FINANCIAL STRATEGIES

Financial Strategy for Indian Oil Plc

Introduction1

Discussion1

Task 1 - Critical Review of Literature on Cross Listing1

Cross Listing1

Benefits of Cross Listing3

Costs of Cross Listing4

Task 2 - Capital Structure of Indian Oil Plc4

a)Long Term Sources of Finance4

Indian Oil Plc's Sources of Long Term Finance5

b)Rationale behind the Capital Structure9

c)Cost of Capital11

Task 3 - Transaction Risk for Indian Oil Plc12

a)Business Transaction and Real Exchange Rate12

b)Hedge and Forward Contract13

c)Use of Money Market Hedge and Forward Contract14

Conclusion15

References17

Appendix20

Appendix A - Figures20

Appendix B - Tables25

Financial Strategy for Indian Oil Plc

Introduction

The paper aims at exploring the modern concept of financial strategy and transaction hedging instruments. In the light of relevant academic literature, the paper critically evaluates the benefits and associated cost of cross listing for companies. The paper examines annual report of Indian Oil Plc in order to identify and explain long term sources of finance, which have been employed by the firm.

In addition to this, the paper inspects capital structure of Indian Oil Plc in order to provide rationale behind the selected capital structure, and to estimate the cost of capital for the firm. Moreover, the paper scrutinizes foreign operations of the firm in order to understand and analyze the concept of money market hedge and forward contracts. Finally, the paper draws a conclusion on the overall understanding of the subject matter.

Discussion

Task 1 - Critical Review of Literature on Cross Listing

Cross Listing

The term 'cross listing' refers to a firm's stock listing on various exchanges, which may distinguish from its primary stock exchange. Cross listing may refer to dual or multiple listing of stocks (Sercu, n.d., p. 8). O'Connor and Phylaktis (2012, p. 1) state that a number of factors underlie a firm's decision to engage in cross-border activities, for instance, capital markets, increased participation in cross-border trading, international cross listing and M&As. These factors may affect the value of cross listed firms relative to non-cross listed firms as illustrated by figure 1 (O'Connor and Phylaktis, 2012, p. 41).

Figure 1: Stock Value Comparison of Cross Listed and Non-cross Listed Firms in the UK and US (O'Connor and Phylaktis, 2012, p. 41)

A firm deciding to cross list its shares is required to meet the basic listing requirements of the intended exchange such as accounting policies, revenue of the firm and number of shares. For example, a foreign company operating in the UK may wish to cross list its shares in the UK market in order to benefit from an unforeseen condition due to the fluctuation of sterling (£) against major foreign currencies (Abdullah, 2005, p. 19). Lasfer (2012, p. 2) states that cross listing may result in reduced cost of capital for an issuing firm. It further identifies the dependence of cost of capital on the domestic market portfolio's risk premium.

In order to develop a close understanding of the phenomenon, Lasfer (2012, p. 2) reports the work of Karolyi, which was conducted in 1998. According to these statistics, in the US, costs of capital of UK cross listed firms were reduced from ...