrestricted access to capital markets may not be the case, making a strategy with consistent ......... more difficu |
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Term
| weighted average cost of capital (formula) |
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Definition
| = [(After-tax cost of debt)*(Proportion of debt financing) + (Cost of equity)*(Proportion of equity financing)] |
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Term
| WACC (Weighted Average Cost of Capital |
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Definition
| WACC is a calculation of the overall cost of capital used by an enterprise, made by totalling the cost of each source of capital used multiplied by its proportional share of the total capital used. |
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Term
| The choice of capital structure depends on... |
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Definition
| on tax rates, the degree of development in the local equity markets, and creditor rights. |
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Term
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Definition
| Basically debt and equity markets. |
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Term
| A Eurocurrency (i.e. offshore currency) |
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Definition
| any currency banked outside of its country of origin, but it is primarily dollars banked outside the United States. The term can change to “Euro-[and the currency being banked offshore]” (ex. Euroyen/Eurosterling) |
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Term
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Definition
| a certificate of deposit in dollars banked outside of the United States. |
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Term
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Definition
| an unregulated by the Fed. Large companies/govts/etc. like to put their dollars in banks overseas in order to avoid domestic interest rate regulations, reserve requirements and other barriers to the free flow of capital (isn't even a definition on google for this one.) |
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Term
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Definition
| when one borrows in the Eurocurrency market (i.e. from a foreign bank in their home currency) for between 1 and 5 years. |
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Term
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Definition
| when many banks come together to give one loan in order to spread risk while still extending credit to a borrower. |
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Term
| LIBOR (London Inter-bank Offered Rate) |
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Definition
| s the short-term interest rate for dollars held in the Eurodollar market. |
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Term
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Definition
| a bond(basically a loan made from an entity besides a bank) that is available to domestic and foreign investors. |
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Term
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Definition
| An International Bond one sold outside the country of the borrower but denominated in the currency of the country of issue. |
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Term
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Definition
| is an international bond sold in a currency other than that of the country of issue. |
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Term
| The international bond market is good because... |
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Definition
| it allows companies to diversify their debt, a wider range of funding sources, and it can be less expensive. |
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Term
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Definition
| when an investor takes an ownership position in return for shares of stock in the company and the promises of capital gains(an appreciation in the value of the stock) and maybe dividends. |
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Term
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Definition
| the “Equity Capital Market” is a.k.a. the... |
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Term
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Definition
| a measure of the value of a company’s equity on the stock market. It’s calculated by the total number shares of stock listed times the market price per shar |
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Term
| The three largest stock markets in the world |
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Definition
| New York, London, and Tokyo, with the U.S. markets controlling nearly half of the world’s stock market capitalization. |
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Term
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Definition
| a market of companies that have started in the past few decades of issuing shares on stock exchanges outside of the boundaries of its home country (allowing foreigners to buy ownership in your company). While this was big in the 90s, it has become less popular because some exchanges perform better than others (weak market returns), each stock exchange has annual fees, increased regulation (Sarbanes-Oxley), |
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Term
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Definition
| shares of a company listed on stock exchanges in countries other than the company’s home country. |
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Term
| An American[/European/Global] Depository Receipt |
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Definition
| a negotiable instrument issued by a U.S. bank in the United States to represent the underlying shares of a foreign company’s stock held in trust at a custodian bank in the foreign country. |
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Term
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Definition
| the provision of financial services by banks and other agents to nonresidents. I.e. this sinvolves the borrowing of money from nonresidents and lending to nonresitidents. Ex. Eurodollar market. |
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Term
| Offshore Financing Centers |
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Definition
| cities or countries that provide large amounts of funds in currencies other than their own. They offer low or zero taxation, moderate or light financial regulation, and banking secrecy and anonymity. They generally have one of more of these characteristics: A large eurocurrency market (London), a market that functions as a large net supplier of funds to the world (Switzerland), a market that functions as an intermediary or pass-through for international loan funds (Bahamas, Cayman Islands), Economic and political stability, efficient and experience financial community, good communications and support services, and an official regulatory climate favorable to the financial industry (protects investors without totally restricting financial institutions). |
