Corporate risk management – multinational tax management


Various products are frequently sold in most of the countries by multinational organizations with denomination of prices in subsequent local countries. Extensively it is known that as the instability in exchange rate has become greater than before vividly after the collapse of a system which is called Bretton Woods. This is the system of those exchange rates which are fixed (Chowdhary  and Howe, 1999), multinational corporations might have become more and more susceptible to exchange risk ever since the short term schedule into exchange rates are frequently not attended through the offsetting changes in prices in subsequent countries.  
 
When an organization considers the tax which is gulp by them, it is the society bane to most persons (Anon, 2008). It is illegal, if an organization is not paying the tax intentionally. Avoidance of tax is illegal. Avoiding of higher taxes in a business puts our business in a position of tax optimal situation. This is clear that most persons do not like to pay tax, unless if we are powerful and rich we should pay this. If the organization is rich and powerful as a large corporation there are means to evade paying higher tax rates in several of nations we operate in.    
Through the transfer pricing, several multinational companies are avoiding tax. A company is having a subsidiary in other country. For subsidiary the tax rates are highest than that of company (Anon, 2008). Thus, if benefits are higher where subsidiary is placed than the company would lose more and more by tax. The company is proficient to keep more currency which had been lost by tax. Basically this is extremely cheeky and government do attempt and implement systems to bane the running transfer pricing but it may be hard risk.

Multinational firms are extra manipulative and would do the lot to avoid the tax. In this world every company would be positioned in Bahamas! Another thing is that the infrastructure of this type of companies must take into account. For an example, it might not be possible for business to transfer a tax to a friendly country. Structure and strategy of a business must be taken in account.



Anon (2008), Tax Management multistate tax portfolios, Tax Management Inc

Chowdhary B., Howe J. T. (1999). Corporate Risk Management for Multinational Corporations: Financial and Operational Hedging Policies, European Finance Review, Kluwer Academic Publishers, 2, 229–246

Raising finance for the company……..

Raising finance for multinational enterprises, collaborative ventures & foreign subsidiaries

When the point comes to raise finance for an organization, mainly 2 options are available: debt and equity. These capital sources have their own benefits and losses. It is essential to strike a strong balance between equity financing and debt financing, it clearly states that measuring the advantages and cost of debt and equity, it is needed to ensure that the company that one cannot stick the firm with debt one cannot repay and minimise the cost of capital (Nasery, 2012).

Debt financing form has been taken as a common in loans which is issued for some time period that will acquire interest in most of the cases. Equity financing can be attained by acquiring duties from all the investors in share form. Both equity and debt are known as valid financing sources and it is more crucial that business areas have to involve both financing methods along with the option to use in combination of each other. It can produce sense of borrowing money for the purpose to cover entire cost to purchase newer equipments but the financing ford development can only come from the venture capital. With the combination of debt and equity, one can maximize the funds while designing the repayments of debt as well as the responsibilities to the shareholders for meeting with the requirements.

For an example, UK banks like the bank of England are needed to maximize its capital. Restrictive bonuses and the dividends do not take place to generate the required amount of capital and now the need of external financing has taken place. International financing can be proved as major option for the banks in UK and they will be more capable in sourcing enough amount of the fiancé from the organizations in UK (Martin, 2012). Furthermore, getting hold of the debt financing option, it may lead to the bank crash. So the debt and equity ratio may be needed to be weighed up in one of the case just before any type of financing starts.

With so many choices for companies for raising their capital, any form of either debit or equity finance would be an acceptable choice. However, when companies doing  well like Facebook it allows the company to be more recognised worldwide. Facebook is a company currently in the headline for its IPO. On first of February 2012 Facebook announced its IPO, and is expected to offer up to $5bn. .As a result Mark z (Facebook CEO) is eager to give the smallest volume of equity away to the public.

Another recent example of the company raising finance is YELP the user generated review website, plans to raise as much as $100 million in what may be the first initial public offering from a major internet company this year.

Yelp, the local-ad driven social review site launched a record-breaking IPO today (Bloomsberg, 2012). Analysts believe the IPO could raise as much as $100m, a valuation even greater than Facebook which filed at record levels less than a month ago (IBT, 2012). However Yelp and Facebook are in direct competition in many areas of their revenue generation which typically focuses on the local ad market (Forbes, 2012). Have Yelp learned from the issues of Facebook in bringing their offering to the public? Some analysts are still concerned that Yelp is over-valued. In light of Facebook's success, probably not.

The IPO for YELP as cited in (Bloomberg) will probably come ahead of Facebook Inc., the biggest social networking website, which field to raise $5billion on Feb.1, without setting terms. At the midpoint of the price range Yelps offering would value the company at about $778million, or about 9.3 times last year’s sale. That compares with 5.2 times for Google Inc. and about 3.8 times for yahoo which Yelp lists as competitors in its prospectus.

Although the IPO for yelp is higher than Facebook  but I think Facebook will raise an unprecedented amount of money which will allow them to invest in projects that help the company grow  and because Facebook is  a highly desirable and popular business. The other reasing for that is that the IPO for Facebook isn’t to raise finance for a company who was in trouble like Yelp which yelp’s net loss last year widened to $16.7 million from $9.6 in 2010.

