Slide 1 [email protected]. Slide 2 [email protected] MNC and its Features; To describe the key theories that justify international business;

Slide 1 [email protected]


MNC and its Features; To describe the key theories that justify international business; and To explain the common methods used to conduct international business. Multinational v.s. domestic financial management, Reasons for going international, Exchange rates and trading in foreign exchange, International money and capital markets, Numerical Problems and Solutions.

Contents of this Topic


What is a multinational corporation?

1. A corporation that operates in two or more countries is called Multinational Corporation.

2. A multinational company is one which has its home in one country but live and operate under the law and customs of other country . the head office of multinational company is in one country and its branches are spread all over the world.

3. A company with production and distribution facilities in more than one country.

Some times multinational corporations are called MNEs. Unilever Novartis Colgate Palmolive

Glaxosmith HSBC


Features of Multinational Company

1. Huge amount of capital

2. Large sized plant and machinery

3. Various activities

4. Market expansion on large scale

5. Professional management

6. Advance technology

7. Profit is the main objective

8. Control of head office

9. Creation of new project

10. Low-cost locations

11. Gaining a strong foothold into the international market

12. Cheaper labor costs

13. Cheaper raw materials and distribution costs

14. Taking advantage of the many tax breaks offered by foreign countries

15. Access to new technologies and methods

16. Availability of government grants


1. To seek new markets

2. To seek raw materials.

3. To seek new technology.

4. To seek production efficiency.

5. To avoid political and regulatory hurdles.

6. To diversify.

7. To Minimize costs of production

8. Globalization: Political and Labor Union Concerns

Why Do Firms Expand Into Other Countries?

9. Privatizations of state-owned industries

10. Revolution in information technology

11. Wave of Mergers and Acquisitions (M&A)

12. Emergence of free market policies

13. Rise of Big Emerging Markets (BEMs)

14. Prime Transmitter of Competitive Forces

15. Massive deregulation

16. Collapse of communism


Managing for Value for MNC

• Like domestic projects, foreign projects involve an investment decision and a financing decision.

• When managers make multinational finance decisions that maximize the overall present value of future cash flows, they maximize the firm’s value, and hence shareholder wealth.

• An MNC’s financial decisions include how much business to conduct in each country and how much financing to obtain in each currency.

• Its financial decisions determine its exposure to the international environment.


Valuing International Cash Flows for MNC

ECF = expected cash flows of MNCCr = Conversion RateCFHC = Cash flow from home country in home currencyCFC1 = Cash flow from country 01 in Local currencyCFC2 = Cash flow from country 02 in Local currencyCFC3 = Cash flow from country 03 in Local currencyAnd so on ……

......) Cr CFC Cr CFC Cr (CFC CFHCECF 321


Examples 01: Valuing International Cash Flows

Consider a US firm that had expected cash flows of $100,000 from local business and 10,00,000 Mexican peso’s from business in Mexico at the end of year 2012. Assuming that the peso’s value is expected to be $0.09. Find out the expected dollar cash flow for US firm.

)Cr (CFC CFHCECF 1

Sol

utio

ns:

190,000 $

000,90$000,100$

0.09) $ Peso (1000000 100,000 $


Practice 01: Valuing International Cash Flows

Consider a Bangladeshi Multinational firm that had expected cash flows of Tk100,00,000 from local business and $10000 from business in USA at the end of period 2013. Assuming that the $ value is expected to be Tk 82.2425. Find out the expected cash flow in Terms of Taka for Bangladeshi firm.

108,22,425Tk

8,22,425Tk 100,00,000Tk

82.2425Tk $10,000 US100,00,000Tk




Consider a Bangladeshi Multinational firm that had expected cash flows of Tk 500,00,000 from local business and $10000 from business in USA and Rs 15,00,000 at the end of period 2011. Assuming that the $ value is expected to be Tk 83.4545 and Rs value is Tk 1.6525. Find out the expected cash flow in Terms of Taka for Bangladeshi firm.