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Term
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Definition
| An offshore financing center with extensive banking activities involving short-term financial transactions. |
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Term
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Definition
| OFCs in which little banking activitiy occurs but in which transactions are recorded to take advantage of low (or no) tax rates. These places mainly acts as tax dodges (but can also harbor money for drugs or terrorist activity.) |
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Term
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Definition
| defined by the OECD (Organization for Economic Cooperation and Development) by four factors: No or only nominal taxes, lack of effective exchange of information (especially bank secrecy), lack of transparency, and no substantial activities. |
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Term
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Definition
| the process whereby MNEs determine which projects and countries will receive capital investment funds (usually based on Net Present Value, the Payback Period, or the Internal Rate of Retur |
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Term
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Definition
| the time it takes to recover the initial investment made on a project. |
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Term
| The Forumla for Net Present Value |
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Definition
[image]
t = time period / Ct = the annual free cash flow in t / r = the appropriate discount rate; that is, the required rate of return or cost of capital / Co = Initial Cash outlay / T = The project’s expected life. |
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Term
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Definition
| The required rate of return is the required rate in order to make money from the project. If NPV is negative the project will lose money, if positive, it will gain money, and if zero, it breaks even. |
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Term
| Internal Rate of Return (IRR) |
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Definition
| - the rate that equates the present value of future cash flows with the present value of the initial investment (the percentage of money gained over the initial investment.) |
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Term
| Complications in Capital Budgeting |
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Definition
| 1) Parent Cash Flows (cash flows from the project back to the parent in the parent’s currency) vs. Project Cash Flows (cash flows in the local currency from and for the sale of goods and services). 2) Remittance of funds to the parent are effected by tax systems, legal and political constraints, local business norms, and differences in how financial markets and institutions function. 3) Inflation rates can change. 4) And Exchange rates can change. 5) Political risk can negatively influence cash flows. 6) The value of the project when it is supposed to be completed can vary based on the perspectives (public vs. private, host vs. home vs. third countries, etc.) |
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Term
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Definition
| the minimum rate of return on a project. |
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Term
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Definition
| While some would think this refers to cash, it really refers to “working capital” or the different between current assets and current liabilities. Some sources of internal funds are: Loans, Investments through equity capital, Intercompany receivables and payables, and dividends. |
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Term
| Cash Budgets and Forecasts |
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Definition
| Used to assess the company’s cash needs. |
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Term
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Definition
| a good source of intercompany transfers, but governments often restrict their free movemen through regulations on how large a dividend can be. |
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Term
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Definition
| the process of coordinating cash inflows and outflows among subsidiaries so that only net cash is transferred, reducing transaction costs. The requires sophisticated software and good banking relationships in different countries. |
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Term
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Definition
| when there is no cash managment center this is calculated by subtracting the total payables from the total receivables on a subsidiary-by-subsidiary basis in order to determine the overall position of the firm. |
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Term
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Definition
| a clearing account in which subsidiaries report their net cash. From there a firm’s cash situation can be determined. |
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Term
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Definition
| Because exchange rates aren’t fixed there is always risk a foreign currency’s value with fluctuate negatively in relation to a company’s home currency. This risk is a.k. |
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Term
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Definition
| an account translated at the balance-sheet rate or current exchange rate. |
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Term
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Definition
| occurs when the dollar value of an exposed asset or liability changes as the exchange rate changes. |
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Term
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Definition
| This occurs when there is a transaction between currencies. Because most business is done in terms of receivables the value of the foreign currency being received can rise or fail in between the purchase date and the pay date. |
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Term
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Definition
| This is the potential for fluctuation in expected cash flows due to exchange rates. This can effect future cash flows, the sourcing of parts and components, the location of investments, and the competitive position of the company in different markets. |
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Term
| To protect assets from exchange-rate risk, management needs to... |
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Definition
