1. What additional factors encountered in international as compared with domestic financial management? Discuss each briefly.
International financial management is faced with many more business factors than domestic financial management. For instance, international businesses are required to operate in many different financial aspects around the world. International financial management must deal with customers, shareholders, vendors, and other businesses across a much wider plane than domestic financial managers. Investment decisions regarding international issues may also be greatly affected by the exchange rate, taxes, and arbitrage. It may also be more of a challenge to manage financial records when involved in international trade. Additional differences include higher rates of return as well as the interest-rate parity theory (IRP).
The IRP is the forward premium or discount that should be equal and opposite in size to the difference in the national interest rates. The exposure to the decline of foreign currency is also a serious factor regarding international financial management. An additional factor is the fact that many international subsidiaries may choose to work independently instead of for the multi-national company. This would in turn prove disastrous for the entire company. International companies have much more access to funds as they can seek credit and financing in other countries besides their own. Finally, financial managers have the opportunity to make foreign investments.
2. What different types of businesses operate in the international environment? Why are the techniques and strategies available to these firms different?
There are many types of businesses that operate in the international environment. Any business which participates in business transactions with other nations are part of the international environment. Any organization that is involved in imports and exports would definitely be involved. As well, any large firm that communicates daily with dignitaries from other countries would also be involved in the international environment. These techniques and strategies may be different because of these businesses’ gross domestic product. In addition, these organization’s advancements in technology, knowledge, and communication may lead to higher economic development; therefore, the opportunity to participate in international trade and globalization.
3. What is meant by arbitrage profits?
Arbitrage profits involve investments with little to no risk. An investor makes arbitrage profits by buying in one market with cheap currency, and then selling in another market. This strategy does not involve an investment of funds or any risk bearing. However, the investor would still make a sure profit.
4. What are the markets and mechanics involved in generating (a) simple arbitrage profits
Simple arbitrage involves two or more markets. This type of trading does not include exchange rates across all markets with a single currency. Instead, simple arbitrage is taking advantage of the differences in price regarding one asset.
(b) and triangular arbitrage profits?
Triangular arbitrage is the process of converting one kind of currency to another, then converting it to another currency, and the finally converting back to the original currency. Triangular arbitrage usually occurs within a short time frame. Traders involved in triangular arbitrage would have to have advanced equipment and knowledge in order to effectively and quickly take advantage of this kind of trading.
Keown, A., Martin, J., Petty J., & Scott, D. (2005). Financial Management: Principles and
Applications. Prentice Hall, Inc.
Patton-Fuller Community Hospital
Organizations are constantly looking for new ways to grow. A part of this includes budgeting and forecasting which prepares a corporation for its future endeavors. Corporations explore options for growth and Patton-Fuller Community Hospital has discovered three options for expanding their operations. (Apollo Group, Inc., 2010). These three options include going public through an Initial Public Offering, acquiring another organization in the healthcare industry, and merging with another organization. This essay will provide the strengths, weaknesses, opportunities, and threats of the three options Patton-Fuller Community Hospital has.
Going public through an Initial Public Offering (IPO) has its advantages. For instance, “creating currency that can be used to fund growth and generating liquidity for founders, investors and employees, among others” (Benton, 2005). When an organization goes public the largest concern is creating shareholder wealth therefore, choosing an IPO provides the funds necessary to increase shareholder wealth.
However, acquiring another organization in the healthcare industry may strengthen Patton-Fuller to increase the firm’s assets. According to Patton-Fuller’s 2008 financial statement (Apollo Group, Inc., 2010), the current ratio is 5.41 indicating that Patton-Fuller has $5.41 in current assets for every $1 in current liabilities. The healthcare industry is a costly business therefore this ratio could use improvement.
Merging Patton-Fuller with another organization provides benefits that this hospital lacks. Patton-Fuller is current working on remodeling the hospital waiting area and has recently solved an issue with the nursing staff. Merging with another organization could provide the assistance this hospital requires in the sense of meeting its long-term goals as well as increasing its operating income return on investment which is currently at 12.3%.
We will examine the weaknesses of the three expansion options. There are many disadvantages of going public through an IPO. The major disadvantage of going IPO is the cost and time involved in the transformation. Managers of top business people grow exhausted from dealing with attorneys, bankers, investors, accountants, etc. Another disadvantage is going public gets very expensive. Fees are paid out for various things and to various people. Losing confidentiality, flexibility, and control is another disadvantage. The SEC requires that all public organizations release information about public affairs, profits, etc. Patton-Fuller has to decide if giving up their freedom is the direction they want to gear toward.
Acquiring another organization in the same industry can have its disadvantages. One major disadvantage is the industry being purchased having financial problems. This kind of organization is not worth the investment. The price to purchase may be a good cost for a bad reason. Cost characteristics can be another issue. Competitive problems are another issue. Everyone is trying to go after the same business. Some organization or cut throat concerning competition. If Patton-Fuller takes this route, they need to make sure the industry being purchase is worth the investment. They do not need their investment to work for them.
Merging with another organization another organization could definitely bring on some challenges. When merging, votes must be approved by the stockholders. Stockholders play a big role in businesses merging. Obtaining the votes can be time consuming. Trying to get at least two-thirds or more votes is a task. There could also be conflict of objective between the two businesses. This could be a huge problem. When the two businesses do not see eye to eye, this can cause disruption within the organization. Then there is always the notion of a business becoming too large. When a merging business becomes too large to quick, this leads to higher costs. When merging, Patton-Fuller need to do their research about the business they want to merger with. Merging with the wrong organization could be a risky task.