Tk. 53313295


Valuation Model for an MNC

........)1(

)CrCFC(....)CrCFC()CrCFC()CrCFC(CFHC

)1(

)CrCFC(....)CrCFC()CrCFC()CrCFC(CFHCMNCfor Value

2nn332211

1nn332211

i

i

Cr = Conversion RateCFHC = Cash flow from home country in Local currencyCFC1 = Cash flow from country 01 CFC2 = Cash flow from country 02 CFC3 = Cash flow from country 03 i = the weighted average cost of capital of the

parent company


Example 02: Valuing of MNC

Consider a US firm that had expected cash flows of $100,000 from local business and 1000000 Mexican peso’s from business in Mexico at the end of period 01. Assuming that the peso’s value is expected to be $0.09. Find out the expected dollar cash flow and the Value for US firm if weighted average cost of capital (i) is 10%.

2772.172727$10%)(1

$190,0001

)1(

)CrCFC(....)CrCFC()CrCFC()CrCFC(CFHCMNCfor Value

1nn332211

i



Consider a Bangladeshi Multinational firm that had expected cash flows of Tk100,00,000 from local business and $10000 from business in USA at the end of period 01. Assuming that the $ value is expected to be Tk 69.2425. Find out the expected cash flow and the Value of the firm if weighted average cost of capital (i) is 12% for Bangladeshi firm.

Tk. 9546808.04


Practice 04: Valuing International Cash Flows for more than 01 year

Consider a Bangladeshi Multinational firm that had expected cash flows of Tk 100,00,000 from local business and $10000 from business in USA at the end of period 01. Assuming that the $ value is expected to be Tk 69.2425. In Year 02, the expected cash flows of Tk 200,00,000 from local business and $150000 from business in USA. Assuming that the $ value is expected to be Tk 72.2425. Find out the expected cash flow and the Value of the firm if weighted average cost of capital (i) is 12.5% for Bangladeshi firm.


Solution: Practice-4

933868920.9Tk

124364543.2Tk 9504377.78Tk

(1.125)

30836375)Tk

(1.125)

10692425)Tk

12.5%)(1

72.2425)Tk ($150000 200,00,000Tk

12.5%)(1

69.2425)Tk ($1000010000000Tk

i)(1

)Cr(CFCCFHC

i)(1

)Cr(CFCCFHCMNCfor Value

21

21

211

111

933868920.9Tk


Practice: 04: Shareholder Return

1

212

P

DPP Returnr Shareholde

If a share price rises from Tk 16 to Tk 8 over a one-year period, what was the rate of return to the shareholder if:

1. The company paid no dividends?

2. The company paid a dividend of Tk 1 per share?

1.12.50%2.18.75%


Example 03: MNC’s P/E ratios and Acquisitions

Assume the following hypothetical firms in the pharmaceutical industry. Pharm-USA wants to acquire Pharm-Italy. It offers 5,500,000 shares of Pharm-USA, with a current market value of $220,000,000 and a 10% premium on Pharm-Italy’s shares, for all of Pharm-Italy’s shares.

Company P/E ratio

Number of shares

Market value per share

Earnings EPS Total Market Value

Pharm-Italy 20 100,00,000 $ 20.00 $ 100,00,000 $ 1.00 2000,00,000

Pharm-USA 40 100,00,000 $ 40.00 $ 100,00,000 $ 1.00 $4000,00,000

a. How many shares would Pharm-USA have outstanding after the acquisition of Pharm-Italy?b. What would be the consolidated earnings of the combined Pharm-USA and Pharm-Italy?c. Assuming the market continues to capitalize Pharm-USA's earnings at a P/E ratio of 40,

what would be the new market value of Pharm-USA?d. What is the new earnings per share of Pharm-USA?e. What is the new market value of a share of Pharm-USA?f. How much did Pharm-USA's stock price increase?g. Assume that the market takes a negative view of the acquisition and lowers Pharm-USA's

P/E ratio to 30. What would be the new market price per share of stock? What would be its percentage loss?


a. How many shares would Pharm-USA have outstanding after the acquisition of Pharm-Italy?

Because Pharm-Italy shares are worth $20 per share, they are only worth one-half the value per share of Pharm-USA's $40 per share.So, on a straight exchange, 1 Pharm-USA share is worth 2 Pharm-Italy shares.But, Pharm-USA also needs to pay a premium for gaining control of Pharm-Italy, so it pays an additional 10% over market.So, Pharm-USA pays: 10 million divided by 2 x (1 + 10% premium)

100,00,000 + 55,00,000 = 155,00,000


b. What would be the consolidated earnings of the combined Pharm-USA and Pharm-Italy?

