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    Financial Management in MNCs

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    phamtra241998
    This document discusses 11 key factors that influence financing decisions for multinational corporations (MNCs). These factors include tax planning considerations, protection of creditor rights, the level of development of local debt markets, restrictions on foreign direct investment, and agency costs. MNC affiliates may prefer to raise debt in countries with higher tax rates in order to take advantage of interest payments being tax deductible. The legal protections for creditors, availability of local debt financing options, and rules around thin capitalization also impact whether MNCs choose to take on debt or issue equity.

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    Financial Management in MNCs

    Uploaded by

    phamtra241998
    11 views3 pages
    This document discusses 11 key factors that influence financing decisions for multinational corporations (MNCs). These factors include tax planning considerations, protection of creditor rights, the level of development of local debt markets, restrictions on foreign direct investment, and agency costs. MNC affiliates may prefer to raise debt in countries with higher tax rates in order to take advantage of interest payments being tax deductible. The legal protections for creditors, availability of local debt financing options, and rules around thin capitalization also impact whether MNCs choose to take on debt or issue equity.

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    Summarise module Financial Management in MNCs

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    This document discusses 11 key factors that influence financing decisions for multinational corporations (MNCs). These factors include tax planning considerations, protection of creditor rights, the level of development of local debt markets, restrictions on foreign direct investment, and agency costs. MNC affiliates may prefer to raise debt in countries with higher tax rates in order to take advantage of interest payments being tax deductible. The legal protections for creditors, availability of local debt financing options, and rules around thin capitalization also impact whether MNCs choose to take on debt or issue equity.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    11 views3 pages

    Financial Management in MNCs

    Uploaded by

    phamtra241998
    This document discusses 11 key factors that influence financing decisions for multinational corporations (MNCs). These factors include tax planning considerations, protection of creditor rights, the level of development of local debt markets, restrictions on foreign direct investment, and agency costs. MNC affiliates may prefer to raise debt in countries with higher tax rates in order to take advantage of interest payments being tax deductible. The legal protections for creditors, availability of local debt financing options, and rules around thin capitalization also impact whether MNCs choose to take on debt or issue equity.

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    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
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    of 3

    Financial Management in MNCs

    What I learned from the subject:

    Factors influence Financing decisions in MNCs (11 factors)

    #1. Tax planning considerations


    When MNCs choose debt as a financing source → prefer to raise it in a country
    where the tax rates are higher → WHY?

    Interest on debt is a tax-deductible expense → reduce tax payable.

    for a given pre-tax cost of debt, the post-tax cost of debt is lower in the
    country with a higher tax rate

    ⇒ MNC affiliates in countries like Japan and Italy, with high corporate taxes are
    more highly geared than those in tax havens like Bermuda and Barbados.
    #2. Carry Forward of Losses

    The tax shield on debt reduces tax liability and increases post-tax profitability
    #3. Protection of Creditor Rights

    Consider finance by debt or equity: in countries that don’t have laws protecting
    creditors’ rights, lenders face difficulties when the principal is not repaid → Interest
    rates on debt are likely to be higher → differential btw the cost of debt and the cost of
    equity narrows down, and borrowers are deterred from debt. (Russian, Brazil)

    #4. Level of Development of Local Debt Markets.


    Consider finance by debt or equity: An affiliate’s ability to raise debt in the host
    country depends on the availability and willingness of investors (institutional and
    retail) to subscribe to debt.
    Many emerging markets have underdeveloped debt markets that run a poor second
    to equity markets, in terms of issue volumes, investor interest, trading and liquidity,
    the number of domestic institutional investors, and the absence of credit rating of
    debt instruments.

    #5. Access to Inter-Affiliate Loans [tiếp cận các khoản vay liên kết]

    Financial Management in MNCs 1


    An affiliate chooses to borrow money from its parent MNC or other affiliates (internal
    borrowing) WHEN external borrowing is unavailable, inadequate, or more expensive.

    #6. FDI Restrictions:


    FDI ceilings vary btw countries, or sector to sector, or over time. Some countries
    impose rules specifying a certain percentage of the project cost must be raised by an
    MNC affiliate from local capital market.

    #7. Thin Capitalization Rules


    Forms - limit the maximum interest deduction on inter-affiliate debt, or deny tax
    deductibility on interest on an inter-affiliate loan if the debt-equity ratio exceeds a
    specified level.

    Purpose: the gov uses the rule to protect itself against inter-affiliate debt (affiliates in
    countries with high tax rates lend to affiliates in low tax locations → enjoy the tax-
    deductibility since interest is a tax-deductible expense)

    #8. Trends in Currency Movements:

    When a company decides to borrow funds from overseas since it is cheaper to do


    so, it must take into account not only the cost of financing but also the expected
    exchange rate in order to calculate the effective cost of borrowing overseas.

    #9. Exchange Rate Risk

    If the affiliate’s revenues are denominated in the host country's currency, it should
    consider raising funds in the same currency to avoid currency mismatches and the
    exchange rate risk inherent therein.

    #10. Agency Costs:

    These are the costs that arise when there is a separation of ownership and control.

    In a corporate form of organization, the managers are agents the owners (equity
    shareholders) and the lenders are the principals.

    The principals incur agency costs in order to ensure that the agent (management)
    acts in their interest.

    The larger the firm, the more difficult and expensive it is for lenders to monitor the
    firm, and the larger are the agency costs of debt. So, agency costs affect the
    selection of equity over debt.

    #11. Other Factors:

    They include a preference for equity, earnings volatility, political risk, regulatory
    stringency, and market timing.

    Financial Management in MNCs 2


    Issue of additional equity decreases earnings per share, while issue of debt can
    result in trading on equity, and an increase in shareholder value.

    Financial Management in MNCs 3

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