Critical Analysis of International Financial Management Strategies of BP Corporation

This report critically evaluates and analyses the strategies that corporations generally use while managing their finances at an international level. The report focuses on the effect of country risks over the investment opportunities available in host countries and reasons for which debt sourcing to be done internationally by taking into consideration the advantages associated with the interest rate parity within different countries. The report also includes a critical analysis and evaluation of BP's sources of finances and its capital structure.

International Financial Management (LCBB6002)

Table of Contents
INTRODUCTION...........................................................................................................................3
MAIN BODY...................................................................................................................................3
Critical analyses reasons why BP corporation internationalised………………………………...
Critical analysis of effect of country risks over BP's investment opportunities in host countries
......................................................................................................................................................3
Critical analysis of reasons due to which BP should source debt internationally.......................4
Critical analysis and evaluation of BP's sources of finances.......................................................6
Critical analysis and evaluation of capital structure of BP corporation.......................................8
CONCLUSION................................................................................................................................9
REFERENCES..............................................................................................................................10

INTRODUCTION
International financial management can also be referred to as nternational finance which
involves managing finances of the business while operating business in an international business
environment to enhance the shareholder's wealth (Han, 2018). International businesses by
effectively carrying out financing and investment decision ensures greater value of their
business. This report focuses on critical evaluation and analysis of strategies that corporations
generally while managing their finances at international level. The focus of the discussion will be
the effect of country risks over the investment opportunities available in host countries and
reasons for which debt sourcing to be done internationally by taking into consideration the
advantages associated with the interest rate parity within different countries. Furthermore,
sources of finance that BP Corporation should consider, and its capital structure will be critically
analysed in this report.
MAIN BODY
Critical analysis of effect of country risks over BP's investment opportunities in host countries
Country risks can be defined with reference to political, economic and business risks
associated with a particular country which may lead to unexpected losses to the investment made
therein. This risk arises when companies like BP Corporation go for making investment in
country other than that of their own (Nisa and Kavya, 2018). Every country has its own
investment opportunities but before expanding operations to such opportunistic countries, it is
necessary to be aware of extra risks associated with the host country.
The analysis of country risk could be done by weighing benefits and pitfalls that the
company may enjoy or suffered from while doing their business abroad (True and Svedberg,
2019). There are certain factors which causes country risks to be arise such as poor infrastructure
in terms of poor bridges, roads and telecommunication facilities. These factors make business
operations that are carried out in countries other than the home country quite expensive (Moradi,
Jafari Daredor and Hosseinzadeh, 2019). There may be barriers to entry as well arising from
economic conditions prevailing within the host country in terms of civil unrest, terrorism and
internal conflict. All these factors create issues in doing business abroad. The country risks can
be understood in terms of six different types of risks that is, political risk, economic risk,
exchange risk, sovereign risk, transfer risk and neighbourhood risk (Arnold and Lewis, 2019).

Political risk may caused due to the risk of significant changes in terms of host country's
external relations. The reason of political risk may also cause due to instability within the
internal environment of the country such as terrorist causing unrest and conflicts among
economic institutions which could result in losses for the business due to prevailing country risk
(Yadav, 2020). This risk can be managed by entering into agreements at the time of business
establishment in host country.
Another risk is the sovereign risk which is associated with the acts of government or
related agencies within the host country. This risk can be understood well through an example
where it has been seen that many countries have a regime where its government is not ready to
take the surety responsibility associated with debt funding. In such a scenario, companies like BP
may find it difficult to obtain funds from external sources.
The last country risk that could be discussed with reference to investment opportunities
available to BP is the transfer risk. This risk arises due to policies and regulations meant for
restricting and prohibiting the acts of companies. For instance, BP has the risk due to prevailing
regulations related to capital movements across the borders. This will create problems for BP in
exporting capital from their home country and also it would not be able to repay whatever it has
borrowed from other countries. Accordingly, lenders will not lend money to those businesses
that are operating in such nations.
Based on above discussion, there are following recommendations that could be made to
BP in order to exploit investment opportunities available in host country:
 To reduce or avoid risks or losses associated with confiscation, where there are risks of
sovereign targeting a concern's money, then the company could avoid such conditions by
getting their money transferred to home country as quickly as possible (Al Muhairi and
Nobanee, 2019).
 Divesting is an effective exit strategy where assets are sold out to a willing buyer. This is
helpful in coming out of losses that could result because of country risk.
 Sharing risk is another option through which BP could avoid country risk by joining
hands with local firms or companies. This is helpful in minimizing exposure to the risk of
confiscation as nationals are able to protect multinationals from such risks.