Consolidated Earnings = Pharm-Italy earnings + Pharm-USA earnings

= $ 20,000,000

c. Assuming the market continues to capitalize Pharm-USA's earnings at a P/E ratio of 40, what would be the new market value of Pharm-USA?

New Market Value = P/E x Consolidated earnings

= 40 x $20,000,000 = $800,000,000


d. What is the new earnings per share of Pharm-USA?

e. What is the new market value (price) of a share of Pharm-USA?

gOutstandin Shares ofNumber

Earnings edConsolidat EPS


ValueMarket New PriceMarket New

61.51$15500000

000 000 $800 PriceMarket New

29.1$15500,000

0$20,000,00 EPS


Share price rose from $40.00 to $51.61. So, $ Change = $51.61 - $40.00 =$ 11.61 Percentage increase = 29.03%

f. How much did Pharm-USA's stock price increase?

g. Assume that the market takes a negative view of the acquisition and lowers Pharm-USA's P/E ratio to 30. What would be the new market price per share of stock? What would be its percentage loss?

New market value = Total earnings x P/E = $20,000,000 x 30= $600,000,000 New market price per share = total market value/ shares outstanding = $38.71 Percentage loss to original Pharm-USA shareholders = ($38.71 - $40.00)/ ($40.00) = -$3.23%


Practice 05: MNC’s P/E ratios and AcquisitionsPharm-USA wants to acquire Pharm-Italy. It offers 5,500,000 shares of Pharm-USA, with a current market value of $220,000,000 and a 10% premium on Pharm-Italy’s shares, for all of Pharm-Italy’s shares.

CompanyP/E

ratioNumber of

sharesMarket value per share Earnings EPS

Total Market Value

Pharm-Italy 20 10,000,000 $ 25.00 $10,000,000 $ 1.00 $250,000,000

Pharm-USA 40 11,000,000 $ 40.00 $11,000,000 $ 1.00 $440,000,000


b. What would be the consolidated earnings of the combined Pharm-USA and Pharm-Italy?c. Assuming the market continues to capitalize Pharm-USA's earnings at a P/E ratio of 40,

what would be the new market value of Pharm-USA?d. What is the new earnings per share of Pharm-USA?e. What is the new market value of a share of Pharm-USA?f. How much did Pharm-USA's stock price increase?g. Assume that the market takes a negative view of the acquisition and lowers Pharm-USA's

P/E ratio to 30. What would be the new market price per share of stock? What would be its percentage loss?


Answers: Practice 05

630,000,000

38.18

-$4.55%


27.28%f. How much did Pharm-USA's stock price increase?

50.91e. What is the new market value of a share of Pharm-USA?

1.2727d. What is the new earnings per share of Pharm-USA?

840,000,000c. Assuming the market continues to capitalize Pharm-USA's earnings at a P/E ratio of 40, what would be the new market value of Pharm-USA?

21,000,000b) What would be the consolidated earnings of the combined Pharm-USA and Pharm-Italy?

16,500,000a. How many shares would Pharm-USA have outstanding after the acquisition of Pharm-Italy?



11,000,000 + 5,500,000 = 16,500,000

b. What would be the consolidated earnings of the combined Pharm-USA and Pharm-Italy?

Consolidated Earnings = Pharm-Italy earnings + Pharm-USA earnings= $ 21,000,000

c. Assuming the market continues to capitalize Pharm-USA's earnings at a P/E ratio of 40, what would be the new market value of Pharm-USA?

New Market Value = P/E x Consolidated earnings

= 40 x $21,000,000 = $840,000,000


d. What is the new earnings per share of Pharm-USA?

e. What is the new market value of a share of Pharm-USA?


Earnings edConsolidat EPS


ValueMarket New PriceMarket New

91.50$16500000

000 000 $840 PriceMarket New

2727.1$16500,000

0$21,000,00 EPS


Share price rose from $40.00 to $50.91. So, $ Change = $ 10.91 Percentage increase = 27.28%

f. How much did Pharm-USA's stock price increase?


