1. MNCs can raise capital through bank loans, personal loans, bonds and credit card debt. This method is a debt capital. The cons are it bring additional burden of interest, which is the cost of debt capital. In addition, the payments must be made to lenders. The pros are the cost of debt capital tend to be lower than the cost of equity capital. MNCS can also raise capital through equity capital, which is from the sale of shares of stock. The pros are that the company do not need to repay shareholder investment. The returns can be from the payment of dividends. The cons are the owners are beholden to the shareholder and have to ensure the profitability of the business to pay the dividends. Equity capital are costlier than debit capital. MNCs can raise capital through special method, including international trade loans, international lease and international program such as BOT. The pros are MNCs can decrease their whole taxation burden, transfer capital and lower the political risk. The MNCs can get large amounts of capital and wide source of capital. The cons are the high cost to raise capital, the long cycle length.
2. Hedging foreign exchange risk protects from exchange rate fluctuations. Foreign currency forward contracts are to buy or sell foreign currency in a future date. Foreign currency option is right to buy or sell foreign currency or puts and calls. The advantages of forward contract are that contracts include the exact amount of a foreign currency, some specific
The Balance of Payments in India mainly relies on services exports, remittances and the course capital flows, both foreign direct investments (FDI) and FII. It is very essential that all market participants, such as banks and other intermediaries be provided with the wherewithal so that they can undertake a risk management in a way that is scientific. One of the ways to access domestic, foreign exchange markets is to hedge on the underlying foreign exchange exposures. In addition, the facilities that are available as the booking of forward contracts were included in the domestic forex market in order to evolve and acquire volumes and depth (Sumanth, 2012). Some of the newer hedging instruments have put in place swaps and options in the
Companies can hedge against foreign exchange risk by using forward contracts. Forward contracts allow companies to sell or purchase foreign currency at a future time and a given exchange rate. Regardless of any fluctuation of the exchange rate on the foreign exchange market, the transaction takes place at a time with the fixed exchange rate. Companies can mitigate the risk of the exchange rate fluctuation and increase management’s control over their cash flows and profit.
In general, using external funds, i.e. debt or equity, to finance increasing growth is riskier to the corporation. When issuing debt the company needs to be certain to cover both the repayment of the principal and the interest payments on time (because if they do not this could cause them to have problems securing financing in the future). When issuing additional shares of stock (equity) the value of existing traded stock is diluted (in proportion) and as such the current ownership might lose control (and may even be voted out by shareholders if dilution is substantial enough). Furthermore, with both debt and equity financing, a fast growing company needs to be aware that payments to either may hamper future expansion because payments that need to be send out in the forms of dividends or interest cannot be retained and invested in future projects.
The presentation was scheduled for the first week of December 1990. Mr. Pross outlined the use of various derivatives, noting that they differed widely in their ability to reduce risk. If the company was, say, placing a large bid to buy a building abroad, one might prefer to use foreign currency options to hedge the currency risk in the event the deal fell through. He argued, however, that foreign currency futures were best suited to hedge the fluctuations in revenues arising from currency movements. Mr. Pross proposed a plan to hedge currency risk using futures which
Now, the advantages of debt capital centre on its relative cost. Debt capital is usually cheaper than equity because, the pre-tax rate of interest is invariably lower than the return required by shareholders. This is due to the legal position of lenders who have a prior claim on the distribution of the company’s income and who in liquidation precede ordinary shareholders in the queue for the settlement of claims. Debt is usually secured on the firm’s assets, which can be sold to pay off lenders in the event of default, i.e. failure to pay interest and capital according to the pre-agreed schedule;
AIFS wants to offset any change in the exchange rates that may adversely affect their profit margins by using currency forward contracts and currency options. These hedging activities work to offset the three types of risk defined above as bottom-line risk, volume risk, and competitive pricing risk. Since these hedging activities must be put in place two years before the actual year of sales, AIFS must decide the proportion and cost
The effect of financial leverage on the cost of equity is prevalent in the Modigliani-Miller capital structure theory. Since the financial leverage increases the cost of equity, it can be considered one of the disadvantages of borrowing. As shown in Appendix A, the cost of equity, at each debt to capital ratio, increases by 0.1% as the financial leverage increases by 10%. With a higher
From the perspective of stockholders, debt finance may be more attractive compared with other financial approaches. The reasons are as follows. Firstly, it may ensurestockholders’ ownership unchanged (Mooij, 2012). If the board of the company intend to adopt the approach of equity finance such as issuing new rights, there is a possibility that the former stockholders may not be able to purchase all new issuing rights and then lead to dilution of control which they do not expect. Secondly, debt finance is a relatively cost-effective method as there is tax advantage of debt.If a firm only has equity finance, an extra tax then needed to pay because dividends which come from profits are income for investors which
Then, we took into consideration only a fluctuation of the exchange rate. The scenarios that we analyzed covers different positions of the dollar against the euro: weak dollar (USD 1,48/EUR), stable dollar (USD 1,22/EUR) and strong dollar (USD 1,01/EUR). Different coverage of costs with hedging was also introduced in the analysis. The three main policies are of not hedging, 100% hedging with forward contracts and 100% hedging with options.
