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Unit 4 of 4 · M.Com Sem 3

Unit 4: Financial management of multinational firms

International Financial Management notes · PTU syllabus (MCOPAF312-18)

3 min read4 topics10 exam questions
On this page
  1. Unit summary
  2. Foreign direct investment and cross-border acquisitions
  3. International capital structure and cost of capital
  4. International capital budgeting
  5. Multinational working capital, cash management and trade finance
  6. Key terms
  7. Quick revision
  8. Important questions

Unit summary

Multinationals must decide where to invest, how to finance and how to manage cash across countries. This unit covers foreign direct investment and cross-border acquisitions, international capital structure and cost of capital, international capital budgeting, multinational working capital and cash management, and financing exports and imports.

After this unit you can

  • Explain FDI and cross-border acquisitions
  • Explain international capital structure and cost of capital
  • Perform international capital budgeting
  • Explain multinational working capital, cash management and trade finance

PTU syllabus topics

  • Foreign direct investment and cross-border acquisitions
  • international capital structure and cost of capital
  • international capital budgeting
  • multinational working capital policy and cash management
  • exports and imports
ProcessInternational capital budgeting
  1. 1Estimate project cash flows

    In foreign currency

  2. 2Adjust for taxes and blocked funds
  3. 3Convert to home currency

    Forecast exchange rates

  4. 4Discount at adjusted cost of capital

    Country risk premium

  5. 5Compute NPV from parent's view
1

Topic 1

Foreign direct investment and cross-border acquisitions

  • FDI: investment giving lasting interest and control (10%+ equity) in a foreign enterprise — greenfield (new facility) or brownfield/acquisition (buying an existing firm).
  • Theories: OLI paradigm (Dunning — ownership, location, internalisation advantages), product life cycle (Vernon), internalisation theory.
  • India: FDI policy — automatic and government routes; sectoral caps (insurance 74% → 100% proposed, defence 74% automatic); top sources — Mauritius, Singapore, USA.
  • Cross-border M&A: Tata Steel–Corus (2007), Tata Motors–JLR (2008), Walmart–Flipkart (2018); motives — market access, technology, brands, synergies; risks — overpayment, integration, regulatory and political risk.
2

Topic 2

International capital structure and cost of capital

  • MNCs can access global capital markets, potentially lowering the cost of capital (international diversification, segmented markets).
  • Factors: host country interest rates and taxes, currency risk, political risk, local debt to hedge assets, parent guarantees, subsidiary vs consolidated structure.
  • Cost of capital: use international CAPM (global market beta) or adjust domestic WACC for country risk premium.
Key formulasCountry risk adjustment

  • Cost of equity with country risk

    Ke = Rf + β (Rm − Rf) + Country risk premium

  • After-tax cost of foreign debt

    Kd = [(1 + i)(1 + expected depreciation of home currency) − 1] × (1 − t)

3

Topic 3

International capital budgeting

ProcessInternational capital budgeting steps
  1. 1

    Estimate project cash flows in foreign currency

  2. 2

    Adjust for taxes in host and home countries

  3. 3

    Determine remittable cash flows to parent

    Restrictions, withholding taxes, blocked funds

  4. 4

    Convert using forecast exchange rates

    Parity-based forecasts

  5. 5

    Discount at a risk-adjusted rate

    Country and currency risk

  6. 6

    Compute parent's NPV

    Accept if positive

  • Project vs parent perspective: a project may be good on its own but poor for the parent after taxes, exchange controls and transfer restrictions.
  • Adjusted present value (APV): base-case NPV + PV of financing side effects (subsidised loans, tax shields).
  • Political risk: expropriation, currency controls, war; managed through insurance (MIGA), joint ventures, local financing.

Example

A US$ 10 million project in the US yields $3 million a year for 5 years. Converted at forecast rates rising from ₹84 to ₹88 and discounted at 12%, the parent's NPV in rupees may be positive even if the dollar NPV at the US discount rate is marginal — exchange rate forecasts matter.

4

Topic 4

Multinational working capital, cash management and trade finance

  • Centralised cash management: a regional treasury centre pools funds, reduces idle balances, nets intra-group payments, invests surplus efficiently.
  • Multilateral netting: subsidiaries settle only net amounts through a netting centre — fewer transactions and FX costs.
  • Leading and lagging, transfer pricing, intra-group loans to reposition funds; managing blocked funds.
  • Receivables and inventory: credit terms in different currencies; higher inventory where supply is uncertain or devaluation is expected.

Financing exports and imports

ClassificationTrade finance instruments
Trade finance

  • Letters of credit

    Bank undertakes to pay against documents (UCP 600)

  • Documentary collections

    D/P and D/A bills

  • Pre-shipment finance

    Packing credit in rupees or foreign currency (PCFC)

  • Post-shipment finance

    Bill discounting, export bills negotiation

  • Forfaiting and factoring

    Non-recourse discounting of export receivables

  • Buyer's and supplier's credit

    Import finance

  • Export credit insurance

    ECGC

  • India: RBI's interest equalisation scheme, EXIM Bank lines of credit, ECGC cover, rupee invoicing of trade (Special Rupee Vostro Accounts, 2022).

Key terms

FDI
Investment giving lasting interest and control in a foreign enterprise
OLI paradigm
Ownership, location, internalisation advantages explaining FDI
APV
NPV plus present value of financing side effects
Multilateral netting
Settling only net intra-group amounts
Forfaiting
Non-recourse discounting of export receivables

Quick revision

  • FDI: greenfield vs acquisition; OLI; India's FDI routes.
  • International cost of capital; country risk premium.
  • Capital budgeting: parent cash flows, exchange forecasts, political risk, APV.
  • Cash management: treasury centres, netting, leading and lagging.
  • Trade finance: LCs, packing credit, forfaiting, ECGC.

Important exam questions

Practice questions written to the PTU exam pattern for this unit's syllabus: short answers (Section A style) and long answers (Sections B and C style).

Short-answer questions

  1. Q1.What is FDI?
  2. Q2.State the OLI paradigm.
  3. Q3.What is a country risk premium?
  4. Q4.Distinguish project and parent perspectives in international capital budgeting.
  5. Q5.What is multilateral netting?
  6. Q6.What is forfaiting?

Long-answer questions

  1. Q1.Explain FDI and cross-border acquisitions with Indian examples.
  2. Q2.Explain the international capital structure and cost of capital.
  3. Q3.Explain international capital budgeting and its special problems.
  4. Q4.Explain multinational working capital management and trade finance.

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