Question

1.       What additional factors are encountered in international as compared with domestic financial management? Discuss each briefly.

2.       hat risks are associated with direct foreign investment? How do these risks differ from those encountered in domestic

Answer 1

Answer 1.1. Financial Management means any applying general management principles to the financial resources of the organization.
This involves planning, organizing and controlling financial activities in a way that will maximize shareholders wealth.
Business needs to take the following key decision in managing its finances:
a) Investment Decision: related to investment in assets that will help in the growth and sustainability of the organisation.
b) Financial Decision: relates to raising of finance from different sources so that the cost of capital can be minimized.
c) Dividend Decision: relates to rewarding shareholders for the risk they take by way distributing dividend or to retain profits which can be used to invest in further expansion of the business.

The key difference between international and domestic financial management:
1. Currency Risk: In international finance domestic company need to consider the impact of other county currency, fluctuations in the exchange rate can impact the cost of transaction and operation. There is financial derivative to reduce the impact which needs specialized knowledge and involves cost or premium.

2) Tax Regulation and other regulatory approval: each county has different legal and tax regulations which need to be addressed. Tax on profits might be high or low which will impact companies profitability and there are different competition laws which can impact organization operations.

3. Different Reporting Requirements: Domestic companies follow Generally Accepted Accounting Principles, but other countries may not. This can impact profitability or operations. For eg rate of depreciation can be low in foreign countries when compared to domestic. This can mean that the same type of report could be prepared differently and have other interpretations. A domestic finance manager has to understand the source of the report that he's looking at and how to interpret it.

4. Availability of Capital: companies need to raise capital for expansion and borrow money from financial institutions and cost of borrowing depends upon how easy finds are available and transaction cost and charges have an impact on business expansion plans.