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MBA (General)IV – Semester, International Business Unit V

Definition of the International Financing Decision

   Posted On :  01.11.2021 08:41 am

Before we examine various funding avenues in the global market we must discuss the issues involved in choosing a particular mix of financing in terms of markets, currencies and instruments.

Before we examine various funding avenues in the global market we must discuss the issues involved in choosing a particular mix of financing in terms of markets, currencies and instruments.

The issue of the optional capital structure and subsequently the optimal mix of funding instruments is one of the key strategic decisions for a corporation. The actual implementation of the selected funding programme involves several other considerations such as satisfying all the regulatory requirements, choosing the right timing and pricing of the issue, effective marketing of the issue and so forth.

The optimal capital structure for a firm or, in other words, corporate debt policy has been a subject of a long-running debate in finance literature since the publication of the seminal paper by Modigliani and Miller which argued that in the absence of taxes, capital structure does not matter.

The issue of the optimal composition of a firm’s liability portfolio. The firm usually has a wide spectrum of funding avenues to choose from. The critical dimensions of this decision are discussed below.

Interest rate basis: Mix of fixed rate and floating rate debt.

Maturity: The appropriate maturity composition of debt.

Currency composition of debt.

Which market segments should be tapped?

For instance, long-term financing can be in the form of a fixed rate bond or an FRN or short-term debt like commercial paper repeatedly rolled over. Each option has different risk characteristics.

Individual financing decisions should thus be guided by their impact on the characteristics-risk and cost-of the overall debt portfolio as well as possible effects on future funding opportunities.

In viewing the risks associated with funding activity, a portfolio approach needs to be adopted. Diversification across currencies and instruments enables the firm to reduce the overall risk for a given funding cost target. It also helps to increase investors’ familiarity with the firm which makes future approaches easier.

It should be kept in mind that currency and interest rate exposures arising out of funding decisions should not be viewed in isolation. The firm should take a total view of all exposures, those arising out of its operating business and those on account of financing decisions.

Tags : MBA (General)IV – Semester, International Business Unit V
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