Critical analysis of reasons due to which BP should source debt internationally
Foreign debt or sourcing debt internationally refers to the situation where a company
borrows fund from another country (Brzozowski, 2018). This trend has risen much in modern
time, where there many unexpected side effects as well for the borrowing and lending countries
such as crippling debt problems, slower rate of economic growth and instability of stock market.
Debt when borrowed externally that is, from the country other than that of the home
country, then there are various advantages and disadvantages both for the borrowing company,
such as the following:
Sourcing debt from international market is helpful in satisfying company's financing need
especially for those belonging from developing nations (Atmadja and et.al., 2021). Also, funds
can be borrowed at comparatively favourable terms. If BP is having its operations in low-income
countries, then it could be suggested that borrowing from foreign institutions must be entertained
because it will allow securing funds at competitive rates & flexible repayment terms.
However, excessive sourcing of debt from international market may lead to hindering
capacity of the company in terms of making investment in financial prospects because whatever
they will earn must be spent towards the repayment of loan. Accordingly, there will be a
challenge for the company in growing and developing in the long run.
With regard to sourcing debt internationally, the commonly known concept is Interest
Rate Parity (IRP) which is a fundamental equation governing the relationship between currency
exchange rates and interest rates (Prihartono and Asandimitra, 2018).
The economic benefit that BP could realize by taking an advantage of interest rate parity
as a result of sourcing debt internationally is that, there is an interest rate differential prevailing
among different countries in which the company is having its operations (Yuniningsih, Pertiwi
and Purwanto, 2019). This is also advantageous in terms of getting foreign currency associated
with the country of operation in order to finance operations therein and accordingly, there is no
need to incur additional costs associated with converting foreign currency in local currency.
Therefore, international businesses like BP can source debt internationally which will render
various economic benefits such as obtaining loan at lower interest rate prevailing in the country
of operation along with securing loan in foreign currency by converting which into local
currency may provide greater loan amount due to difference in currency exchange rates between
different currencies of different nations (Bapat, 2020).

These benefits could only be realized when the business is free from risks such as
sovereign and transfer risk explained above. If these risks are prevailing in the countries of
operation, then there will be greater finance costs demanded from lender due to higher risks
associated with the amount lent in terms of principal repayment and guarantee related to the
same (Alkaabi and Nobanee, 2019).
At last, it is to be recommended to BP's management that it should take into
consideration interest rate existing in different countries of operations along with considering the
exchange rate between the currencies in which loan has obtained and the currency in which
utilization will take place.
Critical analysis and evaluation of BP's sources of finances
International businesses such as British Petroleum can raise capital from different sources
of finance which can be categorized majorly into two heads that is, internal and external
financing and is also known as equity and debt. Internal sources of finance include retained
earnings, sale of assets held by corporates. On the other hand, there are various external sources
of finance which can be categorized into medium-, long- and short-term sources of finance. Long
term sources of finance that BP has included in its capital structure are shares, bank loan and
debentures while short term sources of finance involve bank overdraft and bank loan from
creditors (Ocampo, 2018). Also, there is a medium-term source of finance which includes hire -
purchase, bank loan obtained for medium term and leasing.
There are many advantages and disadvantages associated with internal and external
sources of finance which makes it suitable in some or the other ways while sometimes they are
not even recommended. The critical evaluation of the same has been done with reference to the
sources of finance that BP is utilizing in the following section of this report:
 The biggest benefit that an international business line BP could realize by using internal
sources is that there will be no additional dilution of control and ownership and
accordingly, ownership can be retained within the restricted hands only. For instance, if
additional equity are raised for obtained additional finance, then there is a need to give
some form of control as well over the decision - making practices of the business which
is equivalent to the amount of investment made in the capital of the business. It is
criticized on the ground that there could arise conflict among the interest of existing