Surely the driving force behind this strategy is the resurgent tech IPO market. More specifically, Facebook, which is aiming to go public this spring in what is expected to be the biggest Internet IPO in history. Facebook has been the most actively traded stock on Second Market since the company launched its private stock market.

However, Yelp is not in financial green pastures. On net revenues of $83.3 million last year, Yelp lost $16.9 million. Its revenues were up 75% year over year, but its losses rose by a similar 74%. According to the New York Times, at the middle of its expected initial stock price, Yelp would be valued at $778 million.

While the company has grown quickly, it has long faced doubts about its ability to survive as a standalone firm, not least because of its prickly relationship with Google. Yelp has repeatedly accused Google of "scraping" its business listings and reviews of restaurants, bars, and retailers without agreement or compensation for use in its own Google Local service. 

Yelp has never had a yearly profit, losing money every year since it was born.

While the IPO market for technology companies has been open, if not exceptionally forgiving, the market reception of this IPO, which is less fundamentally sound from a technical perspective than other profitable tech firms, will be bell weather. If Yelp finds open arms from investors, it could lead to increased activity. A frigid reception could delay others from making the same move.

In conclusion, we can see number of reason behind the company’s strategy when they raise their finance and the companies doing that not always to fund the future project.

Refrence list:
http://mariamnasery.blogspot.co.uk/2012/04/raising-finance-for-multinational.html

http://www.bbc.co.uk/news/technology-16835116 [accessed  16.02.2012]

http://www.bloomberg.com/news/2012-02-16/yelp-seeks-to-raise-as-much-as-100-million-in-ipo-of-user-review-website.html [accessed 18.02.2012]

https://elp.northumbria.ac.uk/webapps/portal/frameset.jsp?tab_id=_2_1&url=%2fwebapps%2fblackboard%2fexecute%2flauncher%3ftype%3dCourse%26id%3d_224844_1%26url%3d [accessed 18.02.2012]

(Arnold,2008)

http://www.bloomberg.com/news/2012-02-01/facebook-files-to-raise-up-to-5-billion-in-ipo-of-social-networking-site.html[accessed 16.02.2012]

http://www.bloomberg.com/news/2012-02-01/facebook-files-to-raise-up-to-5-billion-in-ipo-of-social-networking-site.html[accessed 16.02.2012]

http://news.cnet.com/8301-1023_3-57368449-93/three-reasons-facebook-has-to-go-public/[accessed 16.02.2012]

The essence of predictions and stock market efficiency.

stock market efficiency.
In 1970, economist Eugene Fama developed the theory of efficient market hypothesis.

The random walk theory attempts to analyse/explain this type of situation. It  states that stocks take a random and unpredictable path and that it’s impossible to predict the future movement of a stock price or market based on its past trends. Unlike those such as Bachelier, followers of the random walk theory believe that one must assume a high level of additional risk whilst trying to outperform the market . This is  as a result of the stock market having an extremely unsystematic pattern over a period of time when events affecting the market occur. Value investors’ theory is more or less the total opposite of Fama’s. They make their money by predicting when stocks can become undervalued then purchasing them and selling them once their prices have risen and got to the stage which one can describe as ‘overvalued’. Bachelier diplomatically explains how most brokers/ those working in the market take action with regard to the fluctuation of the market. 

When creative director of Christian Dior, John Galliano caused outrage because of his drunken, racist comments in early March 2011, the main perception was that stock prices of Dior would become undervalued or at least fall.  However, some believed that this event wouldn’t affect such a large fashion label and that prices would stay stable. The table below shows how stock prices changed from June 2010 onwards.

When creative director of Christian Dior, John Galliano caused outrage because of his drunken, racist comments in early March 2011, the main perception was that stock prices of Dior would become undervalued or at least fall.  However, some believed that this event wouldn’t affect such a large fashion label and that prices would stay stable. The table below shows how stock prices changed from June 2010 onwards.

When money is put into the stock market, it is done with the aim of generating a return on the capital invested. Many investors try not only to make a profitable return, but also to outperform, or beat, the market.

 

Figure 1: Graph sourced from http://www.4-traders.com/CHRISTIAN-DIOR-4629/consensus-/.

From this graph, we can come to the conclusion that prices for Dior fell to €93 from February to March 2011 (the time of the scandal). This was much lower than the target price which proves that sometimes, one cannot predict these things very accurately. It also degraded market efficiency. One can say that this event played a major part in this. Prices generally increased from April 2011 to mid July 2011. Obviously there were many reasons for this but in my opinion, one of the main factors was that the Dior scandal was ‘hushed’ and John Galliano was fired from his position as creative director for Dior which helped the fashion house regain their dignity and value. Unfortunately, the prices decreased massively after mid July 2011 to September 2011 (but remained relatively stable at the end of August that year) whilst analyzing this, it is important to consider the fact that Galliano’s trail and verdict was then. Despite no longer working for Dior, Galliano was still associated with the label. However, prices gradually increased after that. I personally believe that one of the main reasons was that the whole ‘issue’ was forgotten about and Dior was recognised again for what it is, a fashion label. The reason for this example was to highlight how bad publicity/events can affect the actual price of shares in a company.