International Business Finance - Essay Example

International Business Finance Task Executive summary Parent Company This project involves the analysis of IFM plc and its strategic options for investment. IFM plc is a company in the industry of financial services with emphasis on industrial and commercial property. It has a central office in France with subsidiaries across Europe. The company has a market capitalization of 2.5 billion euros, with the ratio of owner’s equity to debt being 88%. Its current turnover is over 60 million euros and an average profit of 1.8 million euros. German Subsidiary and Strategic Options The company has subsidies across Europe but the Germany subsidiary is particular significance as it has been incurring losses for the last 5 years (Friesland, 2010). The subsidiary has a market capitalization of 20 million euros consisting of 13 million in equity and 7 million in debt. As a subsidiary of IFM plc the opportunity cost of equity is 12% while the debt capital stock has a rate of 7% which results to a weighted average cost of capita being 10.25 %.The management is contemplating divesting in the company and has been offered an alternative of joint venture by a new company at a cost of 2 million. The company is also undecided on whether to transfer the parent company’s domicile from France to Monaco and this requires an initial cost of 5million. The management has however decided to expand its operations to new markets and have identified the Asian Continent and it currently sourcing for funds to implement the strategy. Background This project is a report for the senior management team of IFM plc who need to evaluate their decision alternative so as to implement. The strategies available include whether to close operation in German Subsidiary as a result of the successive losses or enter into a joint venture with the EMF plc. The team also requires information on the sources of finance that are available to it for expanding operations. Problem Statement This report seeks to evaluate proposed joint venture, advise the management of any operational aspects and detail the options of corporate financing Objectives of the study Evaluate the proposed joint venture using financial and non-financial analysis State which capital investment appraisal method you have used and it appropriateness The key operational aspects to be considered when re-domiciling the France parent company to Monaco The options of finance for the expanding operations and factors to be considered in choosing the source of finance Financial Analysis This involves the use of available financial information to evaluate the feasibility of the product. These include the Net present value which is the difference between the present values of a projects benefit against the present value of costand the venture has NPV of -0.44159; profitability index which measures the NPV per unit of resources consumed valued at 0.885158and the accounting rate of return average income per book value of resources of 5.51%. The rational for financial analysis is to assess the benefits and costs against the changing value of dollar as a result of time and inflation. Non-financial Analysis Strategic Analysis This involves analysis the proposed joint ventures based on the value it adds to the strategic goals of the company. Strategic goals are the generally long term overall objectives that a company seeks to achieve within the defined period. The strategic element is of relevance to the success of the joint venture as it involves the analysis of risks associated with the growth of the present business operations against the SWOT analysis to determine the feasibility of meeting ,market needs while maintain the required levels of profitability(Friesland, 2010). Technological Analysis This requires the joint venture to be assessed on the level of information and technology to be incorporated during initiation and the necessary measure to ensure that the venture’s technology is up- to- date through the culture of innovation. IFM Plc SMT should ensure that the personnel operating at the joint venture have adequate skills and knowledge to operate the available technology. IFM plc should also have the option of setting up a research and development expenditure programs that will ensure that its customer are able to get the best services at reasonable costs than competitors Marketing Analysis This are activities undertaken in order to ensure that the joint venture is commercial feasible. It is a combination of design features, the cost of providing service to consumers, channels of ensuring that customers are served and ways in which the joint venture will be promoted. It therefore involves studying what the market requires and its ability to satisfy such needs, partitioning the market based on ability and analysis its competitors strengths and weaknesses. Marketing analysis ensures that revenues, profitability and the going concern of the joint venture are achievable in the long term. Social Analysis These are the social factors of considerable success factors that should be considered during the initiation of the joint venture. Such factors include, the possibility of value addition to the customers concerns, the ethics and race considerations of its personnel, creation of employment to the population where the venture will operate and the similarities between the venture’s values, standards, traditions and believes are congruent to that of the populations(Friesland, 2010). Political Analysis These are the political factors that may have a strong impact on the business operations and is influenced by factors such as; stability of the political system, monetary and fiscal policy in country of operations, the subsidies availed by the government during investments and the regulatory measures for the products and factor markets in the country where the joint venture will operate. Organizational Analysis These are factors within the organization that are critical to its success and are evidenced by the organizational structure which defines the relationships between different functional segments, levels of authority and definitions of responsibilities for venture’s employees. The personnel in the organization are required to have the adequate levels of knowledge, abilities and skills to serve the organization. The system infrastructure and software’s