Managing MNCs and the risk of international deals
Describe the complexity of managing multinational corporations and the risks they face when conducting international deals that are different from domestic deals?
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When you manage a firm that have locations and activities in multiple countries (multinational corporation), you have complexities that are not found in domestic-only organizations.
TAXES
For instance, you now have a much more diverse tax situation as some transactions will be taxed by the foreign authorities and others will not. You will have to decide whether to alter transactions in order to get the ...
Solution Summary
Your discussion names four major reasons that multinational firms are more complex to manage.
International Finance Statements
1. Political risk management strategies should be managed carefully and integrated with other risk management structure. Who in your point of view should be in charge of the political risk management and how should that strategy be handled?
2. Once a project is accepted, country risk analysis for the foreign country involved is no longer necessary, assuming that no other proposed projects are being evaluated for that country. Do you agree with this statement? Why or why not?
Respond to following statements:
3, Political risks that MNCs face are business risks and foreign exchange risks which can be classified into two types of risks, Macro risks and Micro risks. Macro risks are where foreign operations are affected by adverse political developments in the host country. Micro risks are where only selected areas of foreign business operations are affected. MNCs can face political risks that originate at the country level such as a transfer risk and cultural risk. Transfer risk concerns mainly the problem of blocked funds, and or sovereign credit risk. Cultural and institutional risks come from ownership structure, human resource norms, religious heritage, and corruption. There are also intellectual property rights and protectionism. Additional political risks like terrorism, the anti-globalization movement, environmental concerns, poverty, and cyberattacks are global specific risks. An example of political risk is that of Niger Delta in Nigeria. Local groups regularly launch attacks against company compounds and kidnap foreign oil workers, demanding that more oil revenue be spent in the local area. Oil companies operating in these areas, such as Shell Oil, often manage these risks by hiring security firms to protect workers, and by negotiating to create schools, hospitals and jobs for locals. Another example of political risk would be in the area of economic changes for a company. For example, a government may decide to increase taxes on a particular product, industry, or company; an economic downturn or changes to the currency can also affect a company's ability to make a profit.
4. The optimal capital structure evolves constantly, and successful corporate leaders must constantly consider six factors, the company and its management, industry dynamics, the state of capital markets, the economy, government regulation and social trends. When these six factors indicate rising business risk, even a dollar of debt may be too much for some companies. Do you agree?
5. The cost of equity increases with an increased use of debt in the capital structure because the risk to investors also increases with the risk of the debt. Business risk is the risk to stockholders when debt is not used by a corporation. Business risk represents the uncertainty in the firm's projected free cash flows and capital investment requirements. Shareholders and managers have a great deal of control over business risk.
What would be the impact on the dividend to stockholders?
6.The cost of equity increases as the firm uses more debt since it makes the investment or the firm providing the debt financing a riskier investment. As the cost of debt goes up so do the leverage and the threat of bankruptcy. Taken to the extreme, if a company is over leveraged and cannot pay its debt then the company is at risk which therefore makes the investment even riskier. Can you illustrate how the financial leverage increases the expected return on equity?