International Business Finance - Coursework Example

International Business Finance Table of Contents Evaluation of the Proposed Joint Venture 3 Advice Regarding Key Operational and Strategic ChallengesFaced by XP 6 Options of Different Sources of Finance 8 Analysis of the Strategies for XP to Expand in Asia 11 References 14 Appendix 16 Preliminary Calculations 16 Calculation of Discount Rate 16 Calculation of Weighted Average Cost of Capital 17 17 Projected Cash Flow in millions (€) 18 Evaluation of the Proposed Joint Venture It is to be affirmed that a cash flow analysis will be performed for evaluating the proposed joint venture on behalf of XP Plc. While conducting the analysis, the provided financial information has been taken into concern. Specially mentioning, Net Present Value (NPV) has been used as the methods relating to capital investment appraisal for assessing the proposed joint venture. Thus, in precise, it is to be affirmed that a multinational capital budgeting criterion i.e. NPV is being applied to evaluate the proposed joint venture. This multinational capital budgeting criterion would assess the proposed joint venture in terms of determining cash inflows as well as outflows that are related to long-term investments (Eiteman & et. al., 2004). Certain estimations have been made while assessing the proposed joint venture on behalf of XP such as the cost of debt is considered as 6% and the equity cost to be 10% based on the provided information. Apart from these, the gearing ratio for the company is considered as 88%. Thus, based on the above provided information, the ratio of debt to equity is computed as 88: 10. With this concern, the weighted cost of capital on an average basis is computed (See Appendix 1). These particular factors including equity cost, cost of debt and gearing ratios are a part of multinational financial system that have been duly considered for assessing the value of the proposed joint venture (Eiteman & et. al., 2004). By considering the information about paying 60% of the investments in year 0 and the rest 40% in year 1, the cash outflow is calculated as €20,00,000x60% i.e. €12,00,000 and €20,00,000x40% i.e. €8,00,000 respectively. After ascertaining cash outflow, the cash inflow of the company will mainly start from the year 1, amounting to €12, 00,000 and €6, 20,000. While calculating net cash flow, various financial aspects would be taken into concern. These aspects may encompass the spot rate of 0.7320 per Euro, the yearly inflation rate, which is expected to rise by 2% in Germany and the increase in operational costs to be 0.325 million Euros yearly. By considering these financial aspects, the statement of cash flow based on which the proposed joint venture of XP can be assessed is presented in Appendix 2. Furthermore, to ascertain the overall valuation of the joint venture the company is majorly focused on adopting the NPV computation to measure the capital investment appraisal. Accordingly, the presented cash flow statement depicts positive value of NPV for the stated period of four years. This could be regarded as one of the prime advantageous factors for the company i.e. XP to conduct or get prepared for the joint venture. Based on the information provided, it can be ascertained that the company possesses a market capitalization amounting to 2.5 billion Euros and a gearing level of nearly about 88%. Apart from this, the company attained 60 million Euros yearly in terms of worldwide sales as well as profits over the previous 5 years of operations. With this concern, it can be affirmed that the company possesses the potentiality of increasing its debt level owing to the reason that its cost of equity is much higher than the cost of debt. It will be vital to mention that the company needs to adopt and implement effective measures while preparing for joint venture and operate business in the Euro zone, as there is a huge market competition in the respective regions. One vital aspect is important to consider that the profit to sales ratio of XP is identified to be of low margin i.e. 0.08, which is mainly calculated by considering the sales of 60 million Euros and an average based trading profit of nearly 4.8 million Euros yearly. Notably, as the company i.e. XP have already winded in the form of making loss relating to its German subsidiary, investing of 4 million Euros as the total cost of joint venture would be deemed crucial. Thus, from the above discussion, it is quite clear that the international financial markets of Eurozone and Germany have been used or taken into concern for the evaluation of the proposed joint venture (Eiteman & et. al., 2004). In relation to the above context based on the financial information being provided, it is to be inferred that the factors such as inflation rate, currency conversion and spot charge are assumed to remain as constant during the period of 4 years of operations performed by the company. However, these variables might be changed based on the business or trading regulations prevailing in the intended business markets. It is projected that the annual gross cash flow, which will be received from the proposed joint venture, will be increased by12% yearly. This could be regarded as one of the positive situations for XP to generate increased level of profit sales and likewise attain maximum level of profitability. Apart from obtaining greater amount of profits, the company will accomplish superior competitive advantage as compared to its chief business market competitors operating in the similar industry. However, no such data or evidences can be traced regarding profit repatriation. From a theoretical perspective, international tax planning