Transcript Chapter 1
International Financial Management, 6e
by Jeff Madura Florida Atlantic University PowerPoint Presentation prepared by
Yee-Tein Fu
National Cheng-Chi University Taipei, Taiwan
©2000 South-Western College Publishing
Part I
The International Financial Environment Multinational Corporation (MNC) Exporting & Importing Foreign Exchange Markets Dividend Remittance & Financing Investing & Financing Product Markets Subsidiaries International Financial Markets
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CHAPTER 1
Multinational Financial Management: An Overview
Chapter Objectives
• • •
To identify the main goal of the MNC and conflicts with that goal; To describe the key theories that justify international business; and To explain the common methods used to conduct international business.
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Goal of the MNC
• • •
The commonly accepted goal of an MNC is to maximize shareholder wealth.
For corporations with shareholders who differ from their managers, a conflict of goals can exist - the
agency problem
.
Agency costs
are normally larger for MNCs than for purely domestic firms, but can vary with the management style of the MNC.
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Goal of the MNC
• •
Various forms of corporate control can reduce agency problems - stock compensation, threat of hostile takeover, monitoring by large shareholders.
As MNC managers attempt to maximize their firm’s value, they may be confronted with various
environmental
,
regulatory
, or
ethical
constraints.
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Theories of International Business
Why are firms motivated to expand their business internationally?
• •
Theory of Comparative Advantage
¤ Specialization by countries can increase production efficiency.
Imperfect Markets Theory
¤ The markets for the various resources used in production are “imperfect.”
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Theories of International Business
•
Product Cycle Theory 1 Firm creates product to accommodate local demand.
2 Firm exports product to accommodate foreign demand.
4a Firm differentiates product from competitors and/or expands product line in foreign country.
4b Firm’s foreign business declines as its competitive advantages are eliminated.
or 3 Firm establishes foreign subsidiary to establish presence in foreign country and possibly to reduce costs.
International Business Methods
• • •
International Trade - a relatively conservative approach involving exporting and/or importing.
Licensing - provision of technology in exchange for fees or some other benefits.
Franchising - provision of a specialized sales or service strategy, support assistance, and possibly an initial investment in the franchise in exchange for periodic fees.
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International Business Methods
•
Joint Ventures - joint ownership and operation by two or more firms.
• •
Acquisitions of Existing Operations Establishing New Foreign Subsidiaries Any method of increasing international business that requires a direct investment in foreign operations normally is referred to as a
direct foreign investment (DFI)
.
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Marginal Return on Projects Marginal Cost of Capital
International Opportunities
Cost-benefit Evaluation for Purely Domestic Firms versus MNCs Purely Domestic Firm MNC MNC Purely Domestic Firm Appropriate Size for Purely Domestic Firm X Y Asset Level of Firm Appropriate Size for MNC
International Opportunities
• •
Opportunities in Europe
¤ Single European Act of 1987 ¤ Removal of the Berlin Wall in 1989 ¤ Single currency system in 1999
Opportunities in Latin America
¤ North American Free Trade Agreement (NAFTA) of 1993 ¤ General Agreement on Tariffs and Trade (GATT) accord
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International Opportunities
•
Opportunities in Asia
¤ Significant growth expected for China ¤ Asian economic crisis in 1997-1998
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Exposure to International Risk
• • •
Exposure to Exchange Rate Movements
¤ exchange rate fluctuations affect cash flows and foreign demand
Exposure to Foreign Economies
¤ economic conditions affect demand
Exposure to Political Risk
¤ political actions affect cash flows
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Overview of an MNC’s Cash Flows
Profile A: MNCs focused on International Trade U.S. based MNC $ for products $ for supplies $ for exports $ for imports U.S. Customers U.S. Businesses Foreign Importers Foreign Exporters
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Overview of an MNC’s Cash Flows
Profile B: MNCs focused on International Trade and International Arrangements $ for products $ for supplies U.S. Customers U.S. Businesses U.S. based MNC $ for exports $ for imports Foreign Importers Foreign Exporters $ for service cost of service Foreign Firms
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Overview of an MNC’s Cash Flows
Profile C: MNCs focused on International Trade, International Arrangements, and Direct Foreign Investment $ for products $ for supplies U.S. Customers U.S. Businesses U.S. based MNC $ for exports $ for imports Foreign Importers Foreign Exporters $ for service cost of service funds remitted funds invested Foreign Firms Foreign Subsidiaries
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Valuation Model for an MNC
•
Domestic Model Value =
n
t
= 1
$,
t
1
k
t
where E (CF $,t ) = expected cash flows to be received at the end of period t n = the number of periods into the future in which cash flows are received k = the required rate of return by investors
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Valuation Model for an MNC
•
Valuing International Cash Flows Value =
t n
= 1
j m
1
1
k
t
where E (CF
j,t
) = expected cash flows denominated in currency j to be received by the U.S. parent at the end of period t E (ER
j,t
) = expected exchange rate at which currency j can be converted to dollars at the end of period t k = the weighted average cost of capital of the U.S. parent company
Valuation Model for an MNC Impact of New International Opportunities on an MNC’s Value New International Opportunities More Exposure to Foreign Economies More Exposure to Exchange Rate Risk More Exposure to Political Risk Value =
t n
= 1
j m
1
1
k
t
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How Chapters Relate to Valuation
Exchange Rate Behavior (Chapters 6-8) Exchange Rate Risk Management (Chapters 9-12) Background on International Financial Markets (Chapters 2-5) Long-Term Investment and Financing Decisions (Chapters 13-18) Risk and Return of MNC Value and Stock Price of MNC Short-Term Investment and Financing Decisions (Chapters 19-21)
Chapter Review
•
Goal of the MNC
¤ ¤ Conflicts against the MNC Goal Impact of MNC’s Management Style on Agency Costs ¤ ¤ Impact of Corporate Control on Agency Costs Constraints Interfering with the MNC’s Goal
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Chapter Review
• •
Theories of International Business
¤ Theory of Comparative Advantage ¤ Imperfect Markets Theory ¤ Product Cycle Theory
International Business Methods
¤ International Trade ¤ Licensing ¤ Franchising ¤ Joint Ventures ¤ Acquisitions of Existing Operations ¤ Establishing New Foreign Subsidiaries
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Chapter Review
• •
International Opportunities
¤ Opportunities in Europe ¤ Opportunities in Latin America ¤ Opportunities in Asia
Exposure to International Risk
¤ Exposure to Exchange Rate Movements ¤ Exposure to Foreign Economies ¤ Exposure to Political Risk
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Chapter Review
• •
Overview of an MNC’s Cash Flows Valuation Model for an MNC
¤ Domestic Model ¤ Valuing International Cash Flows ¤ How Chapters Relate to Valuation
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