What is International Strategic Financial Planning (ISFP)?

Transcription

1 Wat is International Strategic Financial Planning ()? Spring 2013

2 Wy do we need?

3 Wat do we do in Finance? We evaluate and manage te timing and predictability of cas in- and outflows related to a corporation's activities. In managing tese cas flows, we balance goals related to firm profitability and te acievement of our strategy wit te risk of financial distress. Our goal is to: maximize stakeolders utility optimally invest excess funds and raise funds (sort-term or long-term) for new or ongoing projects understand ow to manage financial risks Te coices we make depend on te firm s objectives as well as business and financial constraints.

4 Wat are we going to do in? Extend te relationsips discussed in oter courses between financial coices and firm objectives recognizing te breadt of domestic and international alternatives. Understand te pros and cons of access to various financial markets and instruments around te world: Financial Markets: Stocks, Bonds, Derivatives, etc. Pros/Cons: How risky are te assets? Liabilities? Wen are tey risky? Wat cas flows will tey produce? Wat casflows will tey require? Is it a wortwile use/source of corporate funds? Develop a logical framework linking firm strategic decisions and financial markets.

5 Administrative Issues Materials Assigned readings: te case packet, and a class web page ( TO.tm) Grades 1) Case brief on Prada (to be done in class last weekend togeter) 2) Final project due two weeks after our last class and 3) Contribution. Contribution based on: My evaluation of eac participant s class-by-class contribution and peer evaluation of contribution. Please if you ave to miss a class.

6 Case Analysis: Review Steps we will follow: Wo is te decision maker? Wat is te decision? Wat are te criteria? Maximizing sareolders wealt? Corporate wealt? Management s wealt? NGO s? Limiting risk? Wat type of risk(s)? How significant are eac of tese risks? Implementing a new strategy Key alternatives to consider? (Not just tose in te case!) Analysis and discussion of te alternatives. Decision and action plan.

7 Major Topics in te Course 1. Risk Management - Identifying and caracterizing te risks faced by firms in trying to accomplis teir goals. Wat financial tools exist to manage tese risks and ow tey may impact te acievement of organizational goals. 2. Raising Capital - Understanding te costs and benefits of raising funds for operations in various markets. 3. International Investments - Evaluating te costs and benefits to purcasing and/or operating assets in different markets (e.g., domestic/foreign or emerging/developed).

8 Risk Management

9 Risk Management Te sources of risk must be identified. Tis is more difficult tan frequently acknowledged. Just ask AIG, JP Morgan, UBS, Citibank, S&P, Moodys, DBRS, A culture of irresponsibility took root from Wall Street to Wasington to Main Street. A regulatory regime basically crafted in te wake of a 20 t century economic crisis, te Great Depression, was overwelmed by te speed, scope and sopistication of a 21 st century global economy Barack Obama, June 2009 As Enron sould ave taugt us seven years ago, te most deceitful words in te Englis language are not te ceque is in te post but rater off balance seet. As a result no one, including banks temselves, knew were te risks lay nor ow large tey were. FT September 1, 2009

10 Risk Management Wen identifying risks we start wit te major types of risk: 1. Business or Operational Risk Risks associated wit manufacturing, marketing and selling te firm s products. 2. Financial Risk Te risk associated wit ensuring te firm as adequate casflows to meet its committed cas in and outflows. How do tese risks depend on our actions? Oters actions? Financial markets? How large are te risks? Are tey someting we sould try to edge? Wat tools sould we consider?

11 Were Do Tese Risks Originate? Increased global trade of goods, services (including financial goods and services) as increased risks and opportunities. Global supply and demand ave increased dramatically over te past 30 years. Tis as provided bot increased risks and opportunities. Te most obvious sources of risk: Importing/exporting requires buying/selling different currencies Wat appens to Cinese exporters as te value of te Yuan increases? Canadian importers wit te value of te Mexican Peso? Mexican exporters wit te value of te Peso? American importers wit te value of te US dollar? Wat about borrowing/lending in different countries? How do tese impact your competitive position domestically? Internationally? Are tey risks or opportunities?

12 Examples of Risks and Opportunities Need to identify sources of risk, magnitude of te risk, ability to manage te risk and desirability of managing te risk: Financial Risk Capital Market risk equity values (market segmentation), interest rates Currency risk domestic value of inputs and outputs Liquidity risk te ability to easily buy or sell financial securities Commodity risk te value of inputs and outputs Political and Regulatory Risk Difficulty enforcing contracts or rule of law (including expropriation). Canges in regulation or differences in regulation. Legal restrictions on market access. Strategic and Operational Risk Move production overseas. Economies of scale Diversification of market risk. Global investment opportunities.

13 Example: Identification of Risks McDonalds (MCD NYSE). Extracted from teir 2011 A/R. Examples of some tools to identify and quantify risks: Constant currency financials (EPS, Operating Income etc.), Comparable sales, and comparable guest counts. Tese all allow explicit analysis of te canges in te actual business versus canges resulting from currency fluctuations. 65% of Operating Income and 40% of debt is in foreign currencies. In teir forecasts tey present a sensitivity analysis for te impact of a 10% cange in value of te US dollar and a 1% cange in interest rates. Wat is Value-at-Risk? Wat are stress tests?

14 Example: Identification of Risks Annual Report Discussion of Foreign Excange Translation Risk: In 2011, foreign currency translation ad a positive impact on consolidated operating results driven by te stronger Euro and Australian Dollar as well as most oter currencies In 2010, foreign currency translation ad a positive impact on consolidated operating results driven by stronger global currencies, primarily te Australian Dollar and Canadian Dollar, partly offset by te weaker Euro. In 2009, foreign currency translation ad a negative impact on consolidated operating results, primarily driven by te Euro, Britis Pound, Russian Ruble, Australian Dollar and Canadian Dollar.

15 Example: Management of Risks In managing te impact of interest rate canges and foreign currency fluctuations, te Company uses interest rate swaps and finances in te currencies in wic assets are denominated. Te Company uses foreign currency debt and derivatives to edge te foreign currency risk associated wit certain royalties, intercompany financings and long-term investments in foreign subsidiaries and affiliates. Tis reduces te impact of fluctuating foreign currencies on cas flows and sareolders equity. Total foreign currency-denominated debt was $5.0 and $4.7 billion for te years ended December 31, 2011 and In addition, were practical, te Company s restaurants purcase goods and services in local currencies resulting in natural edges.

16 Raising Capital: Financing Strategies Tere are many costs and benefits to using global financial markets to meet capital needs. Decreased cost of capital, diversification of capital sources, edging currency and interest rate risks, managing political risk... Alternatives: Te standard coices you sould always consider: Internal versus External? Debt versus Equity (or Preferred)? Private versus public? Also, International or Domestic? Wat currency? How can we minimize te after-tax costs wit an acceptable risk?

17 International Investments Is tis an investment wort taking? Standard valuation metodologies from previous courses Are tere differences in te risks and tus ow we value foreign and domestic projects? Business risks? Political risks? Economic risks? Financial risks? How do we account for tese in making our decision? Wat is te required return for tis type of investment? Comparables? Growt rates? Sould we do it and, if so, ow to finance it and manage te associated risks?

18 Optimizing Global Financial Decisions In tis course we will: Identify and caracterize te financial (and business) risks and opportunities faced by a firm. We will consider teir impact on its casflows and balance seet. Determine te significance of te risks/opportunities associated wit te financial instruments available to improve te firm s competitive position. Evaluate te value created by different alternatives around te world. Want to coose te best alternative(s) to increase value for te firm s stakeolders!