International Financial Management

Intemational finanial Manage mert

BI Intemahonal Part II: Intemational Capital Budgeting Port Investnent in

Sousces of Intemational Seuetes
finance · Intemational Capital Budgehing Desions Market

.Glbbal Depos1tg Deision making tov foreign Compary " Retum on Invethment in
ci (GDR) deeloping Product (Sotware) in Tndia Intemaional Jauitie Mahet

Paxt I: Lnteomational Souces ot finanee

Global Depositoy Receipts [nDR]

9Meaning of GDR
GDA is aa depositony eceipt underying hames of he
company.
-Company issue C DR. to toveign investos to raise money in
fovign cueny
hDR issued in us are called ADR & Gh DR issued in ndia ae
called IDR.
"Proeass ot issuing
AConpamy foreign Tnvests
Lndian Company cho
to ra'se funds in Us

decuetinTsganscommifer s Yaiionsed funads

afo Issue GR
Shares
Foreign fnds
|Local Custodiam ot Deposiby's Bamk
Ea JP Morgam
(
Conmunícate it to
floatahin Gor)
Ovevseas Deposity &anh
Eg JP Mtonga
 International FFinancial
() Cost t GDR
Cost
Manazement
Hee 8 Choth Rate

No of shares Expected Drderd pex

underlying X
share t theed ot urderyg
ear

P. Lsug Pace pez aDR x (iDo . - Flaotehen Coet 1)

Isue Praice
per GDR
No ot shares underlyrg Matet Price pex
urderigmg share

Amaurt gured tor Invutmert in the Praet

Net Proceeds pez GDA

Paxt I Irtenstienal Captal Budgehng

|Lrteonahonal Captal Buagenng

· It is the process ot evaluathng &seleching lemg teom iuetmentspjt in
forugn cueney
Techmigues used tor Intematimal Captal Budgeting Deeisions are exacty same
as tor Dome ehie Captal Budgeting Deusins ,ie. NPV Method, MIRA Method,APy
Method,ct as discussed in Advamed Captal Budyehing Deusio Chapter.
While Calelating NPV ot the Pojett , Cash Flows Bount Rate shod be o
Sane lueny. So, NeV can be caleweted using 2 Aproaches as tslle aos :
63 fovaign urrenay Appoach
- Caleulste Cash flouos in forugn Curen
+ Use Diseaut Rate o toeign Cmerey
Required Aetuom in Heme Cureray
I+ Risk free Rate in Home urery *+ Risk free Rate in forvgn buany)
NPV calealated cul be in foeign Cumeny Convert NPV in Home menyug
Spot Exchange Rate at beginming
15
CA AJAY AGARWAL (AIR 1)
 International Financial Management

Appoach
Home Cueny converhnga toreign Cureny Cash
le.lot Cash flows in Home Cureny By
Home Carseny using Eshmated Exehange Rate ot ditfeent year
fless into
o PPP Then as díscused
Catimated Exehange Rate is caleulated using IRP
in forex Chapter.
+Use Discourt Rate ot Home Careney.
Cumeney.
NPV calculated oill be in Horne
of Home
ANb: In Silent Situchion, isc ount Rate given in queshion is assuned to be
ameny of Company.
Cureny

ta oreign Campany developing Product

Decision making ton
(Sottwae) in Imdia

Caleulotiom of Repatriation Amount

Amourt (in )
Particulass
Transter Pice
Costs Example: Rent, Manpoco er, Adminstation Coot,et.] (x*)
EBT
Corpoate Tax (xx)
EAT

Witholding Tax Only it it is not eligible ox Tax Cedit (xx*)

Repataiahon Amout in ]
|Repatriation Amount Comveted in Cuoreney of foign CompamyJ
be

Caleulathin of Total Cost incued on Poduet development Minimum Amout to

be chavged tox Produet from foreign Customer:

Parshicaloss Amount (in Cumeny of foreign Compny)

Transter Price XXX

-5 Repatiahon Amount (**»)

 International Financial Manageme
" Adiee on miabiuty of the Projeet
Pastieulars Amourt (in Cureny ot truign Cm
Selling Paice of Produet to Customer
( Total Cost inumed on Podut
developmert (x*)
Ptt(oss)

Pazt I: Investment in Lntemational &eunies Market

Retunon Investnent in Itenational Seunities
Market
) IF Agpreiation |De
preuation in Carengy is given in questin :
Step A: Caleulate Retun on
Imvastment in &ewmty for Domestie Tmvestr
Retum fo Domesthie Invetor = D+ P, - Po
Po
Here, Diidend Inteest Income an Security or the year
P, Market Pnice ot Seeuity at end a the
year
Market Pn'ce ot seuity at beginning ot the year
Jtep 2: Caleulate Retum an
"If Appreuiati Investmert in seunty for foraign Tvestr
Retun to
on|Depreiatiem in fonreign urenay is given
1+ Rehum toy
foveign Investor Apraaten|ice)-!
in Forign Cumreny
If Appeeiation
Retum foy
Depreeitien . in Home Cunreney is given
Retum tor
foveign Ivestby
in Hne Cumeny
(2) IF Exchange Rate is gien in questhin
Step 1: Caleulate Invastnert Amount in
’ Convet forreign Cumny at beginning ct the er
Lmvestmert Amaunt (aiven in Home Cumen) nto fougn
Cueny using Spot Bxehamge Rate at baginning ot the
Stap 2 Caleulate No ot units purehaed ot
aeuniy
Investnent Anbuvt in bmign Curney
Marhet Pice of Seeuntty at beginning of the Year
step 3: Calculate Value ot Tnvestment in oreign International Financial Management
No. o units puxchased o Cumeny ot end of Year
security x Mazket Price ot keurity at endtheot tte
Year
ALu: Calclate Value ot
Investmert in Home Cunency ot end of the Year
Comvest Value ot Imvestment in toreigm
(tep 3 Amaurt) into Home Cumeney using Curreney at end t the year
Exehange Rate at end ot he Year
Step 5: Coleulate Retuom on
Investmert im Seumty tor foreign Iavestor
Value of Lestment in Home
Cueny at end ot the Year Cuney Investment Amont in Heme
at beginning of the Yeos
Lvestment Amout in Home Curenay at beginning of the ear