International Investments, Risks, and Ethical Issues
You are to choose a choose a publicly traded company that has actively traded over public exchanges for a minimum of 10 years.
Make sure the company has some type of international influence, e.g., Multi-National Corporation (MNC) or international personnel assigned to the organization if it is based in the U.S.
Imagine you are hired as a consultant to render services to a publicly traded company. As a new MBA finance wizard, you have been asked to show your vast knowledge of finance by providing a discussion regarding the operations of finance to the new hires of the company you selected.
Please address the following in your paper:
1. Corporate finance as it relates to analysis and decision-making
2. The theoretical underpinnings of modern portfolio theory
3. Evaluation of financial risks and associated measurements
4. Assessment of risk and ethics in an international setting relative to finance and investments
Writing guidelines
Write 4 pages in APA format utilizing at least 5 references from the Touro library
Ensure you have an introduction with a purpose statement main topics are addressed logically and coherently, and the conclusion ties everything together (add 2-3 sentences in the
conclusion with a summary of what you learned).
Double space throughout the paper, with 1 inch margins all around
Your paper should be based on what you have learned supported by literature (i.e., do not generalize)
Include a title page and reference page, which is not included in the 4 page count.
Add tables and graphs to strengthen your paper (where applicable)
International Investments, Risks, and Ethical Issues
Investing in international markets pose several challenges to multinational companies, and require difficult strategies to compete favorably. The American International Group has several branches in many countries. It has implemented specific financial and investment strategies to be successful. It is imperative to know how it manages its corporate finance, how it implements the Modern Portfolio theory, the financial risks, and ethical issues it faces in international set up. This is an in-depth descriptive of such factors and their impact to a multinational.
Role of Corporate Finance
The American International Group has several competitors in the insurance field, who invests heavily in customer relations and strategic planning to get ahead. This poses a challenge to the company in terms of competitiveness, in addition to being profitable to the investors and shareholders. Corporate finance involves short term and long-term plans meant to increase shareholder value and the profitability of a corporation through several financial decisions. The company makes investment decisions, manages current liabilities, current assets, and inventory control through decision made by corporate finance department. Through capital budgeting, the corporate finance department can use the corporation’s long-term capital to make capital investments meant to expand the company, or acquire new assets (Kono & Barnes, 2010).
Capital budgeting enables the corporation to analyze an investment in terms of its viability, estimated cash flow, profits in comparison to investment, and the best project to invest in (Kono & Barnes, 2010). A corporation is able to accomplish this by using the corporation’s equity or by sourcing out finance through borrowing from financial institutions, selling stocks, or by issuance of debt securities (Shahnazi & Azadi, 2015). Corporate finance also touches the daily operation of the corporation to ensure there is enough short term liquidity that can sustain everyday operations. Therefore, managers invest in short-term equities to ensure there is enough cash flow through balancing of current assets and liabilities. Additionally, multinational corporations like American International Group with branches in over 130 require customizing business operations within each country, and performing proper utilization of resources to reduce tax burden implications. Princen (2012) argues that cross border transfer of assets by multinationals result in double taxation, counterbalanced through capital finance by consolidating and apportioning tax to several entities.
Modern Portfolio Theory
The theory suggests that risk-averse investors can create portfolios that can grant them maximum return on investment on a certain level of risk. The theory suggested by Harry Markowitz in 1952 uses statistics to describe an investments long-term return and its short-term volatility. The theory also suggests that investors spread their risks through multiple investments with different levels of risks and returns instead of majoring on one portfolio (Fabozzi, Gupter, & Markowitz, 2002). This is the separation theorem. This helps in balancing returns since one investment may rise in profitability while another lowers at the same time. It is appropriate to invest in a more volatile investment over a long period to have a guarantee on higher returns, and a less volatile one on a shorter period in order to avoid risks. Example is investments in stocks and bonds respectively. This balancing of risks and rewards results in optimal portfolio called the efficient frontier.
The theory uses standard deviation of the rate of return to measure the volatility of an investment. A bigger standard deviation and a more negative covariance show the variability of the rate of return (Fabozzi, Gupter, & Markowitz, 2002). The efficient frontier point to risk-efficient investments associated with some type of securities, which are possible to find using the Sharp Ratio. The theory highly recommends diversification in terms of investments. It is deemed appropriate to spread asset investments over different asset classes, in different securities within each asset class in each asset performs differently, and provides different rates of returns. Elton and Gruber (1997) suggest that it is prudent to rebalance the portfolio periodically due to altering value of assets with changing markets. This is possible through selling assets that have increased in value and using the funds to purchase underperforming portions of the portfolio assets to revert the portfolio to its original asset mix.
Financial Risks and Their Assessments
Financial risks includes investment and operational conditions that may render a company deficient of cash or lose its investments. Through evaluation of the financial risk of the company, the financial health and financial risk level of the company can determine its creditworthy and investment potential (Lucic, 2014). A company is considered risky financial if it h...