© 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. International Financial Management 10 th Edition by Jeff Madura 1

© 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 2 1 Multinational Financial Management: An Overview Chapter Objectives This chapter will: A.Identify the management goal and organizational structure of the Multinational Corporation (MNC). B.Describe the key theories that justify international business C.Explain the common methods used to conduct international business D.Provide a model for valuing the MNC 2

© 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 3 3 Multinational Corporation: Firms that engage in some form of international business

© 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 4 Facing Agency Problems 1.Agency Problem: conflict of goals between managers and shareholders. 2.Agency Conflict Reduced by: a.Parent control of agency problems b.Corporate control of agency problems c.Sarbanes-Oxley Act (SOX) of 2002

© 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 5 Management Structure of MNC 1.Centralized 2.Decentralized

© 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 6 Why Firms Pursue International Business 1.Theory of Competitive Advantage: specialization increases production efficiency. 2.Imperfect Markets Theory: factors of production are somewhat immobile providing incentive to seek out foreign opportunities. 3.Product Cycle Theory: as a firm matures, it recognizes opportunities outside its domestic market.

© 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 7 Exhibit 1.2 International Product Life Cycles 7

© 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 8 How Firms Engage in International Business 1.International trade 2.Licensing 3.Franchising 4.Joint Ventures 5.Acquisitions of existing operations 6.Establishing new foreign subsidiaries

© 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 9 Valuation Model for an MNC: Domestic Model  where E(CF$,t) represents expected cash flows to be received at the end of period t,  n represents the number of periods into the future in which cash flows are received, and  k represents the required rate of return by investors. 9

© 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 10 Valuation Model for an MNC: International Cash Flows  where CFj,t represents the amount of cash flow denominated in a particular foreign currency j at the end of period t,  Sj,t represents the exchange rate at which the foreign currency (measured in dollars per unit of the foreign currency) can be converted to dollars at the end of period t. 10

© 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 11 Exhibit 1.3 Cash Flow Diagrams for MNCs 11

© 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 12 Uncertainty Surrounding MNC Cash Flows 1.Exposure to international economic conditions 2.Exposure to international political risk 3.Exposure to exchange rate risk