International Financial

Management

2000 South-Western College Publishing

 Part I
The International Financial Environment

Multinational Corporation (MNC)

Foreign Exchange Markets

Dividend
Remittance
Exporting & Financing Investing
& Importing & Financing

Product Markets Subsidiaries International

Financial
Markets
 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.
 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.
 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.
 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

1 2
Firm exports product 3
Firm creates
product to to accommodate Firm
accommodate foreign demand. establishes
local demand. foreign
subsidiary to
establish
presence in
foreign country
4a or
and possibly to
Firm differentiates 4b reduce costs.
product from Firms foreign business
competitors and/or declines as its
expands product line in competitive
foreign country. advantages are
eliminated.
 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.
 International Business
Methods
Joint Ventures - joint ownership and operation by
two or more firms.
Acquisitions of Existing Operations in foreign
countries allow firms to quickly gain control over
foreign operations as well as a share of the foreign
market.
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
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
 International
Opportunities
Opportunities in Asia
Significant growth expected for China
Asian economic crisis in 1997-1998
 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
Overview of an MNCs
Cash Flows
Profile A: MNCs focused on International Trade

$ for products U.S. Customers

U.S.- $ for supplies U.S. Businesses

based
MNC
$ for exports Foreign Importers

$ for imports Foreign Exporters

 Overview of an MNCs
Cash Flows
Profile B: MNCs focused on International Trade and International
Arrangements

$ for products U.S. Customers

$ for supplies U.S. Businesses

U.S.-
based $ for exports Foreign Importers
MNC
$ for imports Foreign Exporters

$ for service
cost of service Foreign Firms
 Overview of an MNCs
Cash Flows
Profile C: MNCs focused on International Trade, International
Arrangements, and Direct Foreign Investment

$ for products U.S. Customers

$ for supplies U.S. Businesses

U.S.-
based $ for exports Foreign Importers
MNC
$ for imports Foreign Exporters

$ for service
cost of service Foreign Firms

funds remitted
funds invested Foreign Subsidiaries
Valuation Model for an
MNC
Domestic Model
n E CF$, t
Value =
t =1 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
 Valuation Model for an MNC
Valuing International Cash Flows


m
j E CFj , t E ER j , t
n 1
Value =
t =1 1 k t


where E (CFj,t ) = expected cash flows denominated
in currency j to be received by the
U.S. parent at the end of period t
E (ERj,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 MNCs Value

New International Opportunities

More Exposure to Foreign Economies

More Exposure to Exchange Rate Risk

More Exposure to Political Risk

m
j E CFj , t E ER j , t
n 1
Value =
t =1 1 k t