•New market value = Total earnings x P/E • = $21,000,000 x 30= $630,000,000 •New market price per share = total market value/ shares outstanding = $ 38.18 •Percentage loss to original Pharm-USA shareholders = ($38.71 - $40.00)/ ($40.00) = -$4.55%


Mini Case Practice 01Bonanza is a Bangladeshi (hypothetical) multinational garments manufacturing firm, with wholly owned subsidiaries in United States (USA), Germany and United Kingdom (UK), in addition to domestic operations in Bangladesh. The basic operating characteristics of the various business units are shown in the below table:

Bangladesh (Tk)

US Germany UK

(Dollar, $) (euros, €) (Pound, £)

Earnings Before Tax (EBT) 450,00,000 62,500.00 45000.00 25000.00

Corporate Income Tax Rate 35% 25% 40% 30%

Average exchange rate for period ---

Tk/$: Tk/€: Tk/£:

82.7475 108.3232 121.2325

Number of Share 650,000

a. After deducting taxes in each country, what is Bonanza’s consolidated earnings per share in Bangladeshi Taka?

b. What proportion of Bonanza’s consolidated earnings arises from each individual country?

c. What proportion of Bonanza’s consolidated earnings arises from outside Bangladesh?

d. What would be the impact on Bonanza’s consolidated earnings per share (EPS) if the Tk/$: 78.2525 with all other earnings and exchange rates remaining the same?

e. What would be the impact on Bonanza’s consolidated earnings per share (EPS) if the Tk/$: 78.2525 and if the Earnings before Taxes in US fell to $58000 as a result of the recession?

f. What is the total amount in Bangladeshi Taka that Bonanza is paying across its global business in corporate income

taxes?

g. What is the Effective Tax Rate on Global basis (Total Taxes paid as a percentage of pretax profits)?

h. What would be impact on EPS and Global Effective Tax Rate if Germany instituted a corporate tax reduction to 28%, and Bonanza’s EBT in Germany rose to € 50000?


Solution: Minicase

38175084.21 Consolidated Earnings of All Countries in BDT

2121568.752924726.403878789.0629250000.00Net Income in BDT- Country wise

909243.751949817.61292929.68815750000Corporate Income Tax Amount

30%40%25%35%Corporate Income Tax Rate

3030812.548745445171718.7545000000.00EBT in BDT

121.2325108.323282.7475

Tk/£Tk/€Tk/$---Average exchange rate for period

25000.0045000.0062500.0045000000.00Earnings Before Tax (EBT) in Local Currency

(Pound, £)(euros, €)(Dollar, $)

UKGermanyUSBangladesh (Taka)


Solution: Minicase

a

Consolidated Earnings per Share (EPS) = (Consolidated Earnings/Number of Common Stock)

58.73

b Country Wise Earnings Proportion 76.62% 10.16% 7.66% 5.56%

Total Earnings from outside Bangladesh 8925084.21

c

What proportion of Bonanza’s consolidated earnings arises from outside Bangladesh?

23.38%


d. What would be the impact on Bonanza’s consolidated earnings per share (EPS) if the Tk/$: 78.2525 with all other earnings and exchange rates remaining the same?

Bangladesh (Taka)

US Germany UK


Earnings Before Tax (EBT) in Local Currency

45000000.00 62500.00 45000.00 25000.00

Average exchange rate for period--- Tk/$ Tk/€ Tk/£

78.2525 108.3232 121.2325

EBT in BDT 45000000.00 4890781.25 4874544 3030812.5


Corporate Income Tax Amount 15750000 1222695.313 1949817.6 909243.75

Net Income in BDT- Country wise 29250000.00 3668085.94 2924726.40 2121568.75

Consolidated Earnings of All Countries in BDT 37964381.09

Consolidated Earnings per Share (EPS)=(Consolidated Earnings/Number of Common Stock) 58.41


e. What would be the impact on Bonanza’s consolidated earnings per share (EPS) if the Tk/$:78.2525 and if the Earnings before Taxes in US fell to $58000 as a result of the recession?

Bangladesh (Taka)

US Germany UK



45000000.00 58000.00 45000.00 25000.00


78.2525 108.3232 121.2325

EBT in BDT 45000000.00 4538645 4874544 3030812.5







h

Bangladesh (Taka)

US Germany UK



45000000.00 62500.00 50000.00 25000.00


82.7475 108.3232 121.2325

EBT in BDT 45000000.00 5171718.75 5416160 3030812.5





Total Tax 19468698.24

Effective Tax Rate on Global basis (Total Taxes paid as a percentage of pretax profits) i.e. Effective Tax rate = Total Tax / Total EBT in BDT 33.21%


Documents

Slide 1 [email protected]. Slide 2 [email protected] MNC and its Features; To describe the key theories that justify international business;