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Gujranwala Institute of Management Studies, Gujranwala

This document contains an assignment on the process of financing foreign operations. It discusses two main goals of a multi-national corporation's financing strategy: 1) Minimizing the cost of capital by raising funds through various means like stock issuance and debt; and 2) Reducing risk through hedging currency exposure and political risk diversification. The assignment then examines how a firm can calculate the dollar cost of local currency loans versus home currency loans to determine the cheapest financing option. Data was collected from the teacher, books, and internet sources.

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Anam Khan
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30 views8 pages

Gujranwala Institute of Management Studies, Gujranwala

This document contains an assignment on the process of financing foreign operations. It discusses two main goals of a multi-national corporation's financing strategy: 1) Minimizing the cost of capital by raising funds through various means like stock issuance and debt; and 2) Reducing risk through hedging currency exposure and political risk diversification. The assignment then examines how a firm can calculate the dollar cost of local currency loans versus home currency loans to determine the cheapest financing option. Data was collected from the teacher, books, and internet sources.

Uploaded by

Anam Khan
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
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Assignment No.

2
Operations

Process Of Financing Foreign

Assignment No. 2
Subject: Corporate Finance (8524)

Submitted to:
Sir Bilal Riaz
Department of Business Administration
Submitted By:
Name : Anam khan
Roll No: AR 523959

( Department Of Business Administration)

Gujranwala Institute Of Management Studies,


Gujranwala

Corporate Finance

Assignment No. 2
Operations

Process Of Financing Foreign

ACKNOWLEDGMENT
Person is not a perfect in all the contexts of his life, he has a limited mind and
mind thinking approaches. It is the guidance from Almighty ALLAH that shows the
man light in the darkness and the person find his way in the light. Without this
helping light, person is nothing but a helpless creation. The teaching of the Holy
Prophet Muhammad (PBUH) were also the continuous source of guidance for me
especially his order of getting knowledge and fulfilling once duty honestly was key
motivation force for me with prayers of my Parents and support of my Teachers it
became possible to formulate this report.

Corporate Finance

Assignment No. 2
Operations

Process Of Financing Foreign

Abstract
A company can kick start international operation in many ways. The option that a
company would select is primarily dependent upon the surrounding circumstances.
Most important factor would be the tax position of the entity because a company may
be exposed to double taxation in its home country and in the country of operation.
Most of the businesses are not just conducting their trade in one currency. They have
to trade in more than one currency. All the currencies except the home currency are
known as foreign currencies. This is extremely large market and most of the
transactions are carried out using the telecommunication technology like telephone,
email, fax etc. The main market players are central banks, banks and For-ex
(Foreign exchange) dealers conducting trade on behalf of their clients including
business firm, governments.

Corporate Finance

Assignment No. 2
Operations

Process Of Financing Foreign

Content

Title page........1
Acknowledgement ....2
Abstract ...3
Content ....4
Process Of Financing Foreign Operations ....5
Minimize The Cost Of Capital...5
Reducing The Risk Of Firm Operations .6
The Dollar Cost Of Alternate Financing.7
Data Collection...8

Corporate Finance

Assignment No. 2
Operations

Process Of Financing Foreign

Process Of Financing Foreign Operations


General Considerations in Financing International Operations
A multi-national corporation has a wide choice of methods for financing its
operations. The financing strategy of a multi-national corporation can be viewed as
serving two broad purposes:
1) Minimize the cost of capital.
2) Reduce the riskiness of firm operations.
In a sense, the two goals are the same. If the firm can reduce the riskiness of its
operations, this should also reduce the cost of capital as investors will being willing
to supply capital at lower rates.
1) Minimize the cost of capital.
There are a wide range of capital sources available. A firm can raise capital through
issuing stock (which could be preferred or common, issued at home or to foreign
buyers) or through issuing debt (which could be direct borrowing from banks, or done
as an issue of bonds which could be domestic or eurobonds et cetera). There are an
incredibly large number of different specific ways to raise capital and new ways and
new securities are being invented all the time.
The point of exploring alternate methods of obtaining financing is that a firm can
sometimes find financing at below market rates. That is, capital may be available to
the firm at rates below the prevailing market rate. The existence of cheaper sources
of financing is based on the existence of certain distortions in the markets
(sometimes called externalities). Differential taxes are one such distortion.
Of course, often governments also offer more direct routes to cheaper financing. It is
important to remember that government subsidies are available to many multinational firms. For instance, almost all governments provide export financing of some
type (if you agree to produce in the country and export from there they will provide
subsidies, low rate loans et cetera). Many governments also offer incentives to firms