should be enhance the processes involved in the entity such as communication, information process and enhance flexibility of operations and that of work force. Human resource and Project Manager Analysis This involves analyzing the current workforce and their contribution to the overall objectives of the firm. The work force should be required to have technical knowledge, ability and skills, their ability to work as a team for the purpose of achieving the strategic goals of the firm (Friesland, 2010). This therefore requires identifying the categories, procedures and conditions of tasks to be performed. Necessary measure should be put in place to ensure that the workforce is acquired and maintained as assets to the organization, through adequate compensation and remuneration. The project manager is the overall person responsible for the implementation of strategies that have been designed. This position requires special consideration and includes factors such as experience in the field of business operations, leadership and management skills. The project manager will delegate authorities and responsibilities to staff to ensure achievement of goals as well as overseeing the implementation of internal culture in the organization. b) The key operational aspects that they need to consider when re-domiciling the France parent company to Monaco. The key operational aspects for consideration include; business processes which involve determining the most effective and efficient technique adopted by the organization in serving its customer to ensure value provision and eliminate all non-value added activities; Performance measurement as used by an organization in evaluating its processes, personnel and organization; Organization’s employee having skill and knowledge to enable them conduct its businesses effectively; Organization structure which requires appropriate structures and leadership that enable an organization conduct its operations and Appropriate technology required by the entity to support its business processes as well as the ability of customers to understand such processes(Friesland, 2010). Business Processes This is defined as the set on interrelated activities and tasks performed by individuals, teams, departments within the business entity. It involves the process of consuming inputs, adding value and produces output valuable to its users such as customer service. The operational aspect of business process in re-domiciling can include instituting new processes or improving the existing processes. Among the process change that can be availed to the company include automation of operations for more efficiency through computerization, rationalization which involves standardizing the operation procedures for more efficiency and business process redesign that requires a major restructuring of the current process with the aim of reducing wastes and costs Organization structure This defines how tasks related to a job are formally divided, grouped and coordinated (Robbins, 2013). This involves consideration of aspects such as work specialization, departmentalization and chain of command. Work specialization is the degree to which an organization’s activities are subdivided into separate jobs and allocated to individuals. This requires competence of the personnel in the area of application has been proved to enhance productivity. Departmentalization is the basis by which jobs in an organization are grouped together in the manner preferred by the entity such as by functions performed, the different services provided by the organization or the customer segment that the company intends to satisfy. Chain of command is a representation of authority that extends from the top to the bottom of an organization and clarifies the reporting framework (Connolly, 2006). Technology This is a critical operational aspect that involves providing an efficient and effective environment for research administration. It enables an entity to reassess existing operations and lay a framework for developing new methods (Connolly, 2006).Technology considerations will seek to provide quality services to customers, increase compliance the company’s with laws and regulations, improve the efficiency of operations and ensure operations are reported and monitored. Organization employees These are those charged with the responsibility of conducting the processes designed by management. The key aspects for consideration include the presence of a suitable culture in place that emphasizes on customer service, the availability of adequate knowledge, skills and behavior required to perform tasks assigned and customer satisfaction through timely service to its customers. The company is therefore required to define and communicate the roles and responsibilities expected from its employees and customers, continuous training and development of the workforce to ensure they are aware of tasks and can handle changes whenever they occur. The process of recruitment and selection should also be defined to ensure the staffs are competent. Performance measurement This is the evaluation of the actual work performed against established criteria to determine the needs for taking corrective actions ensure that organizational goals are achieved. Performance measurement therefore enables an organization to internally evaluate its operations against objectives, furnish those charged with governance with evidence to monitor and take corrective actions. Performance measurement will therefore include the processes of developing key measures for performance, setting the required objectives that assist in constant development, communicating the objectives and foundations required for those in management, and monitoring the measures undertaken (Friesland, 2010). c) Sources the multinational company has to fund expansion Equity financing Issuing of new shares This involves raising additional cash from issue of new stock to the general public. This occurs in the stock markets where both primary and secondary shares are bought and sold. There are different methods of issuing shares for cash such as public offer which is a bid opened to the general public to subscribe for shares of the company either for the first time as Initial public offer or as additional shares; placing which involves the sale of small portions of the joint venture’s shares to selected investment