Long-Term International Asset and Liability Management
Ing. Jana Šimáková, Ph.D.
simakova@opf.slu.cz

Butler: Multinational Finance, 3rd ed. Chapters 15 + 16

•Like domestic capital budgeting, this focuses on the cash inflows and outflows associated with
prospective long-term investment projects
•
•Capital budgeting follows same framework as domestic budgeting
–Identify initial capital invested or put at risk
–Estimate the future cash flows generated by the project, including the terminal value or salvage
value of the investment
–Identify appropriate discount rate for NPV calculation
–Apply traditional capital budgeting decision criteria such as NPV and IRR to determine the
acceptability or ranking of potential projects
–
Multinational Capital Budgeting
Long-Term International Asset and Liability Management

•Several factors make budgeting for a foreign project more complex
•
•Parent cash flows must be distinguished from project
•Parent cash flows often depend on the form of financing, thus cannot clearly separate cash flows
from financing – this changes the meaning of NPV •Additional cash flows from new investment may in
part or in whole take away from another subsidiary; thus as a stand alone a project may provide
cash flows but overall may add no value to the entire organization
Complexities of Budgeting for a Foreign Project (1)
Long-Term International Asset and Liability Management

•Parent must recognize remittances from foreign investment because of differing tax systems, legal
and political constraints
•
•Non-financial payments can generate cash flows to parent in the form of licensing fees, royalty
payments, etc. – relevant for parent’s perspective
•
•Managers must anticipate differing rates of national inflation which can affect cash flows
•
•Use of segmented national capital markets may create opportunity for financial gains or additional
costs
•
Complexities of Budgeting for a Foreign Project (2)
Long-Term International Asset and Liability Management

•Use of host government subsidies complicates capital structure and parent’s ability to determine
appropriate WACC
•
•Managers must evaluate political risk
•
•Terminal value is more difficult to estimate because potential purchasers have widely divergent
views
•
Complexities of Budgeting for a Foreign Project (3)
Long-Term International Asset and Liability Management

Scheme of Multinational Capital Budgeting
Long-Term International Asset and Liability Management


•The following forecasts are usually required
–Initial capital investment
–Consumer demand over time
–Product price over time
–Fixed and variable cost over time
–Project lifetime
–Salvage (liquidation) value
–Restrictions on fund transfers
–Tax payments and credits
–Exchange rate forecasts
–Required rate of return
•
Input for Multinational Capital Budgeting
Long-Term International Asset and Liability Management

•Strong arguments exist in favor of analyzing any foreign project from the viewpoint of the parent
•Since most of the project’s cash flows to the parent are financing cash flows, this violates the
capital budgeting concept that financing cash flows should not be mixed with operating cash flows
•The evaluation of a foreign project from the project viewpoint is useful in determining its
competitiveness compared to local firms •Multinationals should invest only if they can earn a
risk-adjusted return greater than that of local competitors, otherwise investors are better off
investing in the local firms
Project versus Parent Valuation
Long-Term International Asset and Liability Management

•Most firms evaluate foreign projects from both parent and project viewpoints
–The parent’s viewpoint analyzes investment’s cash flows as operating cash flows instead of
financing due to remittance of royalty or licensing fees and interest payments
–Funds that are permanently blocked from repatriation are excluded
•The parent’s viewpoint gives results closer to traditional NPV capital budgeting analysis
•Project valuation provides closer approximation of effect on consolidated EPS
Project versus Parent Valuation
Long-Term International Asset and Liability Management

Project versus Parent Valuation
Long-Term International Asset and Liability Management
Parent Firm
(Germany)
START
Foreign Investment
(Czechia)
EUR invested in overseas
    Particular investment
Project Viewpoint
Capital Budget
(CZK)
Parent Viewpoint
Capital Budget
(EUR)
Cash flows remitted
to Parent (CZK to EUR)
Estimated cash
flows of project
Is the project investment
justified (NPV > 0)?
END

•Foreign projects generate foreign currency cash flows that must be approprimately taken into
account in cross-border capital budgeting
•
•Recipe 1
–Discount in the foreign currency and convert the foreign currency NPV to
a domestic currency value at the spot exchange rate
•Recipe 2
–Convert foreign cash flows into the domestic currency at expected future spot rates and then
discount in the domestic currency
•
Foreign Currency Cash Flows
Long-Term International Asset and Liability Management

