Question

Describe the importance of international capital structure. What risks can you identify when working with cash, credit and inventory management? Provide your rationale and any supporting data.

Answer 1

Ans- The Capital structure is the distribution between equity and debt that a company uses to finance its operations. The importance of international capital structure can be considered similar to the capital structure for a multinational company. International capital structure is vital for the company holding operations in more than one country.

Importance of International capital structure can be considered as follows:-

1 Tax Minimization- Multinational companies have the advantage to shift their income legally where the tax advantage is the most. While making capital structure decision company should strategize their tax planning which will help them in bringing down their tax liabilities in a particular country.

2 Increase in investment- Investing in equity and debt in different countries increases the growth opportunities for multinational companies.

3 Growth of economy- when any company invests in equity and debt in a particular country it not only helps in increasing FDI (Foreign Direct Investment) of a particular country but it also helps in empowering the global financial market.

4 Value increase- International capital structure helps in increasing the value of a particular company at a global level, as a result, it also helps in increasing the share price of that particular company.

Risks associated while working with cash, credit, and inventory management.

1)cash Risk- It may be beneficial for the company to work with cash because the company does not need to borrow cash from other sources but if the company uses excessive cash above its criteria then it may lose the interest which it could get if the cash would be in the bank. But the risk associated with using cash is less as compared to other risks

2)Credit Mangement Risks - The company should have a proper strategy to tackle credit management because it may lead to bad debts which in turn can cost company heavy loss to a company which is not good for company's financial health.

3)Inventory management risk is the risk which occurs due to inventory planning and control failures. This can lead to various other risks like-

1 Excessive inventory- when there is a mismatch between demand and supply then this occurs

2 Supply shortage- It may occur due to the poor sales forecast, mismatch in demand and supply, etc.

3 Value of the product may lose if it is in the inventory for more than its shelf life.

4 Theft can also be major concern for inventory management.