International Business.

1. BY: ZAMAN IMTIAZ

2. PRESENTING BY:
 ZAMAN IMTIAZ. L4F16MCOM0035

3. PRESENTATION TOPICS:
RISK IN INTERNATIONAL BUSINESS:
COST OF CAPITAL AND PROJECT
VALUATION:
MNC`SCAPITAL STRUCTURE:
 INFLUENCE FACTORS AND
CHARACTERISTICS:
INTERNATIONAL PAYMENT METHODS:

4. RISK IN INTERNATIONAL BUSINESS:
 Every country presents its own investment
opportunities. Before expanding your
company overseas.
 however, be aware of the additional risks of
the foreign trade market.
 Business risk implies the possibility of some
unfavorable happening.
 It is the possibility of loss due to same
uncertain future occurrence.

5. RISK IN INTERNATIONAL BUSINESS:

6. RISK IN INTERNATIONAL BUSINESS:
Country risk:
Political risk:
Regulatory risk:
Economic risk:
Currency risk:
Law and order risk:
International trade association:
Financial risk:
Takeaways:
Cultural risk:
In the followings International business risk are
explain.

7. RISK IN INTERNATIONAL BUSINESS:
POLITICAL RISK:
 Determine the political climate of the country you hope to
enter.
 An unstable or ineffective government will be unable to
protect your business interests.
REGULATORY RISK:
 A sudden change in trade laws or a poor legal system
exposes your business to regulatory risk.

8. CURRENCY RISK:
 Fluctuations of a foreign country's currency can diminish
profits when converting back to the home currency.
 Analyze the risk and rewards of making an investment in
another country.
RISK IN INTERNATIONAL BUSINESS:
ECONOMIC RISK:
 Economic conditions such as high unemployment
or a largely unskilled labor force can be barriers to
entry.

9. RISK IN INTERNATIONAL BUSINESS:
LAW AND ORDER RISK:
 Law and Order situation in any country can be
threat to business activities .
 If they are not under control it can be create hurdle
in the success of the business.
INTERNATIONAL TRADE ASSOCIATION:
 If you are planning to do business overseas, contact the local
office of the International Trade Association, or ITA, in your
state.

10. RISK IN INTERNATIONAL BUSINESS:
COUNTRY RISK:
 Weigh the benefits of your company doing business abroad
against the potential pitfalls.
 Poor infrastructure such as roads, bridges and
telecommunications networks can make it expensive to
operate a business in another country.
TAKEAWAYS:
 Best practices for international business include strong risk
assessment and mitigation strategies against fraud,
misconduct, and other potential problems.

11. RISK IN INTERNATIONAL BUSINESS:
CULTURAL RISK:
 Unfortunately, most American business people
have very limited knowledge of foreign cultures.
 They often know even less about foreign law.
FINANCIAL RISK:
 It considers the ability of the country to finance its trade
debt and marketable requirements and against financial risk.

12.  Cost of capital is the required return necessary to
make a capital budgeting project.
 such as building a new factory, worthwhile.
 Cost of capital includes the cost of debt and the
cost of equity.
COST OF CAPITAL:
CAPITAL BUDGETING:
 Capital Budgeting involves choosing projects that add
value to the firm.
 This can involve almost anything from acquiring a lot
of land to purchasing a new truck or replacing old
machinery

13.  When a firm is presented with a capital budgeting
decision.
 one of its first tasks is to determine whether or not the
project will prove to be profitable.
 Net present value (NPV)
 Internal rate of return (IRR)
 Payback period (PB)
 Above methods are the most common approaches to
project selection.
PROJECT VALUATION:

14. PROJECT VALUATION:
PAYBACK PERIOD:
The payback period calculates the length of time required to
recoup the original investment.
FOR EXAMPLE,
if a capital budgeting projects requires an initial cash outlay of
$1 million, the PB reveals how many years are required to for
the cash inflows to equate to the one million dollar outflow.
 A short PB period is preferred as
it indicated that the project will
"pay for itself" within a smaller
time frame.

