Lcbb6002 International Financial Management Assignment Sample

Understanding the Dynamics of International Financial Management

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IntroductionInternational Financial Management

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The well-known term for international financial management (IFM) in today's era is international finance. International financial management refers to the management of finances in the global business environment(Madura, 2020). This term is somehow different from financial management as it includes different factors of various countries such as imperfect markets, currency, diversified opportunity sets, and political stability. International financial management plays a vital role in those company that wants to globalize their business. Any company that is planning to operate its business internationally than it has to manage all its international finances (Rugman, 2019). IFM has various importance to every company like the emergence of a new form of businesses, development process of nations, opening of new economies, growth of world trade, specialization of some products and services, etc.

To effectively understand the term international financial management, Deloitte is chosen as a case company for this report. The company is a UK-based private company that lies in the industry of professional services. Deloitte was established in the year 1845, with headquartered in London, England(Deloitte, 2022). The services provided by the company to its customers are management consulting, tax, financial advisory, audit, risk advisory, and legal services. The company is a multinational corporation that covers worldwide serving areas. The report highlights a critical evaluation of Deloitte's dividend distribution policy along with its efficient market hypothesis theories. Also, different methods of appraising projects that are chosen by the case company are discussed in the report.

Figure 1:Deloitte logo

Deloitte logo

Critical analyzes and evaluation of multinational corporation's dividend distribution policy

The case company generally uses an interim dividend policy as its dividend distribution policy. An interim dividend refers to the paid out beforehand the yearly audited financial statements that are usually along with an SEC Form 10-Q, a three-monthly unaudited report (Bloomberg, 2020). Meanwhile, existing earnings are not recognized and interim dividends are funded from the retained earnings that are earnings collected from the preceding financial year. The interim dividend is declared by an organization's board of directors but shareholders give the final approvals for it. The interim dividend refers that dividend disbursement creates beforehand a corporation's annual general meeting (AGM) or release of ultimate fiscal reports.

This acknowledged dividend generally complements the firm's interim fiscal reports. An interim dividend delivered additional often in the UK where disbursements are frequentlyfunded twice a year. Persons capitalize on businesses through stocks or bonds. The bonds pay a fixed rate ofinterest, or investors have superiority over the shareholders in case of insolvency, however, investors do not benefit from any share price gratitude. Stocks do not pay interest, however, some do pay dividends.

Dividend disbursementspermit shareholders to help with remunerationsdevelopment through both the final and interim dividends as well as share price gratitude(Najiba, and Siwar, 2019). Directors state the interim dividend, however, it is subject toshareholder endorsement. By distinction, the normal dividend which is also named theultimate dividend ischosen on or acceptedan annual general meeting formerlypays are recognised. Together the final or interim dividends can paid-out in stock or cash. The distributing of an interim dividend is a more common exercise in Deloitte where payments are often paid to the shareholders on a biannual basis.

Retained earnings can as well be believedto be an undistributed income. The case company usually pays these disbursements on a six-month or quarterly basis earlier than the end of the year. Interim dividends are remunerated every 6 months in the UK. The case company distributes and declares the interim dividend all through an extraordinary earnings period or when the legislation creates it further advantageous to do so.

The efficient market hypothesis theory in the context with chosen multinational corporation's operations

The efficient market hypothesis (EMH) theory offers all the important understanding related to the financial markets that reflect in the stock price of the company. An efficient market theory is a significant part of modern finance (Rossi, and Gunardi, 2018). The experimental indication is uncertain, however, the conceptionof the market hypothesis is sound. The efficient market hypothesis may be applied to capital markets. Deloitte's home country’s capital market proficiency is chiefly related to cost competence, whereasits other operating country’s markets are frequentlyevaluated from a viewpoint of distributioneffectiveness. In universal,effective stock market is the market where share prices revealfundamental facts about businesses.

Now this case, themarket worth of an organization variations in themanner very alike to that ofinherent worth of thefirm. These types of variations are not reliable with assessment or do not confine from interchangefiscalresources. All changes in stockholderresponsivenessor uneven business costs avoidimportantfluctuations in assessment to be totallyor directlyreproduced in the market values. But, if the markets are well-organized, fluctuations in the asset values cannot be reproduced in the systems, whereas additionalprofit is increased as the accomplishment rather than the outcome of therightforecast. The dependence on a market is as efficient when it was not possible to earn a return higher than the market return.In simple words, aprice of stocksredirectsa fair rate of an organization or is identical to future cash movementsreduced by thedifferent cost of capital.

Usually, the spirit of theeffective market is made on the 2 pillars such as accessible knowledge that is previouslycombined in the stock values, and stakeholders cannot make the risk-weighted extra profit or both of these are in the efficient market. Considering a piece of information revealed in the market values, market effectiveness is typicallywrecked down obsessed by3 levels. Feeble, semi-strong, or robustpractices of marketplaceeffectiveness are famous. In unconvincingly effective share markets, an existing share value reproduces all datalinked to share price variations in past. Such infocomprisesinformations on the precedingrates, interchangecapacity, etc. Based on above-mentioned information, itdevelopsformerlyunbearable to create excess profit in the stock market. Therefore, if a market is a weak, technical, orefficient evaluation yields no extra return. In semi-strongly effective markets, present stock prices reproduce not only statistics about thepastrates but also all the existing publicly accessibleinfo, for instance, disbursement pay-outs, alterations in bookkeeping policy, announcements of acquisitions, etc. Finally, in powerful efficient markets, recent stock prices reflect all the potentialdata that does not essentially have to be public.

