International Business Finance - Example

International Business Finance Student’s Name: Institution’s Name: Instructor’s Name: Course Code: Submission Date: Executive summary This is discussion is about IFM Plc which is a multinational company based in France and operating several subsidiaries in other countries with an excellent track record of performance. However, the company is being faced with two important strategies: entering a joint venture with EFM Plc and restructuring its business in order to transfer the parent company to Monaco. In order to determine the suitability of each strategy different factors including the financial and non-financial have been considered. This was done with the intention of determining whether it’s viable for the business to take on the two strategies. Based on the available data, it is important to point out that the two strategies are important for the business. However, further study of the Monaco market and the associated aspects of operations such as political, repatriation of tax and among others need to be undertaken. This is because it is like there is so much speculation about the business environment of Monaco. Further, the analysis has also explored the various sources of finance both internal and external that IFM Plc can use to expand its business to Asian market and in particular India and China. Table of Contents Executive summary 2 3 Overview of the strategic issues 3 1.Joint venture proposal 4 1.1 Financial evaluation 4 1.2 Non financial evaluation 7 2. Re-domiciling to Monaco 8 3.Sources of finance 9 3.1 Internal sources 10 There are two major sources of internal funding that IFM Plc could consider to use in financing its expansion project to Asia and which include sale of its assets and subsidiary funding. 10 3.2 External sources 11 4. Conclusion 12 5. Recommendations 12 References 13 Appendices 15 Overview of the strategic issues A strategic issue is any issue of great importance to the business and that can affect its operations and therefore requiring the identification of what help is required so that an organization can be able to prioritize its goals in a more suitable and competitive way (William, 2000). Given the case of IFM Plc which is a multinational company based in France and operating several subsidiaries in other countries with an excellent track record of performance of a market capitalization of 2.5 billion Euros and a gearing level of 88%, it is important to point out that it is being faced with two important strategic issues which are very important. The first strategic issue that will be subjected to evaluation and consequent consideration is whether the company will enter into a joint venture with EMF Plc and second, whether the company can restructure itself and transfer its parent company from France to Monaco. The ultimate objective is to try and make sure that the company remains most profitable and that can expand its business to potential markets globally. The evaluation of the two strategies will look at both the ups and downs of each strategy based on how it will affect the company operations and performance. Attention will be paid both to the financial and non-financial issues that surround the two strategies. 1. Joint venture proposal As already mentioned, the joint venture with EMF Plc is the first strategic issue that the company is facing. To determine the viability of this strategic issue requires an evaluation of both the financial and non-financial issues that are involved. According to the proposal by EMF Plc, each company will be expected to contribute 2 million Euros each towards the venture which translates to 50:50. 1.1 Financial evaluation The method of appraisal that has been used to evaluate this strategic issue is that of the Net Present Value (NPV). When using this type of method, all the revenues and costs of an initiative, project or strategy are estimated and then discounted and compared with the first investment that was made. In this case a project, initiative or strategy that has the most positive NPV should be appraised as opposed to the one with low or even negative NPV (Loizos, 2003). This is because with a negative value, it clearly indicates that the project will not be able to recover the initial capital that was used to start the project. In general therefore, this method is preferred in the case of EMF Plc in evaluating its joint venture strategy since take into account the time the strategy will take to recover the initial cost of starting it (Kollo and Ian 2006). This is actually a very important that makes it the most suitable method of evaluation as opposed to other methods such as discount rate, internal rate of return (IRR) and benefit/cost ration (BCR) among others which do not clearly show the comparisons between the initial cost and the project revenues and costs (Bauer, 2007). This method therefore, attaches so much value to money and time and will help show whether the strategy will help the company ascertain whether it will make some gains within the shortest time possible. Calculation findings From the calculations it is clear that the project is positive. The NPV calculations show a positive outcome from the strategy of the joint venture that EMF Plc is about to undertake with IMF Plc. This calculation was based