15 International Working Capital Management: Chapter Objectives
15 International Working Capital Management: Chapter Objectives
15 International Working Capital Management: Chapter Objectives
International Working
Capital Management
Chapter Objectives
2. To list different channels available to move funds from one country to another.
3. To explain how MNCs can expedite the collection of funds and delay the
disbursements of funds.
4. To explain why MNCs centralize their cash management and how they invest
their excess funds.
Chapter Outline
I. Basics of Working Capital Management
A. Working capital management refers to the management of current assets
and liabilities.
i. Domestic companies differ from multinational companies due to
the different business environment that they operate in.
ii. Working capital management can be viewed as a dynamic (flow)
or a static (stock) responsibility.
Netting is a method designed to reduce the foreign exchange transaction cost through the
consolidation of accounts payables and accounts receivable.
Leads and Lags are respectively acceleration and delay of the timing of foreign currency
payments in order to reduce the foreign exchange exposure or to increase working capital
available.
Transfer Prices are prices of goods and services sold between related parties such a
parent and its subsidiary.
Transaction Motive holds that cash balances are held partly in anticipation of day-to-day
cash disbursements.
Precautionary Motive suggests that cash balances are held partly against deviations
from budgeted cash flows.
Speculative Motive relates to the holding of cash in order to take advantage of profit
making opportunities.
2. The ability to relocate working cash balances and profits on a global basis provides
multinational firms with several types of arbitrage opportunities. These types of
arbitrage opportunities do not include arbitrage.
A. tax
B. financial market
C. regulatory system
D. commodity market
E. both A and B
4. Which of the following is not a major component of fund flows from subsidiary to
parent?
A. dividend payments from subsidiary
B. interest payments from subsidiary
C. royalty payments from subsidiary
D. payments for goods received from the parent
E. tax payments from subsidiary
11. Multinational firms may be able to repatriate funds from foreign affiliates through the
following method(s) .
A. royalty payments
B. management fees
C. dividend payments
D. adjustment of transfer prices
E. all of the above
12. Which of the following is not related to the traditional objectives of multinational
firms' cash management?
14. The most important factor affecting the location of international cash centers is
probably .
A. the local government's political stability and its attitude toward foreign-based
companies
B. having enough cash balances at the local subsidiary
C. exchange rate volatility
D. the local government's ability to export oil
E. all of the above
17. A 1996 study by Ricci and Morrison found that 80 percent of Fortune 200 companies
use wire transfers , 50 percent poor their cash , and almost half net payments
and transfer funds electronically .
A. sometimes; sometimes; sometimes
B. often; often; often.
C. often; sometimes; rarely.
D. rarely; rarely; rarely.
E. often; often; rarely.
19. Re-invoicing centers are set up in tax haven countries to do the following .
A. charge higher prices
B. meet different accounting standards
C. bypass government restrictions and/or avoid taxes
D. A and B
E. A, B, and C
23. In international cash management, which of the following items is most important?
A. interest rate differential between two countries
B. inflation differential between two countries
C. interest rate and foreign exchange rate comparisons between two countries
D. A and B
E. A, B, and C
24. Which of the following is not one of the ways that a multinational company can delay
its payments?
25. The difference between European and American companies regarding working
capital is:
A. European companies have a considerably higher level of net working capital than
US companies due to support the same level of sales.
B. European companies have a considerably lower level of net working capital than
US companies due to support the same level of sales.
C. there are no noticeable differences regarding working capital.
D. US companies have higher levels of net working capital but this is used to support
a higher level of sales.
E. European companies have higher levels of net working capital but this is used to
support a higher level of sales.
27. A U.S. company has $10,000 in cash available for 45 days. It can earn 1 percent on
45-day investment in the United States. Alternatively, if it converts the dollars to
German marks, it can earn 1.5 percent on a German deposit for 45 days. The spot rate
of the German mark is $0.50. The spot rate 45 days from now is expected to be $0.40.
Should this company invest its cash in the United States or in Germany?
A. In the United States
B. In the Germany
C. It does not make any difference
D. All of the above
E. None of the above
28. A German investor has DM100,000 to invest for one year. U.S. Treasury bills offer a
yield of 11 percent. The current exchange rate of the mark is $0.50. What is the yield
on the investment if the exchange rate of the mark is $0.46 at the end of the year?
A. 10.25%
B. 12.55%
C. 15.00%
D. 20.65%
E. 25.00%
1. E 11. E 21. D
2. D 12. E 22. E
3. E 13. B 23. C
4. E 14. A 24. B
5. A 15. B 25. A
6. A 16. C 26. E
7. B 17. B 27. A
8. B 18. E 28. D
9. E 19. C
10. D 20. A
Solutions
27. Solution:
U.S. investment earns 1 percent.
Percentage change in mark = ($0.40 - $0.50)/$0.50 = -20%.
German investment loses 18.8 percent: [(1 + 0.015)(1 + (-0.20)] - 1 = -18.8%.
28. Solution:
Convert DM100,000 to $50,000 at $0.50 rate.
Invest $50,000 in the U.S. at 11 percent.
($50,000 x 1.11 = $55,500)
Reconvert dollars to marks.
($55,500/$0.46 = DM120,652)
Yield = (DM120,652 - DM100,000)/DM100,000 = 20.65%.