Critical evaluation of the multinational corporation's methods of appraising projects

The case company uses different methods to appraise its projects internationally. The different methods of project appraisal help the company to evaluate whether all the projects are viable in the global market or not(TeBoveldt, et. al. 2022).

Here are the methods of appraising the projects used by Deloitte:

  • Payback period (PP)- This method is seen as one of the simplest methods that identify the period by which the company's investment gets recovered through the net cash inflows which are derived from the gross cash inflows subtracting the overall cash outflows.
  • Discounted payback period (DPP) -The disadvantage of payback period system that is it overlooks the time value of the money, which is covered in this method(Maghsoudi, and Sadeghi, 2020). The discounted payback period refers to the discounted future cash flows that arrived at a certain rate on the present value of future cash flows.
  • Average accounting return (AAR) -Under this method, the rate of return is represented that earns by the average projected investment per annum. Those earnings are known as the annual average of the net earnings of the company's project. AAR is also called return on capital employed (ROCE) and an average return on investment (ARI).
  • Net present value (NPV) -Under this method, all future cash flow values are predicted whether it is negative or positive(Basher, and Raboy, 2018). That future cash flow is determined over the whole life of the project investment that is discounted to the present.
  • Internal rate of return (IRR) -This method finds out rate on which cash flows are reduced and NPV becomes zero. IRR is the rate on which when practicalto the future cash inflows then thecurrent value of the influxesoccupied organized should associate with a currentrate of a project investmentprice.
  • Profitability index (PI) -The profitability index shows a relationship between the cost of investment and the future earnings' present value. If the NPV of an investment is positive then the index results as more than one and when the NPV is negative then the index becomes negative.
  • Time value of money (TVM) - The time value of money mentions to key principle of finance. The concept of this method shows the amount of money is more worth now than same sum will get in the upcoming date due to the receiving potential in the interim.
  • Net working capital (NWC)- Firstly it is determined that the NWC shows the net current assets of the company which is extracted from the formula of total current liabilities subtracted from the total current assets. Under this method, every project cost includes the margin money for working capital.
  • Scenario or sensitivity analysis- To avoid the investment risk, a precautionary financial analysis are to be carried out which is called sensitivity or scenario analysis(Mavromatidis, al. 2018). In the context of scenario analysis, several probable scenarios are aligned from the project report and after it, the financial analysis is created as an extra precautionary measure. On the other hand in sensitivity analysis is a simplification of scenario analysis it is to be considered that all basic appraisals are correct except one variable like the volume of the activity or unit vending price etc.

For the case company, the best suitable method of appraisal project is a scenario or sensitivity analysis. As this appraisal makes an effective evaluation for the company's project future estimation. The second one suggested for the company is NPV which will lead to a future cash flow of the company's invested project. This method will attract more investors to the company's project. The third and best method of project appraisal is ARR which reflects on the return on the company's project in the future.

Conclusion as recommendation

Based on the above report it is concluded that Deloitte has good market reach in each country in which it is operating its business. But only good market reach will not give the company a more hike. The case company uses different types of financial strategies or dividend policies to get more returns. It is recommended to the company that it should efficiently use International financial management tactics in its all departments that are situated in different areas of the world. As the company uses an interim dividend policy as its dividend distribution policy which is more suitable for the company as the company's shareholders are more satisfied with this policy along with its home country's dividend policy. It is suggested to the company that it should go with NPV and ARR methods of project appraisal along with sensitivity analysis. The market hypothesis theory of the company's home country and its other operating markets shows that the company uses different market theories to effectively operate in different markets.

References

  • Basher, S.A. and Raboy, D.G., 2018. The misuse of net present value in energy efficiency standards.Renewable and Sustainable Energy Reviews,96, pp.218-225.
  • Bashir, S., 2020. Deloitte fined by FRC for audit failures (online). <https://ukinvestormagazine.co.uk/deloitte-fined-frc-audit-failures/> (accessed on 30 November 2022).
  • Bloomberg, H.Z., 2020. High interim dividend a positive.
  • Deloitte, 2022. Making an impact day in, day out (online). <https://www.deloitte.com/global/en.html> (accessed on 30 November 2022).
  • Madura, J., 2020.International financial management. Cengage Learning.
  • Maghsoudi, P. and Sadeghi, S., 2020. A novel economic analysis and multi-objective optimization of a 200-kW recuperated micro gas turbine considering cycle thermal efficiency and discounted payback period.Applied Thermal Engineering,166, p.114644.
  • Mavromatidis, G., Orehounig, K. and Carmeliet, J., 2018. Uncertainty and global sensitivity analysis for the optimal design of distributed energy systems.Applied Energy,214, pp.219-238.
  • Najiba, G. and Siwar, E., 2019. Determinants of Financial Structure and Dividend Distribution Policy: Study of Tunisian No Financial Listed Companies.Available at SSRN 3443058.
  • Rossi, M. and Gunardi, A., 2018. Efficient market hypothesis and stock market anomalies: Empirical evidence in four European countries.Journal of Applied Business Research (JABR),34(1), pp.183-192.
  • Rugman, A.M., 2019. From globalisation to regionalism: The foreign direct investment dimension of international finance. InShaping a new international financial system(pp. 203-219). Routledge.
  • TeBoveldt, G., Keseru, I. and Macharis, C., 2022. When monetarisation and ranking are not appropriate. A novel stakeholder-based appraisal method.Transportation Research Part A: Policy and Practice,156, pp.192-205.
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