Critical Assessment of International Financial Management and Theoretical Models

This article provides a critical assessment of international financial management and the theoretical models it applies. It discusses the importance of international financial management for multinational corporations and analyzes various methods and techniques related to financing international business. The article also examines models of corporate value with international cost of capital and financial structure.

Critical assessment of
international financial
management and the
theoretical models it applies

Table of Contents
INTRODUCTION...........................................................................................................................2
MAIN BODY..................................................................................................................................3
Answer 1......................................................................................................................................3
Answer 2......................................................................................................................................5
Answer 3......................................................................................................................................6
CONCLUSION................................................................................................................................8
REFERENCES................................................................................................................................9

INTRODUCTION
In his report a brief description of international financial management is provided. Also
various methods and techniques related to financing international business is highlighted. Further
critical analysis of models of corporate value with international cost of capital and financial
structure is outlined.
MAIN BODY
Answer 1.
Managers of the multinational corporations use international financial management that
include investments and financing decisions which maximises the profits of these corporations.
International financial management is important for business that operates in multiple nations.
These corporations have to identify the competitors and its influence in the market, costs, rate of
exchanges and many more. The decision of the management to invest in a new business depends
upon the costs incur and potential benefits arises from the expansion (Madura, J., 2020). To
perform analysis the management of the corporations rely on the financial information provided
from accounting. The corporations do ventures in new businesses to gain competitive advantage
by obtaining specialisation that help in to increase efficiency of production. Financial mangers
use financial modelling to analyse and forecast future earnings and business performance using
financial models. There are different types of financial models that solve various business
problems. Some of the financial models are Three-statement model, Discounted Cash Flow
(DCF) model, Merger model, Leveraged Buyout (LBO) Model, Budget Model and so on.
Provided:
Estimated cost of supplied component widgets for 5 years
Time 1 2 3 4 5
Payments for widgets (£) 100000 110000 121000 133100 146410
Cash Outflows for producing component widgets in-house by Curt plc for 5 years
Time 0 1 2 3 4 5
Cash outflow (£) 70000 80000 82000 84000 86000 88000
Loss of Income 48000
Solution:

Depreciation on Machinery
time 0 1 2 3 4 5
Amount (£) 0 12000 12000 12000 12000 12000
Cash Inflow
Time 1 2 3 4 5
Amount Saved (£) 20000 28000 37000 47100 58410
Cash inflow (£) 32000 40000 49000 59100 70410
Net Present Value
Year 0 1 2 3 4 5
Discount rate 16% 16% 16% 16% 16%
Cash inflow 32000 40000 49000 59100 70410
Present value discount factor 0.862 0.743 0.641 0.552 0.476
Present value of cash inflow 27586 29727 31392 32640 33523
Cash outflow 118000 80000 82000 84000 86000 88000
Net Present Value (Total Cash Inflow -Total Cash Outflow)
= 154868 – 538000
= -383132
Internal Rate of Return
Year 0 1 2 3 4 5
Cash flow from
operations
-538000 32000 40000 49000 59100 70410
IRR = -19%
Conclusion:
From the above analysis the value of Net present value derive is negative and the Internal Rate of
Return is also negative. This means production of component widgets in-house by Curt plc is not
viable.
Factors affecting decisions to Curt plc
 Working capital requirement: for to produce components widgets in house the may be
able to purchase machinery and equipment but to finance day-to-day operations Curt plc
required working capital. Insufficient working capital might lead to non-availability of
raw materials, lack of short-term funds, non-payment of labour, etc.

 Cost of Capital: availability of capital to finance the project at proper cost is a challenge.
Management of the Curt plc have to evaluate market to find out availability of capital at a
affordable cost (Vo, 2021).
 Market Risk: the business opportunity that have high risk so to compensate the risk Curt
plc might require high return. Risk of inflation or interest rate may rise the cost of
acquiring capital which will result in Curt plc to turn down the opportunity.
Answer 2.
Methods of financing an international business
Project Financing involves components of Debt and Equity which provide project capital
that is used to generate cash-flows. There are various methods which can be used to fund project
i.e. through short-term methods through overdraft, short-term loans or through long-term
methods through Debentures, Equity share capital, Venture capital, retained profits, Project
grants and funding (Cherunilam, 2020).
 Overdraft: It is a source of short-term financing that consist of repayment obligation in
less than a year. Interest is charged as a cost of using the funds.
 Short-term Loans: funding from this source is for short period. These loans can be paid
in instalments and interest will be charged on the fund provided.
 Debentures: These are the debt instruments that do not have collateral as a security. The
debt taken through debentures are for long duration and interest rates are generally fixed.
It is use to raise capital by the corporation to finance business projects.
 Share capital: Funds will be raise by the issue of share of the company to the
shareholders. From the exchange of funds the shareholder are provided share in the
profits by the way of dividend. Share capital are of two types Equity share capital and
Preference share capital.
 Venture Capital: it is type of private financing method with the use of equity. The
investment is made to the companies that will have the potential of future growth. The
investors are provided equity share as a part of the company’s ownership.
 Retained Earnings: It is a part of internal financing method. The profits generated by
the company is retained and do not distributed among the shareholders. It has very less or
no cost.

