acca p4课件、真题及其他chp

1、Chapter 8International investment and financing decisionsStudy guideImpact of exchange rate upon value of a projectForecast project or firm free cash flows from overseas projects and calculate NPVSignificance of exchange controls for a given investment and strategies for dealing with itFirms exposur

2、e to transaction, economic and translation riskCosts and benefits of alternative sources of financing within international financial market2 Exchange rate assumptionsExchange rate risk is the risk that arises from the fact that cash flows are denominated in a foreign currency.Some fundamental relati

3、onships can help the financial manager to form views about exchange rates.Purchasing power parity (PPP)International Fisher effect (IFE)Expectation theoryPurchasing power parity(2007/JUN-1)Purchasing power parity(PPP) states that changes in exchange rates is due to differences in the expected inflat

4、ion rates between two countries. *If S0, appreciate, foreign currency depreciate S: spot rate,1$Sc: foreign countryb: home country (British)h: expected inflation rate Interest rate parityInterest rate parity (IRP) states that the difference between two countries interest rates should offset the diff

5、erence between the spot rates and the forward exchange rates over the same period.S: spot rate,1$SF: forward ratec: foreign countryb: home country (British)i: interest rate International Fisher effectFisher equation:International Fisher effect states that interest rate differentials between countrie

6、s provide an unbiased predictor of future changes in spot exchange rate:Given free movement of capital internationally, the real rate of return in different countries will be the same as a result of adjustments to spot exchange rates.Expectation theoryExpectation theory states that forward rate prov

7、ides the unbiased predictor of future changes in spot exchange rate: Forward rate=expected future spot rateS0: spot exchange rate in t=0S1: expected spot exchange rate in t=1F0: forward exchange rate of t=1 in t=0Summary Summary of exchange rate theoriesPPPIFEIRPFEExpectation theory Calculating NPV

8、for international projectsWhen calculating NPV and appraise an international project, the following should be taken into consideration:Effects of exchange rate APV: effect on exports, taxes, subsidies, exchange controlRiskNPV for international projectsTwo methods:Convert project cash flows into ster

9、ling and discount at sterling discount rateDiscount cash flows in the foreign currency at an adjusted discount rate for that currency, and convert resulting NPV at spot exchange rate to get sterling NPVP277 Q&AMethod 1NCF=cash flows- tax paidCalculate exchange rate for each year and convert foreign

10、cash flows into sterling cash flowsMethod 2Use International Fisher Effect to calculate discount rate of foreign currencyDo not forget to convert NPV in foreign currency into sterling NPV(cash flows-depreciation) of previous yeartax rateEffect of exchange rate on NPVWhen there is a devaluation of st

11、erling relative to a foreign currency, the term increases, and NPV of foreign investment increases.The opposite happens when sterling appreciated against foreign currency.P279 Q&A 3 Forecasting cash flows from overseas projectsThe following factors should be taken into consideration:1 Effect on expo

12、rts: - PV (loss of export earnings)2 Taxes: corporate taxes, withholding taxes, double taxation, investment tax allowances etc.P281 Q&A withholding tax3 Subsidies: benefit of concessionary loans4 Exchange restrictions5 Impacts of transaction costs: currency conversion and administrative expensesS: f

13、oreign currency exchange rateL: amount of loan in foreign currencyLP: periodic loan repayment in foreign currencyi: borrowing rate in UKTaxationWith double taxation (p281)Credit method home tax rateoverseas tax rate, further UK tax payable based on tax rate differenceWithout double taxation290 Q&ATa

14、x haven (p280)Low e tax and withholding taxStable government and stable currencyAdequate financial services support4 Exchange control (restrictions)Exchange controls restrict the flow of foreign exchange into and out of a country, can be in forms of:Rationing the supply of foreign exchangeRestrictin

15、g the types of transaction for which payments abroad are allowed: blocked fundsImpact of exchange controls on investment decisionsCase 1: no exchange controls Case 2: no repatriation until period N and no investment of CFCase 3: no repatriation until period N and CF investment each period to earn a

16、return of iStrategies of dealing with exchange controlsIn order for parent company to get payments from subsidiary where there exists exchange controls Transfer pricingRoyalty paymentManagement chargesLoans to subsidiary*Note: the policy may be unsuccessful, as most governments require the transfer

17、price to be set on an arms length basisAPVStep 1: estimate NPV assuming that the project is financed entirely by equity.Step 2: estimate the effects of the actual structure of financeTax effect of debt and debt issue costsAny finance raised in the local marketsRestrictions on remittancesSubsidies fr

18、om overseas governmentsStep 3: add the values from step 1 and 2 to obtain APV5 Exposure to foreign exchange riskTransaction exposure occurs when a company has a future transaction thatll be settled in a foreign currency, involving actual conversion of currency in the course of normal international t

19、rading transactionsThe overall transaction exposure should be evaluated in a portfolio contextTransaction risk can be managed by hedgingTranslation exposure occurs in multinational corporations that have foreign branches or subsidiaries with assets and liabilities denominated in foreign currency, wh

20、en their accounting results are translated into the home currency, for the purpose of financial reporting. 2006-6-1(c)no effects on actual cash flowsNo need to hedge in efficient marketCan be partly offset by matching 5 Exposure to foreign exchange riskEconomic exposure is the degree to which a firm

21、s present value of future cash flows is affected by fluctuations in exchange rates. 2006-6-2(c)Exchange rate changes may affect the value of the firm even though the firm is not involved in foreign currency transactions.What is significant for companies is the effect on real cash flows, after the ef

22、fects of inflation have been removedDifficult to hedge using financial derivatives, can be reduced by:Matching assets and liabilitiesDiversifying the supplier and customer baseDiversifying operations world-wideChange prices7 Costs and benefits of alternative sources of finance for MNCsMultinational

23、companies have to make decisions whether the funds should be drawn from the domestic or international markets.Large companies are able to borrow long-term funds on the eurocurrency markets and on the markets for eurobonds. Large companies can also borrow medium to long-term loans on the syndicated l

24、oan marketGroup of lenders (sharing risks); single borrower; large amounts; high speed in providing financeOriginally limited to international org. for acquisitions and other investments of similar importance and amounts, but now more widely available.Borrowing internationallyAdvantages:AvailabilityLower cost of borrowingLower issue costsRisks:May expose company to exchange rate riskWhen the currency used to borrow appreciates during the debts life, then cost of borrowing will increaseChoices of financing:Overseas investment, match