on the gross inflows, operating costs of the strategy and the associated taxes which helped to show the net cash flows of the strategy for every year. The NPV of the strategy for EMF Plc is €1,641,000 after getting all the costs as shown in appendix 1. In appendix 1, the NPF has actually been estimated during the 4th year when the joint venture is expected to end or even get renewed. The NPV of the strategy has actually been arrived at after deducting the initiative cost of investment and the operating costs from the gross cash flows as shown in appendix 1. In real practice, what the results of the NPV outcome is showing is that the strategy is actually a good one and that EMF Plc stands to benefit from it in terms of returns. The implication of this finding is that the EMF Plc should proceed with the joint venture with IMF Plc as it is able to make some positive returns to the business after the 4 years the joint is expected to exist. Assumptions The first and most important assumption that helped reach the conclusion that EMF Plc should proceed with the joint venture strategy with EMF Plc is that the home currency was used in the calculation and which is euro. This means that the figures could be reflecting clearly on what the business anticipates in terms of returns irrespective of the country in which it operates. This is a good show for the business given the fact that euro is one of the leading world currencies and commonly used in the European market. This is particularly important for the company in the sense that the business will be able to absorb any shocks that are related to currency fluctuations (Bill, 2004). The other important assumption that was drawn from the calculation is about taxation. The findings of the calculations have been based on the assumption that tax in Germany is paid twice because of the double taxation agreement. This is one important reason that could be used to explain as to why the company business in Germany has not been favourable following the continuous losses. Further, it is also assumed that tax is paid in arrears. This is particularly important for the business in the sense that part of tax due can be used in other business investments to generate some returns before it could be paid to the responsible authority. This actually helps the business maintain a good cash flow that is important in their daily operations (Chuck et al, 2000). Finally, it is also assumed that all the data was collected was factual and accurate (Akbel & Schnitzer 2011). This is important in helping the business make accurate prospects on how the strategy will work. For instance, since the tax element is important in determining the outcome of the strategy in terms of performance, and therefore, if the information provided about the prevailing tax systems are not accurate then the evaluation of the strategy findings are misleading. 1.2 Non financial evaluation One of the important areas that any investment cannot overlook is the non-financial aspects that affect the business and which include benefits and risks (Henry et al, 2005). IMF Plc for instance is likely to benefit from the joint venture in a number of ways in which include: access to new markets, increased capacity, sharing of risks and greater access to resource. For instance, given the fact that IMF Plc wants to venture into other world markets, it could be so pressing in terms of the resources required. However, with the joint venture with EMF Plc, IMF Plc stands a better chance of getting more funds to expand its businesses without having to borrow. This is the benefit could be achieved alongside mobilizing resources to exploit a business opportunity. On the other hand, there are some risks that EMF Plc should be aware of when taking part in this venture with EMF Plc and most of which are related to the complexity of handling the joint venture and which include agreeing on the objectives of the venture, acting with honest, employment of expertise, existence of different cultures in business and the inability to provide the required leadership for the venture (Mihir & James, 2004). For instance the two organisations could be having two different objectives on what they want to achieve from the strategy. This could actually hinder IMF Plc from reaching its objectives in a timely way because a lot of time will be spent in settling the differences that may be between the two partners (Doukas & Pantzalis, 2003). 2. Re-domiciling to Monaco The second strategic issue that IFM Plc could be dealing with is that of restructuring itself and then transferring its mother company to Monaco. However, this strategic issue could only be handled based on the various operational factors that could influence the company’s business if it had to transfer its parent company to Monaco from France. The leading operational aspects that have been considered in evaluating this strategic option include: taxpaying system of Monaco, political risks that are experienced in Monaco, the repatriation of profits, availability of funding, workforce and language and culture among others. To start with, Monaco is a small state that is situated in the central of Riviera and is one state that has never lacked criticisms of different kinds but most important of all is its leadership which has continued to