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FINANCIAL MANAGEMENT
Chapter Objectives
To understand how value is measured and managed across the multiple units of the multinational firm
To understand how international business and investment activity alters and adds to the traditional financial
management activities of the firm
To understand the three primary currency exposures that confront the multinational firm
To examine how exchange rate changes alter the value of the firm, and how management can manage or
hedge these exposures
Opening Case
Summary:
When Schering-Plough had a downturn in business it elected to not repatriate cash reserves from overseas
to maintain its dividend level. Rather, it decided to lower its dividends significantly and to lay off at least
1,000 employees. It was not willing to pay the heavy taxes associated with bring the money back into the
U.S.
1.
Chapter Outline
I. WHAT IS THE GOAL OF MANAGEMENT?
A. Maximize stockholder wealth or consider financial and social health of all stakeholders?
Focus on Ethics
Stockholder Wealth Maximization and Corporate Culture: The Enron Debacle
Summary:
The conclusion of this case is that Enrons culture focused solely on earnings-per-share growth and that this
focus on profits and greed led to many of the questionable ethical decisions and the demise of the company.
B. Global Financial Goals
1. Maximization of consolidated, after-tax income
2. Minimization of the firms effective global tax burden
3. Correct positioning of the firms income, cash flows, and available funds
C. Genus Corporation is a sample corporation used to illustrate how the various components of the
multinational firm fit together and how financial management must make decisions regarding
trade-offs
1. Tax Management would have Genus rearrange its profits into the countries having the
lowest tax rates
2. Currency Management would have Genus rearrange its profits into Germany because
of the stability of the euro
3. Funds Flow Management would have Genus rearrange its profits and cash flow to
minimize having funds blocked up in China
D. Multinational Management at Genus as an illustration of the complexity of the process
1. Financial management issues facing Genus
a. Primary goal is maximization of consolidated profits after tax
b. Consolidated currency is expressed in currency of the parent company, but may
reside in subsidiaries
c. Subsidiary financial statements are in local currency
d.
Focus on Culture
To Hedge or Not to Hedge?
Summary:
The story is told of how Coca-Colas profits are down due to losses it is taking by engaging in hedging to
protect itself against foreign currency fluctuations. Although in gained $87 million through hedging in
1999, it has lost money since then.
3.
A. Benefits
1. Allows the circumvention of price controls
2. Due to preference of exchanging goods with major trading partners
3. Way to gain entry into new markets
4. Can provide stability for long-term sales
B. Disadvantages
1. May not be efficientyou have to want what the other party has
2. Accounts must be settled on a bilateral basis to maintain balance of trade