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WELCOME TO ALL

WELCOME TO ALL. International Financial Management Course Code: FIN4205. Book Reference. International Financial Management By Jeff Madura (8 th Edition). Multinational Financial Management: An Overview. 1. Chapter. Multinational Corporation (MNC). Foreign Exchange Markets.

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WELCOME TO ALL

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  1. WELCOME TO ALL InternationalFinancial Management Course Code: FIN4205

  2. Book Reference • InternationalFinancial Management By Jeff Madura (8th Edition)

  3. Multinational Financial Management:An Overview 1 Chapter

  4. Multinational Corporation (MNC) Foreign Exchange Markets Product Markets Subsidiaries International Financial Markets Part IThe International Financial Environment Dividend Remittance & Financing Exporting & Importing Investing & Financing

  5. Goal of the MNC & Conflicts Against the MNC Goal • The commonly accepted goal of anMNC is tomaximize shareholder wealth. • For corporations with shareholders who differ from their managers, a conflict of goals can exist -theagency problem.

  6. Goal of the MNC & Conflicts Against the MNC Goal • Agency costs are normally larger for MNCs than for purely domestic firms. • The sheer size of the MNC. • The scattering of distant subsidiaries. • The culture of foreign managers. • Subsidiary value versus overall MNC value

  7. Impact of Management Control • The magnitude of agency costs can vary with the management style of the MNC. • Acentralizedmanagement style reduces agency costs. However, adecentralizedstyle gives more control to those managers who are closer to the subsidiary’s operations and environment.

  8. Cash Management at A Cash Management at B Financial Managers of Parent Inventory and Accounts Receivable Management at A Inventory and Accounts Receivable Management at B Financing at A Financing at B Capital Expenditures at A Capital Expenditures at B Centralized Multinational Financial Management for an MNC with two subsidiaries, A and B

  9. Cash Management at A Financial Managers of A Financial Managers of B Cash Management at B Inventory and Accounts Receivable Management at A Inventory and Accounts Receivable Management at B Financing at A Financing at B Capital Expenditures at A Capital Expenditures at B Decentralized Multinational Financial Management for an MNC with two subsidiaries, A and B

  10. Impact of Management Control • Some MNCs attempt to strike a balance - they allow subsidiary managers to make the key decisions for their respective operations, but the decisions are monitored by the parent’s management.

  11. Constraints Interfering with the MNC’s Goal • As MNC managers attempt to maximize their firm’s value, they may be confronted with various constraints. • Environmental constraints. • Regulatory constraints. • Ethical constraints.

  12. Why are firms motivated to expand their business internationally? Theories of International Business • 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.”

  13. Why are firms motivated to expand their business internationally? Theories of International Business • Product Cycle Theory • As a firm matures, it may recognize additional opportunities outside its home country.

  14. Firm creates product to accommodate local demand. Firm exports product to accommodate foreign demand. Firm establishes foreign subsidiary to establish presence in foreign country and possibly to reduce costs. a. Firm differentiates product from competitors and/or expands product line in foreign country. or b. Firm’s foreign business declines as its competitive advantages are eliminated. The International Product Life Cycle

  15. InternationalBusiness Methods There are several methods by which firms can conduct international business. • International tradeis a relatively conservative approach involving exporting and/or importing. • The internet facilitates international trade by enabling firms to advertise and manage orders through their websites.

  16. International Business Methods • Licensingallows a firm to provide its technology in exchange for fees or some other benefits. • Franchisingobligates a firm to provide a specialized sales or service strategy, support assistance, and possibly an initial investment in the franchise in exchange for periodic fees.

  17. International Business Methods • Firms may also penetrate foreignmarkets by engaging in ajoint venture(joint ownership and operation) with firms that reside in those markets. • Acquisitions of existingoperationsin foreign countries allow firms to quickly gain control over foreign operations as well as a share of the foreign market.

  18. Firms can also penetrate foreignmarkets byestablishing new foreign subsidiaries. In general, any method of conducting business that requires a direct investment in foreign operations isreferred to as adirect foreign investment (DFI). The optimal international business method may depend on the characteristics of the MNC. International Business Methods

  19. Exposure to International Risk International business usually increases an MNC’s exposure to: • Exchange rate movements • Exchange rate fluctuations affect cash flows and foreign demand. • Foreign economies • Economic conditions affect demand. • Political risk • Political actions affect cash flows.

  20. Managing for Value • Like domestic projects, foreign projects involve an investment decision and a financing decision. • When managers make multinational finance decisions that maximize the overall present value of future cash flows, they maximize the firm’s value, and hence shareholder wealth.

  21. 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 • Domestic Model

  22. 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 • Valuing International Cash Flows

  23. Valuation Model for an MNC • An MNC’s financial decisions include how much business to conduct in each country and how much financing to obtain in each currency. • Its financial decisions determine its exposure to the international environment.

  24. Impact of New International Opportunities on an MNC’s Value Exposure to Foreign Economies Exchange Rate Risk Political Risk Valuation Model for an MNC

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