| o: Define and measure exposure, establish a reporting system, adopt an overall policy on exposure management, and formulate hedging strategies. |
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Term
| In order to create a useful hedging strategy... |
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Definition
| , a company should look to forecast exchange-rate movements in-house or with external experts and create a reporting system to control exchange-rate risk that should incorporate input from central control (HQ) and input from foreign operations. |
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Term
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Definition
| any technique designed to reduce or eliminate financial risk; for example, taking two positions that will offset each other if prices change. These can be either operational or financial. The safest position is the one which balances exposed assets with exposed liabilities. |
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Term
| Operational Hedging Strategy |
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Definition
| One strategy is using local debt to balance local assets instead of dealing with borrowing money in a different currency and having the exchange rates play a role in balancing the currency. The second strategy is taking advantage of leads and lags in company payments (i.e. pay or receive money from transactions faster or slower in order to withhold stronger currency.) |
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Term
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Definition
| pay or receive money from transactions faster or slower in order to withhold stronger currency. If one must make purchases with hard currency (good stuff leaving) and make sales in soft currency they should resort to forward contracts and/or options in order to fix exchange rates at a certain price. |
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Term
| When planning for taxes for a MNE... |
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Definition
| one must understand how both domestic and international taxation will affect profitability and cash flow. |
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Term
| Taxation is impacted by... |
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Definition
| Location of operations, choice of operating form, legal form, having possible facilities in tax-haven countries to raise capital and manage cash, method of financing, capital budgeting decisions, method of setting transfer prices. |
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Term
| Problems with taxation arise when... |
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Definition
| &there is a lack of familiarity with laws loose enforcement. |
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Term
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Definition
| a tax measured by the amount of business done. |
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Term
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Definition
| A tax where at each stage of the development of a product a company pays a percentage of the value added to the product. |
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Term
| Separate Entity/Classical Approach |
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Definition
| When a taxes a taxable entity when it earns income. This leads to double taxation (stockholds and the corporation are taxed based on their earnings, which is unfair.) |
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Term
| Integrated System Approach |
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Definition
| An approach where corporations or stockholders get tax credit or split the tax rates on distributed and retained earnings (called “split tax rates”) in order to avoid double taxation. |
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Term
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Definition
| income (or loss) is directly included in the parent’s taxable income. |
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Term
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Definition
| income is not taxed until it is remitted to the parent company as a dividend. Therefore income gained can be reinvested without being taxed. This income can either be parent or tax deferred depending on whether is a “controlled foreign corporation” and whether its income is passive or active. If not a CFC, then any income is taxed when declared to the parent company as a dividend. |
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Term
| (CFC) Controlled Foreign Corporation |
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Definition
| This is when U.S. shareholders hold more than 50% of the voting stock in a company. Active income is tax deferred. Subpart F income is taxable when earned. |
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Term
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Definition
| income derived from the direct conduct of a trade or business. |
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Term
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Definition
| income that is from sources other than those connected with the direct conduct of trade or business, generally in tax-haven countries. This can be from holding company income (dividends, interest, royalties, rents, and gains on sale of stocks), sales income (sales in countries in which a company is not incorporated), or service income (income from the performance of technical, managerial, or similar services for a company in the same corporate family). |
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Term
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Definition
| companies owned by a tax-haven subsidiary which prevents them from being taxed heavily. |
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Term
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Definition
| the price between two companies that do not have an ownership interest in each other. |
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Term
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Definition
| a price on goods and services one member of a corporate family sells to another. This can manipulated in order to pay the least amount of taxes. |
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Term
| The OECD (Organization for Economic Cooperation and Development) |
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Definition
| an organization of 30 nations (as of 2002) whose purpose is to promote trade and economic growth in both member and nonmember nations. The handle issues on how MNEs dodge taxes, such as when a company uses transfer prices to dodge taxes. |
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Term
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Definition
| occur when both stockholders and corporations get taxed or when income generated in a foreign country and the home country of the corporation both tax one corporation. In the U.S. tax credits are given to the corporation equal to how much the corporation paid in income for the foreign-sourced income. |