Generally, firms can choose among various capital structures in order to maximize overall market value of the company. It is proposed however, that
The second is to combat the unfavourable currency movement by reducing the negative impact of currency exposure (Eiteman et al, 2009). This can be understood by the fact that for an organisation who is involved in international business, exposure to currency fluctuation accounts for the dramatic variance of the organisation’s income and expenses (Cusatis & Thomas, 2005). It is found that forward contracts are normally used to eliminate the variance involved in contractual commitments while option-type contracts are used to reduce the impact caused by uncertain foreign currency denominated future cash flows (Bodnar & Gebhardt, 1999). As in most cases, payment and experiences are contractual obligations, forward contracts are more popular, but for big organisations who have a bigger number of uncertain payments received from overseas customers, options can be also commonly seen (Bodnar & Gebhardt, 1999). In general, an organisation that has a higher level of foreign pretax income is more likely to benefit from hedging in this case (Geczy, et al, 1997).
Expanding globally can be very lucrative for a corporation, however it is very risky as well. To, have a smooth transition when expanding globally, a corporation is going to require capital. When looking to raise capital, corporations have several options to choose from. One of the most common options to raise capital that corporations have is debt financing. Debt financing is when a corporation sells bonds, bills, and notes to individuals. (Investopedia) Another form is equity financing, which allows corporations to raise capital by the sale of shares. (Investopedia) In this assignment, I will be discussing the advantages and disadvantages of corporations using debt to gain capital.
A wrong decision about the capital structure of their firm can leads towards the financial distress as well as towards bankruptcy. There are various theories to analyze capital structure. Among all these theories the trade off theory which derived by Modigliani and miller (1963) was the earliest and most recognized which explains the formulation of capital strcture. He consider taxation and suggested that the firm should carried debt as much as possible. Companies has an edge in using debt rather than using internal capital as the gain benefit from tax shield. It allows the firm to pay lower tax than they have. When using more debt than capital it created more firm
Introduction Overview of the hedging techniques In the financial market, almost all of companies need to face the currency risk. In order to manage the currency risk, companies will use different hedging techniques, such as financial and operational hedging techniques. For example, money market, futures contracts, options and forwards contracts are commonly used by firms, as well as operational hedging techniques. All of 4 types of financial hedging techniques are short-term hedge. Money market is a part of financial markets for assets involved in short-term borrowing,lending, buying and selling. Its features are high liquidity, lower risk, such as treasury bills. Futures contracts are future transaction for buying or selling, and made
There are two types of capital that can be raised, debt and equity. Now some would think that as long as there are funds there to work with, regardless of how they were procured, the end result would be the same. However, that is not the case. Debt financing and equity financing have significant differences in how they affect the business’s bottom line and in how they are acquired. For instance, the interest paid on a business loan (option for debt financing) is tax deductible, therefore decreasing the amount of taxable income and increasing overall