Corporate Finance Growth in Demand for Exotic Foods

Question :

Augment the content with applications that enable the CalSouthern Learner to apply text materials to a problem and solve that application problem using Learner selected methods and procedures.

Answer :

A) A multinational corporation is a company that operates in more than one country. For Example, companies having operations simultaneously in a country other than their home country. Companies like Apple, CITI group, etc are multinational companies. Companies expand to other countries for growth and expansion. The customer base increases and the company is widely known. (Multinational Corporation - Overview, Characteristics, Advantages, n.d.) Expansion to other companies increases market share. Sometimes the company also expanded to reduce its cost, as technological and labor cost may be lower in another company than in the home country(Top Reasons for Coporate Global Expansion, 2016)

B) The six major factors are

a. Different currency denominations: Since a Multinational company will have cash flows in different currencies, proper financial management of all the currencies is required

b. Economic and legal ramifications: The difference of tax Laws affects a multinational company that does not affect a local company

c. Language differences: There are different languages in different countries, which needs to be managed

d. Cultural differences: Cultures are not same for all the countries

e. Political Risk: All countries do not have the same Political scenario, so a local company is only bound by the politics of the USA however a multinational company has to bear the politics of other countries as well

f. Borrowing Cost: The borrowing cost is different in different countries. So a multinational corporation is exposed to different borrowing costs. (Woodruff, 2019)

C) The current international monetary system is a floating rate system . i.e the exchange rate is allowed movement with the market conditions with minimum government intervention. Prior to August 1971, it was a fixed exchange rate system where the exchange rate was fixed and the government would change the exchange rate based on the market conditions. (Kumar, 2014)

D) A convertible currency is a currency that is readily available to buy and sell in the world currency exchange. When a currency is not convertible the biggest challenge for a multinational company is to bring back the currency home as there is no market to convert the foreign currency to domestic currency. ("Foreign Exchange Markets", n.d.)

E) Spot rates are the rate of currency that is presently trading in the market. Forward rates are the rates that are expected to prevail in the market after a certain period of time. A forward rate is a premium to spot rate when the currency is expected to appreciate. Similarly, if the currency is expected to depreciate it is traded at a discount. ("Foreign Exchange Markets", n.d.)

F) Inflation is directly proportional to interest rates. Countries with lower inflation have lower interest rates and higher inflation has higher interest rates. Inflation is indirectly proportional to exchange rates. In a country which has a higher inflation rate will see its currency depreciating against a country with lower inflation rates. (Calvo & Vegh, 1995)

G) The transactions of international currencies and securities are done in the international capital market. It is the market where an individual can buy securities issued by foreign governments and firms.

Credit Management: The transactions are done with many countries even with smaller countries, so the credit risk is sometimes higher with those countries. Sometimes countries try to save their risk by buying credit insurance

Inventory Management: Inventory Management is very difficult as inventory is stored in different countries, some inventory is in shipping, the carrying costs are different in different countries.

References

Zhang, Q., Huang, X., & Tang, L. (2011). Optimal multinational capital budgeting under uncertainty. Computers & Mathematics With Applications, 62(12), 4557-4567. https://doi.org/10.1016/j.camwa.2011.10.035