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Finance Chapter 19 Multinational financial management.

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Presentation on theme: "Finance Chapter 19 Multinational financial management."— Presentation transcript:

1 Finance Chapter 19 Multinational financial management

2 International operations  A multinational (MNC), or global corporation, is a firm that operates in an integrated fashion in a number of countries.  Companies “go global” for 6 primary reasons: 1. Expand markets (Coca Cola, Sony) 2. Obtain raw materials (Exxon Oil) 3. Seek new technology (Xerox, P&G) 4. Lower production costs (GE) 5. Avoid trade barriers (Honda, Toyota in the U.S.) 6. Diversify (cushion impact of adverse economic conditions in one country, GM)

3 Implications of globalization  Corporations use their economic power to exert substantial economic and political influence over host governments  The traditional American policy & doctrine of independence and self-reliance is now in question  To whom is the corporation loyal?

4 MNC vs. domestic financial management  Different currency denominations-exchange rate considerations  Economic & legal issues  Different tax laws  Common law (UK)  French Civil Law  Language  Culture  Role of government  Are all market places competitive?  Political risk  Nationalizing firms (Venezuela)  Kidnappings

5 Exchange rates  Exchange rate – the number of units of a given currency that can be purchased for one unit of another currency  Direct quote – the number of domestic currency units required to purchase one unit of a foreign currency  ¥6.574 = $1.00  Indirect quote – the number of units of foreign currency that can be purchased for one unit of domestic currency  $0.152 = ¥1.00

6 Exchange rates  Exchange rate fluctuations make it difficult to estimate the dollars that a U.S. overseas operation will produce  Floating exchange rate system – the U.S. and other major trading nations (except China) operate under a floating exchange rate system  Currency rates float with market conditions largely unrestricted by government intervention  Central banks operate in the foreign exchange market to smooth out exchange rate fluctuations  Recent G7 actions to weaken the Japanese yen  See WSJ article  Pages 731-732

7 Exchange rates  Pegged exchange rates – occur when a country establishes a fixed exchange rate with a major currency. Consequently, the values of pegged currencies move together over time.  Convertible currency – a currency that may be readily exchanged for other currencies (pg. 732)

8 Spot rates  Spot rates – the rates paid for delivery of currency “on the spot”  Forward currency exchange – the rate paid for delivery at some agreed-upon future date (30, 90, 180 days)  Forward rate can be at either a premium or discount to the spot rate

9 Parity & risk  Interest rate parity – holds that investors should expect to earn the same return in all countries after adjusting for risk  Purchasing power parity – aka law of one price, implies the level of exchange rates adjusts so that identical goods cost the same in different countries  Political risk – a foreign government may take some action that will decrease the value of the investment  Exchange rate risk – risk of losses due to fluctuations in the value of domestic currency relative to the values of foreign currencies (e.g., dollars vs. yen)

10 Cash flows  The relevant cash flows in international capital budgeting are the (domestic currency) dollars that can be repatriated to the parent company  Eurodollars are U.S. dollars deposited in banks outside the U.S.  Interest rates tied to LIBOR (London Interbank Offer Rate)

11 International capital markets  U.S. firms often raise long-term capital at a lower cost outside the U.S. by selling bonds in the international capital markets  International bonds  Foreign bonds – like domestic bonds except the issuer is a foreign company  Eurobonds – bonds sold in a foreign country but denominated in the currency of the issuing company’s home country

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