influence how different aspects are run. The first and most important operational aspect of the country is its tax system (Chowdhry & Nanda 1994). The country is luxurious state and its government is known not to charge income tax for its residents. However, what this analysis has established is that this is just a misconception that many corporations hold. For instance, the country does not actually easily register offshore companies that want to operate in the country because they think it is a tax haven (Chuck et al, 2000). This therefore is something the IFM Plc should be very careful with when trying to transfer its business to Monaco. Another operational aspect that is associated with Monaco is the political risk. This is because neither the ruling family nor the Grimaldis have remained the monarchs of the state that has been sovereign for over 700 years. This kind of political leadership is not so good for the business since it could change its business policy and regulation at any time and thus making it very difficult for such businesses as IFM to operate (Bauer, 2007). This is because the company could be bound to accept the labor and other industrial laws which are not consistent with its operational strategies. Since the country does take precautionary measures to monitor all the offshore corporations that register in the country because they think they will be excluded from paying tax, there is also a possibility that the government of Monaco could monitor and even restrict the repatriation of profits from the country. This is because repatriation is a clear indication that a corporation is taking advantage of the available weak tax systems to make unfair profits as indicated by Akbel & Schnitzer (2011). Despite the fact that Monaco is not a member of the European Union, it has very strict financial institutions. However, most important for IFM Plc is the fact that Monaco has a good network system of financial institutions that can be sources of funding to multinational corporations including IFM Plc. This therefore means that IFM Plc will have the opportunity access different sources of funding including from the banks only if they meet the laid down procedures (Mihir & James, 2004). Finally, IFM Plc is subject to such aspects as workforce and language and culture. It is important to note that the business will deal with almost the same workforce with the same language and culture. This is because many of the workers from France close over to Monaco to work there. This will therefore be easy for IFM Plc to adopt its workplace culture in Monaco. This is important because the business can easily adopt the required workplace culture because there are no many language and cultural issues to deal with (Chuck et al, 2000). 3. Sources of finance For IFM’s strategy of penetrating further the Asian market and in particular India and China to succeed, it is becoming absolutely important for the business to evaluate its capacity in terms of resources that are required to run the strategy. This is because the estimated budget for expansion of 250 million euros is large amount that can affect the company normal operations. This is the estimated figure that will help run the expansion strategy for the next 5 years. To ensure that the company is not limited in terms of capacity to take this ambitious plan, the following are the different sources of funding that are available for consideration (Stanley, 2006). 3.1 Internal sources There are two major sources of internal funding that IFM Plc could consider to use in financing its expansion project to Asia and which include sale of its assets and subsidiary funding. Sale of assets: Since the company is not doing so well in the Germany market, it is important for it to consider disposing some its assets and transfer the proceeds to the Asian market. This will help ensure that it does not tamper with the operations of other subsidiaries which are productive and profitable (William 2000). However, a very important consideration that IFM Plc should consider when considering using this source of funds is the depreciation element and the market value of the assets so that losses are not incurred in the process of disposing them. Retained earnings: This is of course one of the most convenient ways to fund the business strategy or project. The retained earnings are gotten from the dividends that the corporation chooses not to pay to the owners (Stanley, 2006). Given the fact that IFM Plc has remained profitable all through it is possible to say that it is entitled to pay dividends to the shareholders. However, since it wants to expand its market, IFM Plc could choose not to pay dividends and instead use them in its expansion strategy. The benefit of using this source of finance is that its less costly and bears very minimal risk since it’s the contribution of the owners. However, the important consideration that IFM Plc should take into consideration is the company policy with regard to retained earnings. This is to avoid a situation where shareholders are not happy if the company uses retained earnings in its expansion programme. Subsidiary funding: Since the company operates several subsidiaries in various countries, it can check on how the cash flow of each and every subsidiary looks like. This is to determine if they any funds that could be used to fund this strategy (Larry 2002). For instance, the company can obtain financing from subsidiaries by increasing the markups of all the supplies they send to the subsidiaries. The only precaution that the company should take into account when using this source of funding is the acceptable cash level of each subsidiary that can support its operations. 