Corporate Finance

Assignment No. 2
Operations

Process Of Financing Foreign

importing products from their country. A multi-national firm may be able to get a low
rate loan to finance the purchase of goods from that country.
A well run multi-national company will know the various government agencies around
the world and may use threats of going to other countries to extract the best deal in
terms of financing for its international operations.
2) Reducing the risk of firm operations.
Multi-national firms can use their method of financing to control exchange rate risk by
simply matching the currencies of assets and liabilities. If the assets and liabilities of
the firm are denominated in the same currency then this will provide a hedge. This
means that firms do not necessarily have to rely solely on the derivatives market for
hedging techniques.
Note that there is a trade-off here. Getting financing in the currency your assets are
denominated in reduces risk, but this may not be the cheapest source of financing.
However, this is the beauty of swaps. You can simply borrow wherever the cheapest
rates are available and swap into the currency that you need.
Multi-national corporations must also attempt to avoid (or at least plan for) political
risk. One way to mitigate this is to invest in foreign subsidiaries by making loans to
them rather than injecting capital in the form of equity. This way, if the government
restricts the outflow of dividends from the country the firm is not affected because the
profits are being repatriated in the form of interest payments rather than as
dividends.

Firms can also use their financing strategy to reduce risk through diversification of
fund sources. It is important for a firm to always have sources of new capital
available to them. It is therefore best to have many potential sources available. That
way, if one source is cut off (possibly through government imposed restrictions) there
are still funds available.

Corporate Finance

Assignment No. 2
Operations

Process Of Financing Foreign

This is one reason that many firms keep lines-of-credit with euro banks in the firms
home currency. Many American firms have pre-arranged euro dollar loans so that if
the policies of the Fed turn towards tighter monetary policy the firms can turn to the
euro currency markets for funds.
Some firms will make small euro bond issues from time to time even if they do not
currently need the extra capital. They do this so that the players on the euro bond
market will become familiar with them. In this way, larger future issues (when the
capital actually is needed) are easier to float and can be done at more attractive rate
The Dollar Cost of Alternate Financing
Firms have choices in terms of what currency in which to borrow. It is desirable to
have a way to figure out which is the best currency in which to denominate your
debt.
For this section, we will assume that the firm doing the borrowing does not hedge the
exchange rate risk it is exposed to when borrowing in a foreign currency.
Assume that you are a Canadian firm with a Mexican subsidiary. The subsidiary
needs funds: it can borrow either in the parent companys home currency ($Can., i.e.
the parent would borrow and transfer the funds to the subsidiary) at an interest rate
of RH, or it can borrow in the local currency (Peso) at a rate of RL.
Ultimately, all costs should be evaluated in terms of the home currency of the parent
firm (in this case $Can). Thus, we want to be able to calculate the $Can cost of each
of these types of loans so that we can take the cheapest.
a) Home Currency Loan ($Can)
This is easy. The cost of a home currency loan in terms of the home currency is
simply RH, the rate you pay.
b) Local Currency Loan (Peso)
Say that the exchange rate, e, is defined in terms of $Can/Peso.

Corporate Finance

Assignment No. 2
Operations

Process Of Financing Foreign

Data Collection
I collect all the data from different sources. Detail of data collection related to this
topic is as following;
Teacher:
Sir Bilal Riaz
Books:
Corporate Finance
Internet:
Data for process of financing foreign operations is collected from different website
through Internet.

Corporate Finance

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