15. PROJECT VALUATION:
INTERNAL RATE OF RETURN:
The internal rate of return (IRR) is the discount rate that would
result in a net present value of zero.
The IRR rule is as follows:
IRR > cost of capital = accept project.
IRR < cost of capital = reject project.

16. PROJECT VALUATION:
NET PRESENT VALUE:
The net present value approach is the most intuitive
and accurate valuation approach to capital budgeting
problems
The NPV rule is as follows:
 The NPV rule states that all projects which have a positive net present
value should be accepted
 while those that are negative should be rejected. If funds are limited
and all positive NPV projects cannot be initiated, those with the high
discounted value should be accepted.

17. EXAMPLE:
Assuming a discount rate of 10% project A and
project B have respective NPVs of $126,000 and
$1,200,000. These results signal that both capital
budgeting projects would increase the value of the
firm, but if the company only has $1 million to
invest at the moment, project B is superior.
NET PRESENT VALUE:

18. An MNC’s capital structure decision involves the
choice of debt versus equity financing within all
of its subsidiaries.
Thus, its overall capital structure is essentially a
combination of all of its subsidiaries’ capital
structures.
MNCs recognize the tradeoff between using debt
and using equity for financing their operations.
MNC`S CAPITAL STRUCTURE:

19. THE MNC`S CAPITAL STRUCTURE DECISION
INFLUENCE OF COMPANY AND COUNTRY
CHARACTERISTICS:
 The capital structure is a company’s choice of how much
debt or equity to use to finance its operations.
 For the MNC this is more complex because the capital
structure may differ for subsidiaries located in other
countries

20. COMPANY CHARACTERISTICS:
STABILITY OF MNC`S CASH FLOWS:
 Just like for individuals where richer people can take on
more debt, companies with more cash can handle more debt.
MNC`S CREDIT RISK:
 Credit risk is the estimate of the probability that you will
not be able to pay off a loan. Similarly, companies have
degrees of credit risk.

21. AVAILABILITY OF RETAINED EARNINGS:
 If a company is profitable, the managers have a choice.
 They can pay all the profits to the owners in terms of
dividends or they can keep some of the profits to use to fund
company activities as retained earnings.
COMPANY CHARACTERISTICS:
MNC`S GUARANTEES ON DEBT:
 Parent company guarantees Subsidiaries of MNCs can often
get lower interest rates on loans when their parent company
agrees to back the debt

22. COUNTRY CHARACTERISTICS :
STOCK MARKET REGULATIONS:
Types of financial reporting required by local stock
markets (see the chapter on accounting), restrictions on
foreign companies, and reluctance of local investors to
invest in foreign companies.

23. VALUE OF LOCAL CURRENCIES:
 If the currencies in a host country are weak
relative to the currency of the parent company’s
country
 there is an incentive to use local debt financing
rather than borrowing from the parent
company’s retained earnings.
COUNTRY CHARACTERISTICS :

24. HOST COUNTRY RISK:
High degrees of country risk encourage multinational
managers to find ways to increase local investors’
commitment to the success of the company.
LOCAL TAX LAWS:
This situation encourages local debt financing because it
reduces the taxes on money returned to the parent company.
COUNTRY CHARACTERISTICS :

25. FACTORS THAT CAUSE THE COST OF CAPITAL FOR
MNCS MAY DIFFER FROM THAT FOR DOMESTIC
FI RMS:
The cost of capital for MNCs may differ from that for
domestic firms because of the following differences.
SIZE OF FIRM.
Because of their size, MNCsare often given preferential
treatment by creditors. They can usually achieve smaller
per unit flotation costs too.