3.2 External sources Corporate bonds: In this case IFM Plc will be forced to issue long term bonds to different entities and individuals in return for payment and capital (Chuck et al, 2000). This is done in form of the debt security issue. However, the most important consideration that IFM Plc will make about this source is the risk of interest rates and the inability to pay. Equity financing: This process involves obtaining capital through the sale of new shares. It is actually a sale of ownership interests in order to raise additional capital for business operations (Peter, 2003). There are two important considerations that IFM Plc should consider if it chose to use this type of finance and which include: the regulation governing use of equity financing and the investor appetite to engage in equity financing. Commercial paper: This is unsecured short-term debt instrument that is issued by a corporation in order to finance the accounts receivable (Mihir & James, 2004). It is maturity time is 270 days. This source of financing is good for IFM Plc in the sense that it will not require any collateral. Further, the company will not have to register the paper with the Securities and Exchange Commission (SEC) as long as it will mature before the 270 days lapses. This makes the source of financing most cost-effective to use. Eurobonds: Like the euro-currency, the euro-bond is emerging as a major source of capital (Peter & Mark 1998). This is unsecured long term loan denominated in another currency other than the home currency of the firm in which made the issue (not subject to regulations of the country where the loan was raised). This is particularly of benefit to IFM Plc since it will be free choose which currency to use and which will be favourable in the market it will be operating in. 4. Conclusion This discussion was aimed at exploring two strategic issues that IFM Plc was faced with. The first strategic issue under consideration was about entering a joint venture with EFM Plc and the second, restructuring its business to transfer its mother company to Monaco from France alongside expanding its business to Asian market and in particular India and China. In the process of doing this, both the financial and non-financial factors that will affect the choice of the strategy have been taken into consideration. In general, what has emerged from the analysis of this is that all the strategies are likely to run simultaneously and yet the company has not enough capacity to initiate all the strategies and this forms the basis of the recommendation. 5. Recommendations The first recommendation is for IMF Plc to get to understand how well the two strategies can be implemented at the same time and the implications of the same to the company resources. Undertake a further study of the Monaco market to get facts about doing business in the country. This is because it is like what is known about Monaco is just a perception, there could be much more to know about Monaco before transferring the business there. Finally, there is need to implement the strategies one at a time. This is to ensure that the business is not under any pressure in terms of resources to implement the strategies. 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Appendices Appendix 1: NPV findings   Years   0 1 2 3 4 5 Gross Cashflows €' 000   1,430 1,638 1,877 2,151   Operating costs €'000   -209 -214 -220 -225   Taxable Profits €'000   1,221 1,424 1,657 1,926   Tax @ 29%     -354 -413 -481 -558 After Tax Profits €'000   1,221 1,070 1,245 1,445 -558 Intial Investment €'000 -1,200 -800 - - - - Net Cashflows €'000 -1,200 421 1,070 1,245 1,445 -558 Disctount factor @ 10% 1.0000 0.9090 0.8260 0.7510 0.6830 0.6210 Present Values €'000 -1,200 382 884 935 987 -347               Net Present Value €'000 1,641           Data   Cost of equity 12% Cost of debt 7% Tax rate (Germany) 29% Spot rate(£/€) 0.841 Duration (years) 4 Interest rate(uk) 2% Interest rate (eurozone) 1%   €' 000 Weight Equity 13,000 65% Debt 7,000 35% Total 20,000 100% Expected Exchange Rate = Spot Rate x ((1+interest uk)/(1+interest rate in Eurozone))^time                     Year     Expected Exchange Rate   0 0.841 0.841   1 0841*[(1+2%)/(1+1%)]^1 0.849   2 0841*[(1+2%)/(1+1%)]^2 0.858   3 0841*[(1+2%)/(1+1%)]^3 0.866   4 0841*[(1+2%)/(1+1%)]^4 0.875         Years     1 2 3 4 Uk Cashflows £'000 450 518 595 684 Exchange Rate 0.849 0.858 0.866 0.875 Converted Cashflows €'000 530 603 687 782           Euro Cashflows €'000 900 1035 1190.25 1368.7875 Total Cashflows €'000 1,430 1,638 1,877 2,151 Cost of capital = We x Ke + Wd x Kd                 = 65%*12%+35%*7%(1-29%)                 = 9.54%       = 10%                       Year     1 2 3 4 Operating costs €'000 235 235 235 235 Depreciation €'000 26 26 26 26 Cash Operating costs €'000 209 209 209 209 Inflation €'000 0 5.23 10.59 16.09 Inflated Figure's €'000 209 214 220 225 Read More