1. Multinational Financial Management: An Overview
C H A P T E R 1
Multinational Financial Management: An Overview

2. Chapter Overview A. Managing the MNC
B. Why Firms Pursue International Business
C. How Firms Engage in International Business
D. Valuation Model for an MNC

3. Chapter 1 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

4. Insert chart from page 2

5. A. Managing the MNC
1. Management and Agency Problems a. Parent Control b. Corporate Control 1.) How Sarbanes-Oxley (SOX) Improved MNCs Corporate Governance

6. A. Managing the MNC 2.) Common Methods to Improve Control
Establishing a centralized database of information
Ensuring that all data are reported consistently among subsidiaries
Implementing a system that automatically checks data for unusual discrepancies
Speeding the process by which all departments and subsidiaries have access to data needed
Making executives more accountable for financial statements by personally verifying accuracy

7. A. Managing the MNC 3. Facing Agency Problems
4. Management Structure of an MNC
a. How the Internet Facilitates Management Control

8. B. Why Firms Pursue International Business
1. Theory of Comparative Advantage
2. Imperfect Markets Theory
3. Product Cycle Theory

9. Insert chart page 7 Exhibit 1.2
International Product Life Cycles
Insert chart page 7 Exhibit 1.2

10. C. Why Firms Engage in International Business
1. International Trade
a. How the Internet Facilitates International Trade
2. Licensing
a. How the Internet Facilitates Licensing
3. Franchising
4. Joint Ventures
5. Acquisition of Existing Operations
6. Establishing New Foreign Subsidiaries

11. C. Why Firms Engage in International Business
Summary of Methods by Risk
Franchising
and
Joint Ventures
New
Foreign
Subsidiaries
FDI
Foreign
Acquisitions
LEAST
RISK
MOST
RISK
Degrees of Risk to MNC

12. D. Valuation Model for an MNC
1. 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.

13. D. Valuation Model for an MNC
2. Valuing 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.

14. D. Valuation Model for an MNC
3. MNC’s Cash Flow Uncertainty
a. Exposure to International Economic Conditions
b. Exposure to International Political Risk

15. Insert Exhibit 1.3 from page 11
Cash Flow Diagrams for MNCs
Insert Exhibit 1.3 from page 11