26. ACESS TO INTERNATIONAL CAPITAL MARKETS.
MNCs are normally able to obtain funds
through international capital markets, where the cost of
funds may be lower.
INTERNATIONAL DIVERSIFICATION.
MNCs may have more stable cash inflows due to international
diversification, such that their probability of bankruptcy may
be lower.
FACTORS THAT CAUSE THE COST OF CAPITAL FOR
MNCS MAY DIFFER FROM THAT FOR DOMESTIC
FI RMS:

27. EXPOSURE TO EXCHANGE RATE RISK.
MNCsmay be more exposed to exchange rate
fluctuations, such that their cash flows may be
more uncertain and their
probability of bankruptcy higher.
EXPOSURE TO COUNTRY RISK.
MNCs that havea higher percentage of assets
invested in foreign countries are more exposed
to country risk.
FACTORS THAT CAUSE THE COST OF CAPITAL FOR
MNCS MAY DIFFER FROM THAT FOR DOMESTIC
FI RMS:

28. PRIMARY FACTORS THAT INFLUENCE A
COMPANY'S CAPITAL-STRUCTURE DECISION:
BUSINESS RISK:
Excluding debt, business risk is the basic risk of the company's
operations. The greater the business risk, the lower the optimal
debt ratio.
COMPANY TAX EXPOSURE:
Debt payments are tax deductible. As such, if a company's tax
rate is high, using debt as a means of financing a project is
attractive because the tax deductibility of the debt payments
protects some income from taxes.

29. PRIMARY FACTORS THAT INFLUENCE A
COMPANY'S CAPITAL-STRUCTURE DECISION:
FINANCIAL FLEXIBILITY:
This is essentially the firm's ability to raise capital in bad
times. It should come as no surprise that companies typically
have no problem raising capital when sales are growing and
earnings are strong.
MANAGEMENT STYLE:
Management styles range from aggressive to
conservative. The more conservative a management's
approach is, the less inclined it is to use debt to increase
profits

30. PRIMARY FACTORS THAT INFLUENCE A
COMPANY'S CAPITAL-STRUCTURE DECISION:
GROWTH RATE:
Firms that are in the growth stage of their cycle
typically finance that growth through debt,
borrowing money to grow faster.
MARKET CONDITIONS:
Market conditions can have a significant impact on a company's
capital-structure condition.
Suppose a firm needs to borrow funds for a new plant

31. CORPORATE CHARACTERISTICS:
STABILITY OF CASH FLOWS.
• MNCs with more stable cash flows can handle
more debt.
CREDIT RISK.
• MNCs that have lower credit risk have more
access to credit.
ACCESS TO RETAINED EARNINGS.
• Profitable MNCs and MNCs with less growth
may be able to finance most of their investment
with retained earnings.

32. CORPORATE CHARACTERISTICS:
GUARANTEES ON DEBT.
• If the parent backs the subsidiary’s debt,
the subsidiary may be able to borrow more.
AGENCY PROBLEMS.
• Host country shareholders may monitor a
subsidiary, though not from the parent’s
perspective.

33. COUNTRY CHARACTERISTICS:
STOCK RESTRICTIONS.
• MNCs in countries where investors have less
investment opportunities may be able to raise
equity at a lower cost.
INTEREST RATES.
• MNCs may be able to obtain loanable funds
(debt) at a lower cost in some countries.

34. COUNTRY CHARACTERISTICS:
STRENGTH OF CURRENCIES.
• MNCs tend to borrow the host country
currency if they expect it to weaken, so as to
reduce their exposure to exchange rate risk.
COUNTRY RISK.
 If the host government is likely to block funds
or confiscate assets, the subsidiary may prefer
debt financing.

35. COUNTRY CHARACTERISTICS:
• TAX LAWS.
• MNCs may use more local debt financing if the
local tax rates (corporate tax rate, withholding
tax rate, etc.) are higher.

36. INTERNATIONAL PAYMENT
METHODS:
 For companies to engage in international trade, the
importer.
 The exporter, or financial institutions must provide credit
in the sense that there is a lag between when payments are
made and when goods or services are delivered.
 There are four basic methods of payments to settle an
international trade transaction.

