MNC
MNC
Please describe the sources which multinational corporations could use to finance the capital
for the parent and their subsidiaries.
Equity Financing: MNCs sell shares to raise capital, allowing investors to share profits.
Debt Financing: MNCs can borrow funds from banks or issue bonds, repaying principal with interest
over time.
Internal Financing: MNCs can fund subsidiaries using retained earnings or profits without external
financing.
Foreign Direct Investment (FDI): MNCs can provide capital to foreign subsidiaries through equity,
debt, or combination.
Joint Ventures: MNCs can collaborate with local companies in foreign markets, sharing financial risk
and reducing capital requirements through equity or debt financing.
Mergers and Acquisitions (M&A): MNCs can expand operations and increase capital through
acquisitions, mergers, and equity/debt financing.
Government Financing: MNCs may receive government financial support through grants, subsidies,
or tax incentives to encourage investment in specific sectors or regions.
2. Please describe the process of remitting subsidiary earnings to the parent and explain what
factors affect that process.
The first step is for the subsidiary company to prepare financial statements, calculate net income, and
determines dividends for distribution to shareholders. Approval from the board of directors or
shareholders is obtained before transferring the dividend amount to the parent company through wire
transfer or check. Factors affecting the remittance process include tax laws in both countries,
currency exchange rates, and the legal and regulatory environment. High tax rates may impact the
amount and timing of remitted earnings, while currency fluctuations may affect the parent company's
earnings. To ensure compliance with regulations, minimize tax implications, and account for currency
fluctuations, these factors must be considered when remitting subsidiary earnings.
3. Please Interpret the hedging exposure techniques for payables, and make a comparison of
their advantages and disadvantages
Common payables hedging techniques include forward contracts, options contracts, and money
market hedges.
Forward contracts involve entering into a contract with a financial institution to buy or sell
currency at a predetermined rate on a specific future date. This eliminates the risk of currency
fluctuations but commits the business to a fixed exchange rate.
Options contracts give businesses the right, but not the obligation, to buy or sell currency at a
specified rate within a specific timeframe. This provides flexibility to choose whether or not to
exercise the option based on market movements, but option contracts can be more expensive.
Money market hedges involve borrowing funds in a foreign currency to make payments to foreign
suppliers. This avoids the need to convert the business's currency, thus eliminating currency
fluctuation risks. Money market hedges offer cost-effective, foreign currency funding options.
4. Please Interpret the hedging exposure techniques for receivables, and make a comparison of
their advantages and disadvantages.
The most common hedging techniques for receivables are forward contracts, options contracts, and
invoice currency.
Forward contracts involve entering into a contract with a financial institution to buy or sell
currency at a predetermined rate on a specific future date, eliminating currency fluctuation risk.
However, it commits the business to a fixed exchange rate.
Options contracts give businesses the right, but not the obligation, to buy or sell currency at a
specified rate within a specific timeframe. They offer flexibility but can be more expensive.
Invoice currency technique involves invoicing foreign customers in their currency, eliminating the
need for currency conversion and reducing currency fluctuation risks. It is simple and cost-
effective, but there is a risk if the foreign currency depreciates significantly before payment.
5. Please Interpret what mean do MNCs use to achieve the benefit of DFI.
Vertical integration: MNCs utilize DFI to establish subsidiaries in foreign countries, reducing
transaction costs, securing reliable supplies, and gaining greater production control.
Market expansion: DFI enables MNCs to establish subsidiaries in foreign countries, directly selling
products or services, increasing market share, and reducing domestic market dependence.
Resource acquisition: MNCs utilize DFI for accessing natural resources, ensuring reliable supplies,
reducing costs, and gaining a competitive advantage in production processes.
Tax optimization: DFI enables MNCs to optimize their tax liabilities by establishing subsidiaries in
countries with lower tax rates, reducing overall tax burdens and increasing profitability.
Risk diversification: By operating in multiple countries through DFI, MNCs can diversify their business
risks, reducing exposure to economic, political, and other risks associated with any single country.
Size and Scope: impact adaptability to local customs, regulations, and economic conditions.
Business Model: Corporation's business model shapes foreign market entry strategy.
Management Style: Management style impacts corporation's communication, collaboration with
local partners and employees.
Financial Resources: Corporation's financial resources determine investment capacity and
economic resilience in host country.
From the subsidiary's perspective, project financing offers opportunities for product or service
development, market expansion, and operational efficiency. However, tensions may arise due to short-
term return pressures conflicting with the parent company's long-term outlook
Clear communication and collaboration are crucial for aligning the perspectives of parents and
subsidiaries in project financing. Establishing clear goals, expectations, timelines, and success metrics is
important. Seeking outside advice from financial experts or consultants can help structure the project to
meet the needs of both parties effectively.
11. Please Explain how the increasing or decreasing of subsidiary financing affects the global
capital structure of the parent. If the foreign creditor wants to charge a higher loan rate, why
and how does the parent company handle that to keep the global capital structure
unchanged? Câu hỏi khác: The subsidiary financing affects the global capital structure?
When a subsidiary increases its debt financing, the parent company adjusts its own debt financing to
maintain the desired overall capital structure of the MNC. If a subsidiary reduces its debt financing, the
parent company may increase its own debt or adjust another subsidiary's leverage to achieve the target
capital structure.
To handle a foreign creditor charging higher loan rates, the parent company can use internal funds
instead of external borrowing to finance the subsidiary's needs. This maintains the global capital structure
while avoiding increased costs from the foreign creditor.
Additionally, if the parent company guarantees debt repayment for foreign subsidiaries, it can reduce
perceived credit risk, potentially leading to lower costs of debt for the subsidiaries. This helps maintain the
global capital structure while benefiting from reduced borrowing costs.
12. Please interpret the factors that affect the Cost of Capital of MNCs and the advantages of
these factors.
Advantages: reduce the cost of capital
Size of Firm: Borrowing large amounts can reduce MNC capital costs, stock or bond issues, and
flotation costs by gaining preferential treatment from creditors.
Access to International Capital Markets: Subsidiaries can secure funds locally at lower costs
when host country interest rates are low compared to parent's home country.
International Diversification: Portfolio of subsidiaries' cash flows show lower variability, reducing
bankruptcy probability and capital cost, reducing dependence on individual economies.
Exposure to Exchange Rate Risk: Increased likelihood of bankruptcy due to exchange rate
fluctuations raises the MNC's cost of capital.
Exposure to Country Risk: Establishing foreign subsidiaries increases MNC risk of host country
government seizing assets, increasing bankruptcy probability and capital cost.
Parent Control: The parent corporation should communicate MNC goals to all subsidiaries,
focusing on maximizing overall value rather than individual subsidiary value. Monitor subsidiary
decisions and implement compensation plans aligned with the MNC's goals.
Corporate Control: External factors can help mitigate agency problems in MNCs. Poor decisions
can decrease the value, while acquisition by another firm at a lower price deters them.
Institutional investors can influence management decisions and hold them accountable through
complaints or board changes.