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
2
Part I
The International Financial Environment
Multinational Corporation (MNC)
Foreign Exchange Markets
Product Markets Subsidiaries International
Financial
Markets
Dividend
Remittance
& Financing
Exporting
& Importing
Investing
& Financing
CHAPTER 1
Multinational Financial Management:
An Overview
4
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.
5
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.
6
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 firms value, they may be confronted
with various environmental, regulatory, or
ethical constraints.
7
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.
Theories of International Business
Product Cycle Theory
Firm creates
product to
accommodate
local demand.
1
Firm exports
product to
accommodate
foreign demand.
2
Firm
establishes
foreign
subsidiary
to establish
presence in
foreign
country and
possibly to
reduce
costs.
3
Firm differentiates
product from
competitors and/or
expands product
line in foreign
country.
4a
Firms foreign
business declines
as its competitive
advantages are
eliminated.
4b
or
9
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.
10
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).
International Opportunities
Cost-benefit Evaluation for
Purely Domestic Firms versus MNCs
Marginal
Return on
Projects
Marginal
Cost of
Capital
Purely
Domestic
Firm
Purely
Domestic
Firm
MNC
MNC
Appropriate
Size for Purely
Domestic Firm
Appropriate
Size for MNC
X Y
Asset Level of Firm
12
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
13
International Opportunities
Opportunities in Asia
Significant growth expected for China
Asian economic crisis in 1997-1998
14
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
15
Overview of an MNCs Cash Flows
Profile A: MNCs focused on International Trade
U.S. Businesses
Foreign Importers
U.S. Customers
Foreign Exporters
U.S.-
based
MNC
$ for products
$ for supplies
$ for exports
$ for imports
16
Overview of an MNCs Cash Flows
Profile B: MNCs focused on International Trade and
International Arrangements
U.S. Businesses
Foreign Importers
U.S. Customers
Foreign Exporters
Foreign Firms
U.S.-
based
MNC
$ for products
$ for supplies
$ for exports
$ for imports
$ for service
cost of service
17
Overview of an MNCs Cash Flows
Profile C: MNCs focused on International Trade,
International Arrangements, and Direct Foreign Investment
U.S. Businesses
Foreign Importers
U.S. Customers
Foreign Exporters
Foreign Firms
Foreign Subsidiaries
U.S.-
based
MNC
$ for products
$ for supplies
$ for exports
$ for imports
$ for service
cost of service
funds remitted
funds invested
18
Valuation Model for an MNC
Domestic Model
( )
( )
Value =
E CF
$,
=
t
t
t
n
k 1
1
+

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
Valuation Model for an MNC
Valuing International Cash Flows
( )
Value =
E CF E ER
, ,
=
j t j t
j
m
t
t
n
k

=1
1
1
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
20
Valuation Model for an MNC
Impact of New International Opportunities
on an MNCs Value
( ) ( )
( )
Value =
E CF E ER
, ,
=
j t j t
j
m
t
t
n
k

=1
1
1
More Exposure to Exchange Rate Risk
New International Opportunities
More Exposure to Political Risk
More Exposure to Foreign Economies
How Chapters Relate to Valuation
Background
on
International
Financial
Markets
(Chapters
2-5)
Exchange Rate
Behavior
(Chapters 6-8)
Long-Term
Investment and
Financing
Decisions
(Chapters 13-18)
Short-Term
Investment and
Financing
Decisions
(Chapters 19-21)
Exchange Rate
Risk Management
(Chapters 9-12)
Risk and
Return of
MNC
Value and
Stock Price
of MNC
22
Chapter Review
Goal of the MNC
Conflicts against the MNC Goal
Impact of MNCs Management Style on
Agency Costs
Impact of Corporate Control on Agency
Costs
Constraints Interfering with the MNCs
Goal
23
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
24
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
25
Chapter Review
Overview of an MNCs Cash Flows
Valuation Model for an MNC
Domestic Model
Valuing International Cash Flows
How Chapters Relate to Valuation