International-Financial-Management---Bekaert-2e---

©2012PearsonEducation,Inc.Chapter19ManagingNetWorkingCapitalQUESTIONS1.Whatisnetworkingcapital?Whyshoulditbeconsideredaninvestmentthatafirmmustmaketoincreaseitsfutureprofitability?Answer:Everycorporationmaintainsastockofcurrentassetsandcurrentliabilitiestobuffertheinflowsandoutflowsofcashgeneratedbythefirm’sbusiness.Thetermworkingcapitalreferstothestockofcurrentassetsconsistingofcash,marketablesecurities,accountsreceivable,andinventoriesheldbyafirmatanypointintime.Bysubtractingthevalueofafirm’scurrentliabilities,whicharethecorporation’sshort-termdebtsanditsaccountspayable,fromitsstockofworkingcapital,wearriveatitsnetworkingcapital.Totheextentthatafirmcanbemanagedwithasmallerstockofnetworkingcapital,cashcanbepaidtoshareholders.Thus,onegoalofmanagementistorunacorporationefficientlyinordertominimizetheneedfornetworkingcapital.Increasesinnetworkingcapitalareinvestmentsthatafirmmakestoproducecashinthefuturebecausetheyusecashthatcouldotherwisebedistributedtoshareholders.Ifthecashthatisinvestedinnetworkingcapitaldoesnotearntheweightedaveragecostofcapital,itshouldbepaidtothefirm’sinvestors.2.Whatdistinguishesinternationalcashmanagementfrompurelydomesticcashmanagement?Inparticular,whatconstraintsariseintheinternationalenvironment?Answer:Thegoalsofaninternationalmoneymanagerofamultinationalcorporationare(1)toestablishcontroloverthecashresourcesoftheorganization,(2)toinvestexcessshort-termfundsinanoptimalway,and(3)toobtainshort-termfinancingatthelowestcost.Establishingcontroloverthecashresourcesofanorganizationnecessitatescreatingareportingsystemthatprovidestimelyandaccurateinformation.Whentheinformationisavailable,theinternationalcashmanagercantrytoimproveuponthecashdisbursementstoandcollectionsfromitsforeignaffiliates.Bysynchronizingtheflowsoffunds,theinternationalcashmanagercanlowerthecostofmovingfundsamongthem.Thesegoalsarenodifferentthanthoseofapurelydomesticcashmanagerwhotransfersmoneyfromoneaccounttoanother(orfromonesubsidiarytoanother)sothatthefirmhasanoptimalamountofworkingcapital.However,thereareconstraintsoninternationalcashmanagementthatdomesticmanagersdonotface.Theseconstraintsincludegovernmentrestrictionsonthetransfersoffunds,taxesthatdependonthetypeoffundtransfer,transactioncostsintheforeignexchangemarket,andproblemsmaintainingtheliquidityofallforeignaffiliates.Chapter19:ManagingNetWorkingCapital©2012PearsonEducation,Inc.23.Whyisitimportantforaforeignaffiliatetohaveawell-defineddividendpolicyforrepatriatingprofitstoitsparentcorporation?Answer:Itisoftenadvantageousforamultinationalcorporationtohaveanestablisheddividendpolicythatitcaneasilydefendifgovernmentofficialsofthehostcountryquestionittoavoidproblemsrepatriatingprofitsfromabroad.Withoutsuchapolicyorahistoryofdividendpayments,anMNCmayhavedifficultyexplainingthereasonforanygivenyear’sdividendpayment.Ifthehostcountryishavingdifficultyfinancingitsbalanceofpayments,itmayappeartothegovernmentthattheMNC’sdividendpaymentisactuallyanattemptbythecompanytoexportcapitalfromthecountryinatimeofcrisis.Evenifagovernmentblocksthedividendsandnotransferscanbemade,manyfirmsfindittotheiradvantagetoatleastdeclareadividendinordertoestablishitsvalidityincasethegovernmentlaterrelaxesitsforeignexchangerestrictions.Somecorporationsalsoseta“common”dividendrepatriationrateforalltheirforeignaffiliatesindifferentcountries.Thisapproachestablishesthattheshareholdersoftheparentcorporationdemandacertainshareoftheearningsofallofthecorporation’sforeignsubsidiariesandarenotmerelytryingtotakecapitaloutofoneparticularcountry.4.Whatisthedifferencebetweenaroyaltyandafee?Answer:Royaltiesarepaymentsmadetotheownersofatechnology,apatent,oratrademarkfortheuseofthetechnologyortherighttomanufactureunderthepatentorthetrademark.Assuch,royaltypaymentsarepureprofitsinthesensethatthefirmreceivingthemperformsnocurrentservicesandincursnocurrentcoststoreceivethepayment.Thus,royaltiescanbeasubstantialsourceofincomeforthefirmthatisreceivingthem.Parentcorporationsalsoassessfeesfortheservicestheyprovidetotheiraffiliates,includingmanagementandtechnicalconsultingservicesandfeestorecoveroverheadcostsassociatedwithday-to-dayoperationstheparentperformsfortheforeignaffiliate.Thesecostsincludetheforeignaffiliate’sshareoftheresearchanddevelopmentoftheorganization,itsshareoflegalandaccountingcostsfortheentireenterprise,itsshareofthesalariesofthegeneralcorporatemanagement,andothercosts,suchasgeneralcorporateadvertisingandpublicrelations.Often,thefeesassociatedwiththeparent’soverheadarebasedontheaffiliate’ssales.Inothercircumstances,theoverheadchargesarebasedonaproratasharingofalltheMNC’sfixedcosts.5.Whatarethedeterminantsofleadingandlaggingpaymentsbetweenrelatedinternationalaffiliates?Answer:Aleadingpaymentisapaymentmadeearlierthanusual;whilealaggingpaymentisapaymentmadelaterthanusual.Byshorteningandlengtheningthepaymentcycleofpaymentsbetweenrelatedaffiliates,anMNCcanaffecttheliquidityofitsaffiliatesaroundtheworld.Chapter19:ManagingNetWorkingCapital©2012PearsonEducation,Inc.3Theforemostdeterminantofleadingandlaggingby