•The project’s (local) perspective
–Let NPV(if) represent the value of a foreign project when discounted in the foreign currency
•The parent’s (domestic) perspective
–Let NPV(id) represent the value of a foreign project when discounted in the domestic currency
•These two NPVs may not be equal when the international parity conditions do not hold
–NPV(if) > 0: The project has value from the perspective of a foreign investor (that is, relative
to local financial market alternatives)
–NPV(id) > 0: The project has value from the perspective of the parent
–
•
Valuation when the Intl. Parity Conditions do not Hold
Long-Term International Asset and Liability Management

Long-Term International Asset and Liability Management
•
•
NPV(if) < 0
NPV(if) > 0
NPV(id) < 0
NPV(id) > 0
Reject
Try to lock in
the time 0 value
of the project
Look for better
projects  in the
foreign currency
Parent’s perspective
Project’s perspective
Valuation when the Intl. Parity Conditions do not Hold

•In the asset markets
–Sell the project to a local investor
–Bring in a joint venture partner from the local market
•
•In the financial markets
–Hedge the cash flows from the project against currency risk
–Finance the project with local currency debt or equity
Alternatives for Capturing the time t=0 Value of a Project
Long-Term International Asset and Liability Management

Structuring the Deal
Long-Term International Asset and Liability Management
•
•
NPV(if) < 0
NPV(if) > 0
NPV(id) < 0
NPV(id) > 0
Reject
Try to lock in
the time 0 value
of the project
Accept,
then structure
the deal
Look for better
projects  in the
foreign currency
Parent’s perspective
Project’s perspective

•NPV(if) > NPV(id) > 0
–The project has more value locally than it does from the parent’s perspective
–You should hedge
–Hedging provides the parent with higher expected value and lower exposure to currency risk
–
•NPV(id) > NPV(if) > 0
–The project has more value from the parent’s perspective than it does to local investors
–Whether you hedge will depend on the firm’s hedging policy
–Hedging the project cash flows lowers currency exposure risk but also lowers the expected NPV of
the project
–
Comparison of NPVs
Long-Term International Asset and Liability Management

•The proportion of long-term debt and equity capital and the particular forms of capital chosen to
finance the assets of the firm
•Management must choose
–The proportions of debt and equity
–The currency of denomination
–Fixed or floating rate interest payments
–Indenture provisions
–Conversion features
–Callability
–Seniority
–Maturity
•
Capital Structure
Long-Term International Asset and Liability Management

•Approaches to project valuation
–WACC = Weighted average cost of capital
–APV = Adjusted present value
–
•Use an asset-specific discount rate
–Nominal (real) cash flows should be discounted at nominal (real) discount rate
–Domestic (foreign) currency cash flows should be discounted at a domestic (foreign) discount rate
•
Project Valuation and Cost of Capital
Long-Term International Asset and Liability Management

•As a financial manager of the company with exceeded liquidity, you have two investment
opportunities. Their characteristics are as follows:
•Project A: The initial investment is EUR 80 000, the projected annual net cash flow for 3 years is
EUR 30 000, the residual value of the project after three years is EUR 0.
•
•Project B: The initial investment is EUR 80 000, the projected annual net cash flow is 1st Year
EUR 23 000; 2nd Year EUR 30 000; 3rd Year EUR 37 100, the residual value after three years is EUR
0.
•Which investment do you prefer at the required fixed rate of return 2.6% p. a.? Why?
•
Questions and Applications
Long-Term International Asset and Liability Management

Questions and Applications (1)
Long-Term International Asset and Liability Management


Questions and Applications (2)
Long-Term International Asset and Liability Management


•Corporate governance is the structure of rules, practices, and processes used to direct and manage
a company. •A company's board of directors is the primary force influencing corporate governance.
•Bad corporate governance can cast doubt on a company's reliability, integrity, and transparency,
which can impact its financial health.
•
Corporate Governance
Long-Term International Asset and Liability Management

•
Long-Term International Asset and Liability Management
Key elements of corporate governance | Download Scientific Diagram
Corporate Governance Position

•
Corporate Governance
Long-Term International Asset and Liability Management
KEY FACTORS OF CORPORATE GOVERNANCE MODEL DEVELOPMENT IN TRANSITION ECONOMIES/КЉУЧНИ ФАКТОРИ
РАЗВОЈА МОДЕЛА КОРПОРАТИВНОГ УПРАВЉАЊА У ТРАНЗИЦИОНИМ ЕКОНОМИЈАМА | Semantic Scholar
Anglo-Saxon vs. Continental European Model

THANK YOU FOR YOUR ATTENTION
J