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Term
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Definition
| A dollar-for-dollar reduction of tax liability that must coincide with the recognition of income [obtain under foreign jurisdiction]. |
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Term
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Definition
| these are done for the purpose of preventing double taxation or to provide remedies when double taxation occurs. The U.S. has tax treaties with 65 other countries which results in lower taxes for MNEs who do business in these countries. |
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Term
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Definition
| a trauma one experiences in a new and different culture because of having to learn and cope with new things. o Key to preempting culture shock is the expatriate’s success in developing a productive pattern of schooling, socializing, and shopping. |
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Term
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Definition
| MNE’s use to manage expatriate compensation. The approach develops a salary structure that equalizes purchasing power across countries so that expatriates have the same living standard in their foreign posting that they had at home-no matter to which country their assignment takes them. The principle approach is equalization. It also approaches outlines how the company provides financial incentives that offset qualitative differences between assignment locations. Three common methods: Home-based, Headquarters-Based, and Host-Based Method. |
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Term
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Definition
| occurs when one group places itself at the top of an imagined hierarchy of all groups, seeing other groups as inferior. Reflects the belief that the principles and practices used by the home-office country are superior to those used by rivals in other countries. Advantages- fills key management positions with home-country nationals. Other factors: command and control, local talent gaps, social integration, local implementation, high turnover among locals, and management development. Disadvantages- force-fitting foreign operations with a standardized staffing policy risks pounding circular pegs into square slots. Staffing policies can also leave local managers unmotivated and demoralized. |
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Term
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Definition
| is an employee who leaves her or his native country to live and work in another. There are two types: home-country national or third-country national. |
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Term
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Definition
| is a manger’s premature return home due to poor job performance. It is the failure of an MNE’s selection policies to find individuals who will succeed abroad. It is operationally costly and professionally detrimental. Financial and personal costs are distributive. The improving sophistication of selection processes has reduced the rate. A leading cause is the inability of a spouse and family to adapt to the host country. |
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Term
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Definition
| process of screening executive to find those with the greatest inclination and highest potential for a foreign assignment. Difficult process. |
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Term
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Definition
| “world-oriented” set of attitudes and values that regards humanity as a single entity. The framework does not heed national boundaries and sees the blunt division of home-, host-, and third-country managers as unnecessary. Calls upon HRM to develop the best people for key jobs throughout the organization, regardless of their nationality. Advantages- develops international executives who move between countries and cultures without forfeiting their effectiveness. Helps companies pursue a global and transnational strategy. Disadvantages- economic factors, decision-making routines, and legal contingencies complicate a geocentric framework. |
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Term
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Definition
| a citizen of the country where the company is headquartered. Ex: Brazilian national running the German operations of his Brazilian company. |
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Term
| Human Resource Management (HRM) |
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Definition
| the approach a company takes to manage its most valued assets- the people who implement its strategy. Refers to activities that staff the organization. It is more difficult for the international company than for its domestic counterparts. International company adjusts its practices for political, cultural, legal and economic differences between countries. It is more difficult for the international company than its domestic counterpart due to environmental differences and organizational challenges. |
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Term
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Definition
| process whereby an expatriate retains a foreign assignment provided she accept the status, and corresponding compensation, of a local hire. |
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Term
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Definition
| the principle organization around several political, social, or economic centers. Sees effectiveness of the business practices of foreign “centers” as equivalent to those in the home “center”. Uses host-country nationals to manage local subsidiaries. Advantages- Cost containment, nationalism, management development, employee morale, expatriate failure rates, and product issues. Disadvantages- using host-country managers helps local motivation and morale but at the possible cost of a gap with global operations because of problems with accountability and allegiance. |
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Term
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Definition
| process of reintegrating the expatriate into the home company upon completion of the international assignment. Returning home from a foreign assignment is fraught with difficulties. It tends to cause dissonance in many areas most notably: work, financial, and social. The principle cause of frustrations is finding the right job for the returning expatriate. |
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Term
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Definition
| a citizen of neither the country where he or she works nor the headquarters country, but a third country. Ex: Swedish citizen running the Egyptian operation for an Australian company. |
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