is regarded as the approach of minimising tax rates of a company (Schafer & Spengel, n.d.). In this regard, for the proposed joint venture, the tax rate of 30% is taken into concern. For the proposed joint venture, the future exchange rates have been forecasted based on purchasing power parity (PPP) theory, which is regarded as a fundamental approach. The future exchange cost will be evaluated to provide a better insight towards the amount of cash inflow the project may earn in the future years of its operations. Finally, the theory of international cash management is also used for evaluating the proposed joint venture, which signifies optimisation of cash flows and the investments made that are expressed in terms of excess cash (Siddaiah, 2010). Advice Regarding Key Operational and Strategic Challenges Faced by XP XP remained much concerned about determining whether its parent company would be structured as well as transferred from France to Monaco. This particular initiative of the company generally involves moving its parent company from France and re-domiciled to Monaco. In this similar context, the Finance Director of the company estimated that in order to conduct the aforementioned operation, there lays the requirement of a net funding of 5 million Euros. However, it will be vital to mention that the company may face certain operational along with strategic challenges while re-domiciling its parent company from France to Monaco. From the perspective of operational challenges, XP may face the issue about handling its efficient resources such as human resources. This can be justified with reference to the fact that the operational procedures of the people engaged with XP in France are likely to be different as compared to operational performances that are being performed into the new region i.e. Monaco. In this regard, certain factors would eventually result into making such differences. Such aspects can be reckoned as distinct external as well as internal market conditions, prevalence of dissimilar tax regulations and more importantly change in making effective decisions about restructuring the works perform by the personnel in Monaco. It is obvious that since the company intends to be re-domiciled to Monaco from France, it had to perform several activities. This would significantly prove to be disadvantageous for the company in the initial time, as it may lay the requirement of conducting certain non-productive actions associated with operations (Singh, 2012). It is worth mentioning that re-domiciling the business operations to Monaco would certainly restrict XP to attain extra tax benefits from its base nation i.e. France. In this regard, the theory concerning international tax based planning generally appears, which could impose considerable impact on the profitability level of the company, affecting its operational performance as per the desired level (Shapiro, 2009). With regards to the information provided based on finance, it can be apparently observed that the Finance Director of XP has estimated a net funding of 5 million Euros. This cost might be increased due to the strategy of re-domiciled from France to Monaco, owing to the reasons of incorporating valuable resources and adopting effective decisions towards developing the operational procedures (Singh, 2012). In terms of strategic issues, the company i.e. XP may fail to determine making appropriate investments for efficiently performing different operational functions in new region i.e. Monaco. This might be owing to the reason of changing business market conditions and different operational structures to be followed while performing operations in Monaco. Specially mentioning, the prevailing culture in Monaco may not found to be much suitable for the personnel attached with the company, which in turn, affect their individual performance towards the attainment of short as well as long-term objectives. In response to the different financial turmoil, for deriving positive outcomes in terms of efficiently handling the issue, the management team of the company should attempt to capitalize the prevailing cultural distinctions and any sort of psychological distance. Apart from these factors, the company is also likely to face another strategic issue of managing change in its operations when considering the re-domicile of its parent company to Monaco from France (Stahl, 2004). It must be mentioned in relation to the above context that certain changes are genuinely to be observed while performing the above stated action from the perspective of operational functions and overall performance of the company as well as workforce related with the same. These changes may lessen the confidence level of the employees of XP and the management team while making effective strategic decisions regarding varied business or operational dimensions. These dimensions may comprise redesigning the existing organisational culture as well as structure, making effective decisions towards utilising the available resources in a new place i.e. Monaco and determining the level of investments to be made in long run. It is projected that the above discussed strategic as well as operational challenges that XP is likely to face while re-domiciling to Monaco would result into creating confusions amid the management team members and likewise affect its entire performance in the respective industry wherein it operates (Stahl, 2004). Options of Different Sources of Finance The options relating to finance available for a specific company mainly differ based on the size of a business. It has been apparent that the success of a business mainly relies on the making of substantial investments and