 Project Grants and Funding: These are provided to businesses for a specific project by
the government.
In all the above method of financing the Cost of Capital varies. Companies choose
financing method on the basis of availability and nature of the project. Analysis of the Cost of
Capital is important for the companies to understand the viability of the business project.
Provided:
Clipper owns 100 acres of mature woodland. Cost of Capital 10 percent.
Trees harvested
period
Cash
flow
0 £10000
1 £12000
2 £14000
3 £15500
Value increase £1,000 per annum
Solution:
Assuming Clipper can wait maximum time period of 10 years. So from the calculation the results
are as follows:
Year 0 1 2 3 4
Cash inflow £10000 £12000 £14000 £15500 £16500
Cost of Capital 10% 10% 10% 10% 10%
Present Value Factor 1 0.9330 0.8960 0.8706 0.8513
Present Value of Wood land £10000 £11196.4 £12543.42 £13493.53 £14047.11
Return 0 £803.6041 £1456.582 £2006.466 £2452.891
5 6 7 8 9 10
£17500 £18500 £19500 £20500 £21500 £22500
10% 10% 10% 10% 10% 10%
0.8360 0.8232 0.8123 0.8027 0.7943 0.7868
£14629.28 £15228.67 £15838.92 £16456.2 £17078.06 £17702.85
£2870.721 £3271.332 £3661.078 £4043.798 £4421.943 £4797.148
Conclusion:
So from the above calculation it have seen that with the more passing time period the
return from harvesting woodland is increasing. Given the cost of capital at 10% the best time will
be after 10 years as the return derived is maximum i.e. £4797.148.

Answer 3.
Discounted Cash Flow (DCF) model
It is the project valuation model used to forecast the value of an investment on the basis
of cash-flows arise in the future. This model of valuation analyse the value of the project today in
relation to cash-flows generated in future periods (Laitinen, 2019). A discounted rate is applied
to the stream of future cash-flows to find out the value of the cash-flows at present.
Advantages
This method depend upon free cash-flows generated. It is reliable as free cash-flows
cannot affected and manipulated. It takes into account major assumptions of the business i.e.
Cost of Capital, Inflation, etc. It also help to determine the intrinsic value of a project. By using
this model different scenarios of the project can be prepared that help to understand various
effects on the project.
Disadvantages
This model is highly sensitive to the assumptions taken to calculate future cash-flows.
Due to this the valuation so acquired fluctuate and the fair valuation of the project cannot be
determine. The valuation model can be complex due to high degree of inputs which may results
in errors in the estimation.
Provided:
Project Cost = £800,000,
Project Life = 7 years.
Return cash-flow at the end of year = £150,000
Inflation = 6% per annum and cash inflows are estimated to rise with the inflation.
Rate of Return = 13%
Solution:
Net Present Value
Year 1 2 3 4 5 6 7
Cash inflow £150000 £159000 £168540 £178652 £189372 £200734 £212778
Cost of Capital 13% 13% 13% 13% 13% 13% 13%
Present Value Factor 0.9138 0.8669 0.8351 0.8112 0.7922 0.7765 0.7631
Present Value of Cash
Inflow
£137074.7 £137838.8 £140745.7 £144924.8 £150022 £155868.3 £162377.1
Net Present Value (Total Cash Inflow - Total Cash Outflow)
= 1028851 – 8000000

= 228851.5
Internal Rate of Return
Year 0 1 2 3 4 5 6 7
Cash-flow From
Operations
-£800000 £150000 £159000 £168540 £178652 £189372 £200734 £212778
IRR = 12%
Conclusion:
From the above analysis the Net present Value of the project is calculated to be positive.
According to the discounted cash-flow model is the value of NPV is positive then the project is
viable (Gaspars-Wieloch, 2019). Also, the value of internal rate of return is sought out to be 12%
which is also positive. So, the project is a great opportunity for Hose plc.
CONCLUSION
From the above study it has been concluded that the management of finance is important for
International Corporation to generate profits. International businesses performs venture into
projects to gain competitive advantage (Shapiro, and Hanouna, 2019). The financial modelling
methods are used analyse the viability of the business projects and on the basis of which the
selection of business projects is being made.

REFERENCES
Books and Journals
Cherunilam, F., 2020. International business. PHI Learning Pvt. Ltd..
Laitinen, E.K., 2019. Discounted Cash Flow (DCF) as a Measure of Startup Financial
Success. Theoretical Economics Letters, 9(08), p.2997.
Madura, J., 2020. International financial management. Cengage Learning.
Gaspars-Wieloch, H., 2019. Project net present value estimation under uncertainty. Central
European Journal of Operations Research, 27(1), pp.179-197.
Shapiro, A.C. and Hanouna, P., 2019. Multinational financial management. John Wiley & Sons.
Vo, M. T., 2021. Capital structure and cost of capital when prices affect real
investments. Journal of Economics and Business, 113, p.105944.
Online
Functions of Financial Management: Financial Decisions, 2021. [Online]. Available through <
https://thefactfactor.com/facts/management/financial_management/financial-decisions/542/ >