Question

Consider what you have learnt about 1) the financing of multinational corporations, including the factors to be evaluated when identifying appropriate methods of financing, and 2) the strategies used by multinational corporations to manage their working capital and cash flow. Select a MNC and record, in your journal, your response to the following questions, in 500 words or less: Identify two methods of financing that your selected MNC currently uses. How does this company manage its capital and cash flow? Do you think the company’s methods of financing and of managing working capital and cash flow are appropriate, taking into consideration its organizational structure, exposure to varying tax laws and access to major multinational credit agencies?

Answer 1

1) Finacing or Financial Management deals with procurement of funds and their effective utilisation in the business.Multinational Corporations are those companies which have their operations spread in more than one country.They have a very huge market capture and sale base as they purchase and sale in almost all the countries.They are a symbol of Globalization having subsidiaries and associates in different countries.The Finacing of Multinational Corporations means the method used by the MNC to obtain funds from different sources like equity, preference share capital and its effective utilisation. It includes identification of idle funds and their proper utilization.Financial Implications of each decision have to be analyzed.MNC's make Foreign Direct investments as well.

Their are two broad ways fro procurement of funds that is financing the corporation:-

a) Own Funds

It includes Issue of Equity Share Capital and Retained Earnings.It is better for MNC to raise funds from countries where they have operations.Thus, MNC's can more easily raise capital from multiple countries.The most commen way to issue equity in other countries is to cross-list shares on stock exchange.

b) Loan Funds

MNC's have advanrtage in raisng finance. It is easier fro them to raise finance as the banks easily with lesser formalities provide huge loans at marginal rates, due to their large capital base and wide spread operations.Also they have better access to international markets.

It includes :-

Long Term Sources like Issue of Preference Sahre Cpital,Debenture issue, Bonds issue,Long Term Loans from Financial Institutions, Foreign Exchange loans.

Medium Term sources like External Commercial Borrowings,Hire-Purchase Financing.

Short Term sources like Raising funds through Commercial Papers, Short term loans, Rasisng advances from customers.

Factors

1. Foreign Exchange rate, The MNC has to keep in mind the exchange rates prevalent before choosing the method of Financing.If exchange rates are hiugher thanmethod of own funds is more preferable.

2.Interest Rate Difference, if the intrest rates differ then MNC shall choose to raise loans or issue debentures in the country with lower rates.

3. Since MNC have their operations spread in various countries, International Diversification is necessary. This means that MNC's should try to raise funds from different countries to gain financial advantage.But, it is important that before taking the decision to choosing financing method that it should be analyzed whether the policies of Goverment of that country are favourable.Thus, Economic Condition of the country from where financing is done is an important factor.Thus, choice of loaction from where funds have to be raised is important decision.

4 Risk Factor- Raising funds from own funds is less riskier than debt financing.

5. Cost- Own fund raising methods prove to be more expensive in longer run as dividend expectations prevail, however in case of debt financing, intrest rate charges prove cheaper in longer run.However tax rates and taxation policy prevailing in the given country is an important factor.

6. Control- Control gets diluted in case of raising funds through equity as ownership base is expanded, however no dilution of control takes place ifn debt financing.

7. Time period for which funds have to be raised also play an important role in choosing of method.

2) Working Capital in simple way means:-

Working Capital = Current Assets- Current Liabilities.

Strategies Used to manage Working Capital and Cash Flows

a) maintaing cash inflow -outflow ratio.

b) Cash flow can also be optimized through netting which helps to also reduce exchange conversion costs.

c)Inter subsidiary cash transfers can be managed through the method of Leading and Lagging.

d) Investing excess idle cash.

e) Diversification of cash across currencies also help in adequate cash flow.

f) Cash and Working Capital reuirements and flow should be in line with Corporate Strategy.

g) Centralizing Control is also a helpful startegy to control flow of capital.

h) Managingcollection Float from customers and disburement float is also an importyant key to control capital flows.

i) Achieving capital investment efficiency also plays as a very important strategy to maintain high working capital.

MNC like Microsoft Corporation can be choosen.

Past financail data such as Balance Sheet, Cashflow statement, Profit/Loss Account can be studied to identify the sources of its financing as well as study the organizational Structure to determine whether the methods are appropriate.