seeking for identifying distinct finance sources (Taylor, 2013). Similar to this notion, the identification as well as detailed analysis of different financial sources is deemed important for the company, as it is intending to expand its business in different business markets of Asia. The Board Members of XP have already decided about making its business to expand across Asia and for which, they require the information about various options associated with finance options. It can be apparently observed that a company like XP can raise capital while expanding its respective business to other nations by the ways of debt and equity. In this regard, the theory of considering repatriation of profits could be taken into concern. From the perspective of applying equity way, funds can be reaped by issuing shares as well as stocks (Madura, 2014). On the other hand, debt financing theory could also be duly considered as one of the ways of acquiring funds by borrowing the same from any financial intermediary that include a bank or directly by bond issuance (Dow, 2009). Thus, the debt as well as equity borrowing theories would be potential sources relating to finance for the multinational corporation i.e. XP, in the background of raising funds for its business expansion across Asia. Apart from the above discussed various finance sources, the multinational corporation XP can also opt retained earnings for raising funds in enlarging its business across Asia, which is relevant to the theory of international cash management. It is often observed at certain instances that a company does not disperse all its profits or earnings to respective shareholders, rather retain the same for future use. In this situation, the theory concerning repatriation of profits could be taken into concern by the organisation. This notion is acknowledged as retained earnings. It falls under the theory of internal financing. With this concern, the company can use this option while expanding its business in different business markets of Asia. It will be vital to mention that this particular option of finance source would aid the company to enjoy superior level of operational flexibility as well as freedom. Moreover, the internal financing method or theory in the form of retained earnings will provide active support to the company in increasing the ability of its business to deal with any sort of unexpected loss and maximise the present value of the equity shares. The other financing option, which is available for the multinational corporation, is trade credit. This particular option is used by the business organisations belonging to this present day context as a short-term financing mode. It mainly facilitates the organisations to purchase supplies without involving into making immediate payments. It is projected that the financing mode of trade credit will prove to be beneficial for the company XP in the form of promoting its product sales, covering huge base of customers and more importantly developing inventory level among others (Butler, 2007; Eiteman & et. al., 2004). After acquiring a brief idea about the different financing options available for the multinational corporation XP, it will be vital to mention that the company needs to consider certain factors based on which the decision of adopting such options would be made. In this similar context, such factors can be included as market situation, business or operational purpose, costs involved with the operations and risks inherent within the systems among others. This can be justified with reference to the discussion of an example. If the multinational corporation i.e. XP desires to raise funds particularly for complying with the requirements of fixed capital, it may lay significant focus on acquiring long-term funds by getting involved into debt or equity financing. Similarly, if the company intends to meet its daily requirements, it may focus on raising funds through the utilisation of varied short-term sources (Butler, 2007). Thus, proper evaluation of the prevailing business market conditions across Asia and opt the appropriate means of financing would aid the company to gain greater access in restructuring its business with ensuring maximum profitability in future. Analysis of the Strategies for XP to Expand in Asia Based on the case study provided, it can be ascertained that XP intends to develop its varied operational functions for attaining maximum business growth and expansion over the next 5 years. Notably, the company is making deliberate efforts towards expanding its business in the business regions of Asia such as China, owing to maximum growth witnessed by these regions in this present day context as compared to earlier years. It is quite apparent that the company needs to adopt and implement certain effective strategies for expanding its business in different regions of Asia efficiently. In this similar context, the company can consider the strategies of Foreign Direct Investment (FDI), Mergers & Acquisitions (M&As) and Greenfield. These strategies can be related to the theory of managing risks in the form of hedging. From a theoretical perspective, the perception of FDI denotes making private investments that tend to drive financial growth throughout the globe. This financial growth in the nations of the world can be mainly determined in the form of transferring appropriate technologies, promoting better knowledge administration, developing business culture, facilitating superior access towards distinct foreign markets and raising the level of employment among others. The strategy of FDI would deemed to be suitable for XP, as this might aid the company to reap profitable investment opportunities