International Financial Management, 6e

by

Jeff Madura
Florida Atlantic University

PowerPoint Presentation
prepared by

Yee-Tein Fu
National Cheng-Chi University Taipei, Taiwan
2000 South-Western College Publishing

Part I
The International Financial Environment
Multinational Corporation (MNC)

Foreign Exchange Markets Dividend Remittance & Financing

Exporting & Importing Product Markets

Investing & Financing International Financial Markets

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Subsidiaries

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.
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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 Firm creates product to accommodate local demand.
4a

2 Firm exports product to accommodate foreign demand. or

4b

3 Firm establishes foreign subsidiary to establish presence in foreign country and possibly to reduce costs.

Firm differentiates product from competitors and/or expands product line in foreign country.

Firms foreign business declines as its competitive 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.
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International Business Methods

Joint Ventures - joint ownership and
operation by two or more firms.

Acquisitions of Existing Operations 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).
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International Opportunities
Cost-benefit Evaluation for Purely Domestic Firms versus MNCs
Purely Domestic Firm

Marginal Return on Projects Marginal Cost of Capital

MNC MNC Purely Domestic Firm

Appropriate Size for Purely Domestic Firm

Appropriate Size for MNC

Asset Level of Firm

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

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International Opportunities
Opportunities in Asia

Significant growth expected for China Asian economic crisis in 1997-1998

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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

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Overview of an MNCs Cash Flows

Profile A: MNCs focused on International Trade
$ for products

U.S. Customers U.S. Businesses Foreign Importers Foreign Exporters

U.S.based MNC

$ for supplies $ for exports $ for imports

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Overview of an MNCs Cash Flows

Profile B: MNCs focused on International Trade and International Arrangements
$ for products $ for supplies

U.S. Customers U.S. Businesses Foreign Importers Foreign Exporters Foreign Firms
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U.S.based MNC

$ for exports $ for imports $ for service cost of service

Overview of an MNCs Cash Flows

Profile C: MNCs focused on International Trade, International Arrangements, and Direct Foreign Investment
$ for products $ for supplies

U.S. Customers U.S. Businesses Foreign Importers Foreign Exporters Foreign Firms Foreign Subsidiaries
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U.S.based MNC

$ for exports $ for imports $ for service cost of service funds remitted funds invested

Valuation Model for an MNC

Domestic Model
Value =
n t =1

E ( CF$, t )

( 1 + k)

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

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Valuation Model for an MNC

Valuing International Cash Flows
m j E ( CFj , t ) E ( ER j , t ) n =1 Value = t t =1 ( 1 + k)

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 t =1 1 + k) (

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How Chapters Relate to Valuation

Exchange Rate Behavior (Chapters 6-8) Background on International Financial Markets (Chapters 2-5) Long-Term Investment and Financing Decisions (Chapters 13-18) Short-Term Investment and Financing Decisions (Chapters 19-21) Exchange Rate Risk Management (Chapters 9-12)

Risk and Return of MNC

Value and Stock Price of MNC

Chapter Review
Goal of the MNC

Conflicts against the MNC Goal Impact of MNCs Management Style on Agency Costs Impact of Corporate Control on Agency Costs Constraints Interfering with the MNCs Goal

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Chapter Review
Theories of International Business
Theory of Comparative Advantage Imperfect Markets Theory Product Cycle Theory International Business Methods International Trade Licensing Franchising Joint Ventures Acquisitions of Existing Operations Establishing New Foreign Subsidiaries

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Chapter Review
International Opportunities
Opportunities in Europe Opportunities in Latin America Opportunities in Asia Exposure to International Risk Exposure to Exchange Rate Movements Exposure to Foreign Economies Exposure to Political Risk

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Chapter Review
Overview of an MNCs Cash Flows Valuation Model for an MNC

Domestic Model Valuing International Cash Flows How Chapters Relate to Valuation

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