37. The most common terms of purchase are as
follows:
 Cash-in-advance (pre-payment)
 Letters of credit
 Documentary collections
 Open account.
INTERNATIONAL PAYMENT
METHODS:

38. PAYMENTRISKDIAGRAM

39. CASH-IN-ADVANCE:
 With cash-in-advance payment terms, the exporter can avoid
credit risk becausepayment isreceived before the ownership
of the goodsistransferred.
 Wire transfers and credit cardsare the mostcommonly used
cash-in-advance options available to exporters.
 However,requiring payment in advanceisthe least attractive
option for the buyer, becauseitcreates cash-flow problems.
 Foreign buyers are alsoconcerned that the goodsmaynot be
sent if payment ismade inadvance.

40. CHARACTERISTICSOF CASH-IN-
ADVANCE
• Applicability
– Recommended for use in high-risk trade
relationships or export markets, and ideal forInternet-
based businesses.
• Risk
– Exporter is exposedto virtually no risk asthe burden of risk is
placed nearly completely on theimporter.
• Pros
– Payment before shipment
– Eliminates risk of non-payment
• Cons
– May lose customers to competitors over paymentterms
– No additional earnings through financingoperations

41. LETTERS OF CREDIT ORDOCUMENTARY
CREDIT:
 AnLC,alsoreferred to asadocumentary credit, isacontractual
agreement whereby the issuingbank(importer’s bank), actingon behalf
of its customer (the buyer or importer), authorizes the nominated bank
(exporter’s bank), to makepayment tothe beneficiary or exporter
againstthe receipt ofstipulated documents.
 TheLCisaseparatecontract from the salescontract on which it is based;
therefore, the bank isnot concernedwhether eachparty fulfills the
terms of thesalescontract.

42. CHARACTERISTICSOF ALETTER OF
CREDIT:
• Applicability
– Recommendedfor usein new or less-established trade relationships
when the exporter is satisfied with the creditworthiness of the buyer’s
bank.
• Risk
– Riskis evenly spread between seller and buyer, provided that allterms
and conditions are adheredto.
• Pros
– Payment made after shipment
– Avariety of payment, financing, and risk mitigation optionsavailable
• Cons
– Complexand labor-intensive process
– Relatively expensive method in terms of transaction costs

43. DOCUMENTARYCOLLECTIONS
 Adocumentary collection (D/C)is atransaction whereby the
exporter entrusts the collection of apayment to the remitting bank
(exporter’s bank), which sendsdocuments to acollecting bank
(importer’s bank), along with instructions forpayment.
 Fundsare received from the importer and remitted to theexporter
through the banksinvolved in the collection in exchangefor those
documents.
 D/Csinvolve usingadraft that requires the importer to paytheface
amount either at sight (document againstpayment) or on a
specified date (document againstacceptance).

44. CHARACTERISTICSOF A
DOCUMENTARY
COLLECTION
• Applicability
– R
ecommended for use in established trade
relationships and in stable exportmarkets.
terms
for the exporter, though D/C
more convenient and cheaperthan anLCto the
• Risk
– Riskier
are
importer.
• Pros
– Bankassistancein obtainingpayment
– Theprocessissimple, fast, and lesscostly than LCs
• Cons
– Banks’role islimited and they do not guaranteepayment
– Banksdo not verify the accuracyof thedocuments

45. OPENACCOUNT:
 Anopen account transaction isasalewhere the goodsare shipped and
delivered before payment isdue, which isusually in 30to 90 days.
 Obviously,this option isthe most advantageousoption to the importer
in terms of cashflow and cost, but it is consequently the highest risk
option for anexporter.
 Becauseof intense competition in export markets, foreign buyers often
pressexporters for open account terms sincethe extensionof credit by the
seller to thebuyer ismore common abroad.

46. CHARACTERISTICS OF AN OPEN ACCOUNT:
 Applicability:
– Ideal for an established exporter who wants (a) to have
the flexibility to sell on open account terms, (b) to
avoid incurring any credit losses, or (c) to outsource
credit and collection functions.
 Risk:
– Risk inherent in an export sale virtually eliminated.
 Pros:
– Eliminates the risk of non-payment by foreign buyers
– Maximizes cash flows.
 Cons:
– More costly than export credit insurance.
Generally not available in developing countries

47. BY: STARS OF BUSINESS.
THANKYOU:
ANY QUESTION?
BY: STARS OF BUSINESS: