Presentation on theme: "International Financial Management, 6e by Jeff Madura Florida Atlantic University PowerPoint Presentation prepared by Yee-Tein Fu National Cheng-Chi University."— Presentation transcript:
2 Part I The International Financial Environment Multinational Corporation (MNC)Foreign Exchange MarketsDividendRemittance& FinancingExporting& ImportingInvesting& FinancingProduct MarketsSubsidiariesInternationalFinancialMarkets
4 Chapter ObjectivesTo identify the main goal of the MNC and conflicts with that goal;To describe the key theories that justify international business; andTo explain the common methods used to conduct international business.
5 Goal of the MNCThe 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.
6 Goal of the MNCVarious 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 firm’s value, they may be confronted with various environmental, regulatory, or ethical constraints.
7 Theories of International Business Why are firms motivated to expand their business internationally?Theory of Comparative AdvantageSpecialization by countries can increase production efficiency.Imperfect Markets TheoryThe markets for the various resources used in production are “imperfect.”
8 Theories of International Business Product Cycle TheoryFirm creates product to accommodate local demand.1Firm exports product to accommodate foreign demand.2Firm establishes foreign subsidiary to establish presence in foreign country and possibly to reduce costs.3Firm differentiates product from competitors and/or expands product line in foreign country.4aorFirm’s foreign business declines as its competitive advantages are eliminated.4b
9 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.
10 International Business Methods Joint Ventures - joint ownership and operation by two or more firms.Acquisitions of Existing OperationsEstablishing New Foreign SubsidiariesAny method of increasing international business that requires a direct investment in foreign operations normally is referred to as a direct foreign investment (DFI).
11 International Opportunities Cost-benefit Evaluation forPurely Domestic Firms versus MNCsMarginal Return on ProjectsMarginal Cost of CapitalPurely Domestic FirmMNCAppropriate Size for Purely Domestic FirmAppropriate Size for MNCXYAsset Level of Firm
12 International Opportunities Opportunities in EuropeSingle European Act of 1987Removal of the Berlin Wall in 1989Single currency system in 1999Opportunities in Latin AmericaNorth American Free Trade Agreement (NAFTA) of 1993General Agreement on Tariffs and Trade (GATT) accord
13 International Opportunities Opportunities in AsiaSignificant growth expected for ChinaAsian economic crisis in
14 Exposure to International Risk Exposure to Exchange Rate Movementsexchange rate fluctuations affect cash flows and foreign demandExposure to Foreign Economieseconomic conditions affect demandExposure to Political Riskpolitical actions affect cash flows
15 Overview of an MNC’s Cash Flows Profile A: MNCs focused on International Trade$ for productsU.S. CustomersU.S.-based MNC$ for suppliesU.S. Businesses$ for exportsForeign Importers$ for importsForeign Exporters
16 Overview of an MNC’s Cash Flows Profile B: MNCs focused on International Trade and International Arrangements$ for productsU.S. Customers$ for suppliesU.S. BusinessesU.S.-based MNC$ for exportsForeign Importers$ for importsForeign Exporters$ for serviceForeign Firmscost of service
17 Overview of an MNC’s Cash Flows Profile C: MNCs focused on International Trade, International Arrangements, and Direct Foreign InvestmentU.S.-based MNC$ for productsU.S. Customers$ for suppliesU.S. Businesses$ for exportsForeign Importers$ for importsForeign Exporters$ for serviceForeign Firmscost of servicefunds remittedForeign Subsidiariesfunds invested
18 Valuation Model for an MNC Domestic Modelwhere E (CF$,t ) = expected cash flows to bereceived at the end of period tn = the number of periods into the future inwhich cash flows are receivedk = the required rate of return by investors
19 Valuation Model for an MNC Valuing International Cash Flowswhere E (CFj,t ) = expected cash flows denominatedin currency j to be received by theU.S. parent at the end of period tE (ERj,t ) = expected exchange rate at whichcurrency j can be converted todollars at the end of period tk = the weighted average cost of capital ofthe U.S. parent company
20 Valuation Model for an MNC Impact of New International Opportunitieson an MNC’s ValueMore Exposure to Exchange Rate RiskNew International OpportunitiesMore Exposure to Political RiskMore Exposure to Foreign Economies
21 How Chapters Relate to Valuation Exchange Rate Behavior (Chapters 6-8)Exchange Rate Risk Management (Chapters 9-12)Background on International Financial Markets (Chapters2-5)Long-Term Investment and Financing Decisions (Chapters 13-18)Risk and Return of MNCValue and Stock Price of MNCShort-Term Investment and Financing Decisions (Chapters 19-21)
22 Chapter Review Goal of the MNC Conflicts against the MNC Goal Impact of MNC’s Management Style on Agency CostsImpact of Corporate Control on Agency CostsConstraints Interfering with the MNC’s Goal
23 Chapter Review Theories of International Business Theory of Comparative AdvantageImperfect Markets TheoryProduct Cycle TheoryInternational Business MethodsInternational Trade ¤ LicensingFranchising ¤ Joint VenturesAcquisitions of Existing OperationsEstablishing New Foreign Subsidiaries
24 Chapter Review International Opportunities Opportunities in Europe Opportunities in Latin AmericaOpportunities in AsiaExposure to International RiskExposure to Exchange Rate MovementsExposure to Foreign EconomiesExposure to Political Risk
25 Chapter Review Overview of an MNC’s Cash Flows Valuation Model for an MNCDomestic ModelValuing International Cash FlowsHow Chapters Relate to Valuation