Raider Chemical Co. and Ram, Inc., had similar intentions to reduce the volatility of their cash...

Raider Chemical Co. and Ram, Inc., had similar intentions to reduce the volatility of their cash flows. Raider implemented a long range plan to establish 40 percent of its business in Canada. Ram, Inc., implemented a long range plan to establish 30 percent of its business in Europe and Asia, scattered among 12 different countries. Which company will more effectively reduce cash flow volatility once the plans are achieved?

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Ram Inc. has plans to scatter across12 different countries in Europe and Asia whereas Raider Co. has plans to establish only in Canada. Once the plans are achieved, Ram Inc. will effectively reduce cash flow volatility because of diversification.

Since economies of countries do not move perfectly in tandem over time, net cash flow from sales of products across country’s should be more stable than comparable sales of the products in a single country .By diversification sales (and possibly even production) internationally, a firm can make its net cash flows less volatile. Thus the possibility of a liquidity deficiency is less likely. In addition, the firm may enjoy a lower cost of capital as share holders and creditors perceive the MNC’s risk to be lower as a result of more stable cash flows. An international project can reduce a firm’s overall risk as a result of international diversification benefits. The key to international diversification is selecting foreign projects whose performance levels are not highly correlated over time. In this way, the various international projects should not experience poor performance simultaneously.

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