institutions ideal for projects that require small amounts of capital and rights issue; this involves offering the new shares to existing shareholders in relation to their current proportions of shareholdings (Friesland, 2010). The factors to consider in deciding whether to issue new stock include the type of ownership requirement that results to different types of shares such as common stock which gives stockholders the ability to participate in decision making and have residual effect to company’s distribution. Preference shares are also equity exchange for cash with the holders are having preference treatment and earn dividends based on predetermined rates. Retained Earnings The Multinational Company can decide retain a proportion of their income available for distribution to finance the project. This is an internal source of finance available for the MNC to utilize. It offers incentives for the management as expense associated with raising additional shares are eliminated because the cash is already in the company. It is however limited to the profitability of the parent company, the trade – off between the investors dividends and the value from investment should be considered as only those that add value to shareholders wealth are likely to be approved by shareholders, dividend not distributed attract additional tax in the form of withholding tax(Friesland, 2010). Debt Financing These are long-term sources of finance available to a company that attracts interest payments based on the value of bond at agreed intervals. The rate of payment is determined by the coupon rate that is quoted on the face- value of the bond and is usually constant. The form available for institutional investors is referred to as debentures. Debentures are usually backed by the assets of the company and can be either fixed on specific assets or floating which requires company’s assets to be sold off in cases of default. Factors to consider when deciding on the debt financing method include the tax advantage. Debentures attract interest expense which is tax deductible and is able to reduce the tax paid by the institution and retain more for shareholders (Friesland, 2010). Debentures create obligations to the company to fulfil its obligation of paying interest payment and failure of which creates the risk of continuing into operations in the near future. Debenture also creates the agency costs in which limits the ability of managers to invest in risky assets, even though there may high returns from such investments. Recommendations Joint Venture The financial analysis conducted on the financial data includes net present value, profitability index and accounting rate of return. As a result of the financial analysis the joint venture does not add value to investors and should be rejected. Using the NPV method, the joint venture has a negative value. In profitability analysis the project should as well be rejected as it has an index of less than one (MURRAY& SCOTT, 2012). Non-Financial Analysis The Management has several variables by which this venture can be evaluated and include factors such as economic, strategic, marketing among other variable. The variable however only adds value when the overall prospect is profitable and management has decided to undertake the venture. Operational Aspects of operations for consideration These are the drivers of key performance indicators and include the employees required to be competent, technology used should be add value to the operations of the company, the measure used to evaluate and appraise operations should be realistic, and the organizational structure should made efficient to enhance the ability of the firm to achieve its goals Sources of Finance The company is a multi- national and is accessed to large capital markets. It has the options to finance the project from equity, debt or as retained earnings. All these have their costs and benefits and therefore require alignment with company objectives and goals. Appendix The Net present value 1 2 3 4 Gross Cashflow Euro 0.9 1.035 1.19025 1.368788 United Kingdom 0.45 0.5175 0.595125 0.684394 United Kingdom in Euros 0.535077 0.615339 0.70764 0.813786 Total revenues in Euros 1.435077 1.650339 1.89789 2.182573 Operating Cost 0.2092 0.211292 0.213405 0.215539 Depreciation 0.0258 0.026058 0.026319 0.026582 Total Operating Cost 0.235 0.23735 0.239724 0.242121 Operating Profit 1.200077 1.412989 1.658166 1.940452 Tax 0.348022 0.409767 0.480868 0.562731 Profit after Tax 0.852055 1.003222 1.177298 1.377721 Add Back Depreciation 0.0258 0.026058 0.026319 0.026582 Free Cashflows 0.877855 1.02928 1.203617 1.404303 Discount Factor 0.898049 0.806492 0.724269 0.650429 Present Value 0.788357 0.830106 0.871743 0.9134 3.403605 Initial Cashflow 3.8451936 3.845194 Net Present Value -0.44159 Cost Of Capital Rete Amount Equity 12% 13.00 1.56 Debt 7% 7 0.49 20.00 2.05 Rate 0.1025 Inflation Adjustment Real Rate 0.1025 (1 + Real Rate) 1.1025 Inflation Rate 0.01 (1 + Inflation) 1.01 (1 + real rate) * ( 1 + inflation) 1.113525 Nominal Rate 0.113525 Discount Factor 0.898049 0.806492 0.724269 0.650429 1 2 3 4 Initial Cashflow Year 1 Year 2 EFM Plc 2 IFM Plc 1.2 0.8 3.2 0.806492 3.2 0.645194 3.845194 Inflation Rate 101% Sales Growth 115% Tax Rate 29% Exchange rate 0.841 The Profitability Index is given by Profitability Index 3.403605 3.845194 0.885158 Accounting Rate of Return ARR 1.102574 20.00 5.51% References MCRAE, T. W. (1996). International business finance: a concise introduction. Chichester [u.a.], Wiley. CONNOLLY, M. B. (2006). International business finance. New York, NY, Routledge. DLABAY, L. R., & BURROW, J. (2007). Business finance. Mason, Ohio, South Western. WOOD, D., & BYRNE, J. (1981). International business finance. New York, Holmes & Meier Publishers. PARK, Y. S., & ESSAYYAD, M. (1989). International banking and financial centers. Boston, Kluwer Academic Publishers. http://www.ohsu.edu/research/rda/spa/docs/ohsu_operationalimprovement_022304.pdf http://www.fma.org/Porto/Papers/PROJECT_EVALUATION MURRAY, G., & SCOTT, J. (2012). Financial elites and transnational business: who rules the world? Cheltenham, Edward Elgar. FRIEDLAND, J. A. (2010). Understanding international business and financial transactions. New Providence, NJ, LexisNexis. http://www.contentreserve.com/TitleInfo.asp?ID={63EEF6A8-43D3-402D-A640-EE2DB49B112C}&Format=410. Read More