Patton-Fuller needs to do their research and weigh their options about all three expansion options. Patton-Fuller need to think long-term and what would be beneficial to the hospital long-term.
The Patton-Fuller Community Hospital has been serving its local community since 1975; however the executives at the hospital now believe it is time expand from being a privately and have three options for expansion: going public through an IPO, acquiring another organization in the healthcare industry or merging with another organization. Opportunities of each approach that could benefit the Patton-Fuller Community Hospital will be determined and discussed.
When a privately held coming goes public, it usually means that the company is selling shares of its stock for the first time to the public. This means that a once privately held company now is owned by public stockholders. The change of going from a privately held company to a publicly held company would require a lot of changes to the hospital; more than likely there would be a change in management and a loss of flexibility. However, going public through an IPO may be the only way the hospital would be able to continue to grow and expand.
For any business, going public requires a lot of time and resources to ensure that the process happens smoothly. It is often believed that a company should look for other alternatives such as securing venture capital, forming a limited partnership or examine their current capital before committing to an IPO solution for expansion.
Acquiring another healthcare company could be a consideration; acquisitions occur when two similar companies combine to form a new company altogether. The buyer of the other company takes control of the company because it is buying its shares; this means that the company the purchases the other company has full control over its assets and assumes all liabilities from the company that is being purchased. Acquiring another company within the healthcare industry would allow the Patton-Fuller Hospital to expand within the community. While acquisitions occur when one company buys another company and establishes itself as the owner of both companies, a merger is the result of two companies that agree to move forward together but continue to be owned and operated separately. Merging is often a good idea for a lot of companies because it allows companies to join together for both organizations’ best interests to occur. Mergers allow businesses to dominate within their industries but allow them to each be individually owned and operated.
There are threats associated with going public through an IPO. One threat is that there is a loss of control. “If Wall Street analysts don’t like the way the company is being run, your stock price may suffer, which means hard work has gone to waste. The board of directors may not like the job you’re doing, so your job is in jeopardy. And, of course, the shareholders may vote contrary to your opinion, which could significantly affect your life,” explains Harry S. Raphael, partner of Raphael and Raphael, LLP, a Boston-based full-service accounting and business consulting firm. The threat of losing control of an organization will run the risk of losing the organization.
Also, Public companies have a greater accountability for their actions and must also meet stringent requirements from the Securities and Exchange Commission (SEC) that cause innumerable distractions to the management team. At the same time, steady growth is expected on a quarter-by-quarter basis. If the expectations are not met, there is a chance of the company not being financed by lenders and therefore causing the company to go bankrupt.
Lastly, “going IPO presents a different kind of communication channel, both internal and external, which must be created and maintained. Much of this burden falls on the chief financial officer (CFO), but investor and public relations firms play significant roles in the operation and daily life of a public company, as well. Such communications practices for public companies — or those entrenched in the IPO process — can be critical” (Hell No We Won’t IPO, 2010).
The thought of purchasing an ongoing business would appear to be a good idea however, there are possible issues to consider: there is an existing reputation, customer base, suppliers, equipment, leases and cash flow. “The infrastructure and management team are also in place. These facts will make it difficult for the business to soar if all mentioned is negative instead of positive. There is the possibility of the seller backing out just you get ready to sign the deal due to emotional attachments to the business. Their products may be inadequate and/or defective. The inventory is old and outdated. The business is on a downswing and experiencing a negative cash flow. Overall, it is difficult to find one good feature about the business, except the sales price. When this situation occurs, it is easier to start a new venture than purchase an old one” (AllBusiness, 2010).
Merging with another business, of the same kind, is also an option. However, there are threats to consider. “The cooperation of the target firm existing management is almost a necessity for a merger. This cooperation may not be easily or cheaply obtained. Moreover, the diseconomies of scale if business become too large which leads to higher unit costs. It’s also will create clashes of culture between different types of business. Thus this reduces the effectiveness of the integration. Merger also may be creating a conflict of objective between different businesses, meaning decisions are more difficult to make and causing disruption in running of the business. It also results dissatisfaction among current staffs as positions will be limited and the management have to decide which staffs to hold the position after the transaction has taken place” (William, 2008).
Patton-Fuller Community Hospital is a privately owned and has many options on how they can expand. Patton-Fuller now knows the strength, weaknesses, opportunities, and threats of the three expansion options. They have to determine what approach would best facilitate the hospital needs.
AllBusiness. Retrieved October 11, 2010 from http://www.allbusiness.com/specialty-
Apollo Group, Inc. (2010). Patton-Fuller Community Hospital. Retrieved on October 09, 2010, from https://ecampus.phoenix.edu/secure/aapd/cist/vop/Healthcare/PFCH/pfchHome.htm
Benton, G. L. (2005). The Advantages and Disadvantages of Going Public. .IPO Planner, Guide and Resource Directory for Companies Going Public. Pillsbury Winthrop LLP. Retrieved on October 09, 2010, from http://ipoplanner.webzel.net/forum/00000003.html.
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William, Peter; The Advantages and Disadvantages of Mergers, November 15, 2008. Retrieved
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