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Global Capital Markets Chapter 10 Global Capital Markets Copyright © 2015 Pearson Education, Inc.
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Copyright © 2015 Pearson Education, Inc. 10-1
International BusinessEnvironments & Operations
15e
Daniels ● Radebaugh ● Sullivan
Copyright © 2015 Pearson Education, Inc. 10-2
Chapter 10Global Capital Markets
Copyright © 2015 Pearson Education, Inc. 10-3
Learning Objectives Describe the finance function and how it fits in the
MNE’s organizational structure Show how capital structure varies internationally Describe the different ways to access debt internationally Show how companies can raise capital on stock markets
outside their home countries Highlight tax issues facing MNEs
IntroductionLearning Objective:
Describe the finance function and how it fits in theMNE’s organizational structure
Copyright © 2015 Pearson Education, Inc. 10-4
The Finance Function The CFO, controller, and treasurer determine the
objectives of the global financial management by:
Making the financing decisions
Making investment decisions
Managing short-term capital needs
Copyright © 2015 Pearson Education, Inc. 10-5
Capital Structure Leveraging Debt Financing
The degree to which a firm funds the growth of business by debt is known as leverage
It may not be the best option when:Excessive reliance on long-term debt raises financial
risk and requires a higher return for investorsForeign subsidiaries of the MNE have limited access
to capital markets and debt financing
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Capital StructureLearning Objective:
Show how capital structure varies internationally
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Selected Capital Structures, FY 2012
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Factors Affecting the Choice of Capital Structure
Debt and Exchange Rates Asian financial crisis 1997 Global crisis 2007-2009 European economic crisis 2010-2011
Regulatory Risk Financial stability of banks
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Global Capital Markets Learning Objective:
Show how companies can raise capital on stock markets outside their home countries
Copyright © 2015 Pearson Education, Inc. 10-10
Global Capital Markets Eurocurrency
“Offshore Currency” – any currency banked outside its country of origin
Eurodollar is the most significant Eurocurrency market
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Global Capital Markets Major Sources of Eurocurrencies
Foreign governments or individuals Multinational enterprises with excess cash European banks with excess foreign currency Countries with large foreign exchange reserves
China, Japan, EU, Saudi Arabia, Russia, Taiwan
Copyright © 2015 Pearson Education, Inc. 10-12
Global Capital Markets Characteristics of the Eurocurrency Market
Eurocurrency market is a wholesale market Public borrowers are major playersGovernments, Central banks, Public sector
corporationsEuro-credit – short term credit of 1-5 yearsSyndication – banks pool resources spread the
financial risk
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Global Capital MarketsInterest Rates in the Eurocurrency Market
LIBOR – London Inter-Bank Offered Rate
Began in 1986 by British Bankers’ AssociationAverage rate submitted by 18 different banks Published daily in London
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Global Capital MarketsInternational Bonds
Foreign Bonds – a bond sold outside the borrower’s country but denominated in the currency of the country of issue
Eurobonds – usually underwritten by a syndicate of banks from different countries and sold in a currency other than that of the country of issue
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Global Capital Markets International Bond market is attractive to
borrowers because it allows companies to diversify its funding sources aside from local, domestic banks
Firms can sometimes borrow in maturities that might not be available in the domestic market
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Global Capital Markets Equity Securities
Private placement market Angel investors Venture capital firmsInstitutional investorsSovereign wealth funds (SWF’s) – state-owned
government fund
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Global Capital MarketsEquity Securities
Equity-capital market (stock market) IPO – Initial Public Offering
Firms can list in their home country or abroad – International IPO
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Market Capitalization 2012
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Global Stock MarketTrends toward the importance of stock
markets in emerging economies, especially China. Hong Kong Stock Exchange Shanghai Stock Exchange Shenzhen Stock Exchange
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Global Stock MarketTrend towards a rise in the Euro-equity market
Stock shares are sold outside the boundaries of the issuing firm’s home country
Trend toward Delisting Trend of listing stocks on more than one exchange has
reversed somewhatBetter prices are often found in the home marketListing in several markets is expensive
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Global Stock MarketAmerican Depositary Receipt (ADR)
A negotiable certificate issued by a U.S. bank in the United States to represent the underlying shares of a foreign corporation’s stock held in trust at a custodian bank in the foreign country.
Traded like stock shares Most foreign companies list on the U.S. stock exchanges
through ADR’s
Copyright © 2015 Pearson Education, Inc. 10-22
International Tax PracticesLearning Objective:
Highlight tax issues facing MNEs
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International Tax PracticesIssues:Differences in types of taxesDifferences in Generally Accepted Accounting Principles (GAAP)Differences in Tax RatesTwo Approaches to Corporate Taxation:
Separate Entity Approach – used in the U.S.Integrated System Approach – avoids double taxation
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Taxing Branches and SubsidiariesThe Foreign Branch
Extension of the parent companyThe Foreign Subsidiary
Legal entityThe Controlled Foreign Corporation (CFC)
US Tax law – Active vs. Passive income
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Transfer Prices Differences in taxation rates between countries Arm’s length prices – the price between 2
companies that do not have an ownership interest in each other
Companies can establish arbitrary transfer prices between their affiliated companies, to reduce taxes paid
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Transfer Prices
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Offshore Financial Center OFC’s are cities or countries that provide large
amounts of funds in currencies other than their own, and are used as locations in which to raise and accumulate cash. Transactions are usually on both sides of the balance
sheet Transactions are usually initiated elsewhere Institutions involved are usually controlled by
nonresidentsCopyright © 2015 Pearson Education, Inc. 10-28
Characteristics of OFC’s Large foreign currency (Eurocurrency) Large net supplier of funds (Switzerland) Intermediary or pass-through for international loan funds
(Bahamas, and Cayman Islands) Economic and political stability Efficient and experienced financial community Good communications and support services Regulatory climate favorable to the financial industry
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OFC’s as Tax Havens OECD uses the following key factors in identifying tax havens:
No or only nominal taxes Lack of effective exchange of information (especially bank
secrecy) Lack of transparency No substantial activities
OECD is trying to reduce harmful tax practices through improved translation and disclosure
Copyright © 2015 Pearson Education, Inc. 10-30
Copyright © 2015 Pearson Education, Inc. 10-31
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