through the promotion of greater privatisation and the determination of varied convertible currencies (Dabour, 2000). M&A have certainly evolved as the prime strategic measures for the business organisations operating in this modern day context. These strategic aspects are duly considered as a chief form of corporate restructuring. In precise, it can be affirmed that M&A denote consolidation of two distinct business companies. It can be apparently observed that the modern organisations usually conduct M&As in order to generate more customer value and reaping several significant benefits. These benefits could be measured in the form of increasing profitability in terms of market share, attaining superior competitive position as compared to chief business market competitors and more importantly ensuring long-term sustainability. It is worth mentioning that the strategy of M&As would prove to be quite beneficial for XP in expanding its business in diverse regions of Asia. This could be owing to the reason that M&As tend to improvise shareholder value by raising distribution reach and more importantly adding new product lines among others. With this attributes of M&As, it is projected that the company i.e. XP will be able to reduce varied operational costs and likewise increase profits by absorbing major competitors (Alam & et. al., 2014). Apart from the consideration of the above discussed two strategies, Greenfield investments might also prove to be quite beneficial for XP in terms of expanding its business in different business markets of Asia. This can be justified with reference to the fact that the strategic conception of Greenfield investments tend to make better execution of organisational capabilities as well as valuable resources efficiently towards establishing new production capacities by attaining greater economies of scale. In this regard, the use of Greenfield investments would eventually aid XP to manage and apply its valuable resources efficiently, resulting in supporting the company to accomplish superior extent of economies of scale and likewise successfully expand its business in diverse regions of Asia (Wang, 2009). By taking into concern the above discussed strategic options, the approach of FDI may prove to be quite advantageous for XP to expand its business in distinct regions of Asia. In this similar context, the various benefits that the company can reap from adopting FDI approach have been listed in the following: With the adoption and the execution of FDI approach, XP could be able to transfer its available resources into new business markets across Asia Incorporation of FDI strategic option would facilitate XP to make better exchange of knowledge for the fulfilment of predetermined business targets Greater access towards newer technologies as well as skills would facilitate XP to attain superior competitive position as compared to other existing market players operating within the similar industry XP can avail the opportunity of lessening production costs through effective implementation of FDI approach, only if the labour market of the region wherein the company intends to expand its business, becomes cheaper (Wang, 2005). References Alam, A. & et. al., 2014. Strategic Management: Managing Mergers & Acquisitions. International Journal of BRIC Business Research, Vol. 3, No. 1, pp. 1-10. Butler, D., 2007. Business Planning: A Guide to Business Start-Up. Routledge. Dabour, N. M., 2000. The Role of Foreign Direct Investment (FDI) in Development and Growth in OIC Member Countries. International Journal of BRIC Business Research, Vol. 21, No. 3, pp. 27-55. Dow, J. P., 2009. Large Corporations: What Are Their Financing Options And What Do They Cost? The Basics of Corporate Finance, pp. 91-102. Eiteman, D. K. & et. al., 2004. Multinational Business Finance. Pearson Education India. Madura, J., 2014. International Financial Management. Cengage Learning. Singh, P., 2012. Mergers and Acquisitions: Some Issues & Trends. International Journal of Innovations in Engineering and Technology, Vol. 1, Iss. 1, pp. 1-9. Stahl, G. K., 2004. The Leadership Challenge of Mergers and Acquisitions. Lia, Vol. 24, No. 5, pp. 3-6. Shapiro, A. C., 2009. Multinational Financial Management. John Wiley & Sons. Siddaiah, T., 2010. International Financial Management. Pearson Education India. Schafer, A. & Spengel, C., No Date. International Tax Planning in the Age of ICT. Discussion Paper, pp. 1-39. Taylor, F., 2013. Mastering Derivatives Markets ePub eBook: A Step-by-Step Guide to the Products, Applications and Risks. Pearson UK. Wang, A., 2009. The Choice of Market Entry Mode: Cross-Border M&A or Greenfield Investment. International Journal of Business and Management, Vol. 4, No. 5, pp. 239-245. Wang, P., 2005. The Economics of Foreign Exchange and Global Finance. Springer Science & Business Media. Appendix Preliminary Calculations Future Exchange Rates (Based on PPP theory) (Assuming inflation rate of (0.032) for UK and 0.025 for Eurozone) Formulae: et/e0= (1+ih)t /(1+if)t $/€ Spot 0.7320 Year 1 0.74 Year 2 0.75 Year 3 0.77 Year 4 0.79 Calculation of Discount Rate Cost of Equity = 10% Cost of Debt = 6% Year Cash Outflow Cash Inflow Discount Factor @1% Present Value 0 (120) 1.00 (120.00) 1 (8) 0.99 (7.92) 1 120 0.99 118.8 2 134 0.98 131.3 3 150 0.97 145.5 4 173 0.96 166.08 Calculation of Weighted Average Cost of Capital Weighted Average Cost of Capital = Cost of Debt x Debt percentage + Cost of Equity x Equity percentage = 6% x 0.88 + 10% x 0.10 =6.28% Calculation of Sales Income Insufficient Data Calculation of Writing Down Allowances Insufficient Data Projected Cash Flow in millions (€) Net Present Value = 3.17 Read More