owners in terms of differentiating ideas and vision of new owners against existing
owners.
 Also, there is no need to provide an asset as a security for obtaining finance as in the case
of debt financing. When assets are provided as a security, there are many restrictions
imposed by the lender over the business which leads to losing control over the assets.
 BP has a common tendency of using retained earnings as a source of finance which is one
of the most important internal sources of finance and as a result of using this source, there
are certain benefits that the company is enjoying such as no additional cost and risks for
their business.
 Another major source of finance that BP's management is considering for meeting their
financing needs is equity financing (Martin, Keown and Titman, 2020). This source is
however creates problem such as dilution of control and widely distributed voting rights
but is favoured on other major grounds such as there are very low risk and costs
associated with it. The cost that the company incurred is just restricted to the fees
involved in shares issued in different stock market. Furthermore, there is no need for
giving assets as security when finance is obtained through this source.
 Debt financing is equivalently considered as the source of finance by the financial
management of BP where they resort to make borrowings both from local and
international market as well. The biggest advantage that this source offers to BP's
management is that there are no consequences of conflict of interest and dilution of
control as the debenture holders and lenders does not take part in business decision-
making.
There are certain recommendation that could be made to the management of BP with
reference to the sources of finance they are using, such as the following:
 It is to be recommended to the management of BP that it must take into account the
interest rate charged by local and foreign lenders while going for borrowing from
external sources in the international financial markets (Pignatel and Tchuigoua, 2020).
 Also, while using internal sources of finance such as retained earnings, it is necessary for
the company's management that it must set out considerable amount for its shareholders
periodically to be distributed among them in the form of dividend to keep them satisfied.
It is vital because if shareholders are not satisfied then the company may face problem in

additional capital for growth and development perspectives. Therefore, they must provide
reasonable returns to their shareholders or investors.
Critical analysis and evaluation of capital structure of BP corporation
Capital structure can be described as a mix of sources of finance included in the capital of
the company which is either the debt or equity where the former consists of long- and short-term
debt or borrowings done with the external parties while the latter comprises retained earnings
and stock (both preferred and common stock) (Kaiser and Kirton, 2019). Before critically
analysing and evaluating capital structure of BP corporation, it is necessary to determine and
understood its capital structure with the help of debt-to-equity ratio and the debt ratio which are
meant for indicating the quality and efficiency of company's capital structure.
Accordingly, the debt-to-equity ratio and debt ratio for BP corporation has been
calculated based on sources of financing mentioned within their financial statements related to
the financial years 2020 and 2021
Ratios Formula 2020 2021
Debt to equity ratio Debt / Equity 122287 / 85568
= 1.43
116546 / 90439
= 1.29
Debt ratio Total debt / Total
Assets
182086 / 267654
= 0.68 or 68%
196833 / 287272
= 0.685 or 68.5%
From the above ratios it has been determined that BP is a debt-oriented company because
both debt-to-equity ratio and debt ratio provides the evidence for the same. Like, a greater than
one debt to equity ratio indicates that majority of company's operations are financed through
borrowed funds rather than owned funds. However, the ratio has decline in the year 2021 which
indicates that either the company has repaid its borrowed funds or employed more of equity-
oriented sources of finance in meeting their financing needs. Furthermore, a debt ratio of 68%
indicates that the company is majorly dependent on borrowed funds in an attempt to finance the
assets of the business or the majority of business assets has been financed through borrowed
funds.

This pattern of capital structure may be both risky and costly as well because borrowed
funds demand for mandatory repayment of interest as well as principal amount which causes
financial risk for the business (de Azevedo and et.al., 2020).
Accordingly, there are certain recommendations that is to be made to the management of
BP, which are as follows:
 The management should determine that mix of debt and equity where its weighted cost of
capital is minimum, and its market value is maximum. This is known as optimal capital
structure which must be employed by businesses towards ensuring their financial
sustainability.
CONCLUSION
From the above report it has been concluded that managing finance of business operating
at international level is very important as it assist in determining the best source of finance and
potential investment opportunities. Accordingly, the present report has highlighted various
country risks and their effect over investment opportunities available in host country. Also, the
reasons for which BP should go for sourcing debt internationally has been discussed by taking
into account the advantages of IRP in different countries. At last, sources of finance and capital
structure of BP corporation has been critically analysed.

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