Essential of Multinational Business Finance Practical Approach potx

Essential of Multinational Essential of Multinational Business Finance Business Finance Practical Approach Practical Approach Professor M. Vaziri Professor M. Vaziri Content Content Content Content  Chapter 1  Chapter 2  Chapter 3  Chapter 4  Chapter 5  Chapter 6  Chapter 23  Chapter 14 Chapter 14  Chapter 18 Chapter 18  Chapter 15 Chapter 15  Chapter 20 Chapter 20  Chapter 11 Chapter 11  Chapter 22 Chapter 22  International Banking International Banking  International Financial Market International Financial Market Content Content Chapter 1 Chapter 1 Financial Goals and Corporate Financial Goals and Corporate Governance Governance ■ Multinational business enterprise and finance ■ A business having operating subsidiaries, branches, or affiliates located in foreign countries. ■ Can be engaged in virtually every type of business activity, including banking, accounting, consulting, etc. ■ Business activities, primarily financing, which reach beyond the domestic markets. ■ Major risks include interest rate, exchange rate, and credit risks of foreign markets. Content Content Chapter 1 Chapter 1 Financial Goals and Corporate Financial Goals and Corporate Governance Governance ■ Goal of management : Shareholder Wealth Maximization versus Corporate Wealth Maximization ■ Shareholder Wealth Maximization (SWM Model) ■ Is the predominant theory of domestic U.S. firms ■ Assumes that the stock market is efficient and all news (public or private) is reflected in the stock price. ■ Risk = added risk that the firm’s share bring to an established investment portfolio. ■ Systematic Risk = the non-diversifiable risk inherent in the market, therefore it cannot be eliminated. ■ Unsystematic Risk = the diversifiable risk of an individual. Content Content Chapter 1 Chapter 1 Financial Goals and Corporate Financial Goals and Corporate Governance Governance ■ Weaknesses of Shareholder Wealth Maximization (SWM) ■ Short-term gains vs. long-term gains – Some managers attempt to maximize short-term shareholder wealth at the expense of the long- term profitability of the company. ■ Agency Theory Managers and owners may not share the same goals and objectives. Problem arises as shareholders seek effective motivational tools to promote managers conformity to will of shareholders. Content Content Chapter 1 Chapter 1 Financial Goals and Corporate Financial Goals and Corporate Governance Governance ■ Corporate Wealth Maximization ■ The firm treats shareholders as equals to other groups with interest in the firm (management, labor, local community, supplies, creditors, etc). ■ Risk = total risk = Operational + Financial Risk. ■ Concerned with growing the firm for the benefit of all, not exclusively shareholders. ■ Is the predominant theory of many foreign firms. ■ A few foreign firms are adopting the SWM model. Content Content Chapter 1 Chapter 1 Financial Goals and Corporate Financial Goals and Corporate Governance Governance ■ Weaknesses of Corporate Wealth Maximization (CWM) ■ Attempts to satisfy too many parties simultaneously. It may be to provide adequate satisfaction to any single party. ■ Corporate Governance ■ Relationship among firm’s stakeholders to control the objectives and strategic direction of the firm. ■ U.S. and similar markets use the “one share = one vote” voting system. While many foreign firms issues separate classes of voting, limited voting, and non-voting shares. ■ Due to abuses and failures of internal corporate self-governance, government and outside agencies must enact legislation regulating activities. One such law is the Sarbanes-Oxley Act of 2002. Content Content Chapter 1 Chapter 1 Financial Goals and Corporate Financial Goals and Corporate Governance Governance ■ Three major characteristics of Sarbanes-Oxley ■ CEO’s of publicly traded firms must personally certify company’s public financial statements. ■ Corporate boards must have independent auditors. ■ Companies cannot make loans to company directors. Content Content Chapter 1 Chapter 1 Financial Goals and Corporate Financial Goals and Corporate Governance Governance ■ Basics of Corporate Governance ■ The way a corporation directs itself is called corporate governance. Primarily, corporate governance states the techniques that govern the formation of a corporation’s structure and the laws and customs that affect these techniques. ■ A corporation’s structure is composed of three groups: ■ Board of Directors ■ Managers ■ Shareholders Content Content Chapter 2 Chapter 2 International Monetary System International Monetary System (IMS) (IMS) ■ Structure of IMS: Framework within which the foreign Exchange rates are determined, capital flows & international trade are accommodated & Balance of Payments Adjustments are made ■ History of IMS: The Gold Standard (1876-1913):  Gold as a medium of exchange- Pharaohs (3000 PC)  The Greeks, Romans & Persians Used gold coins & passed through the mercantile era to the 19th century  No multinational agreement, but each country declared a par value for its currency in terms of gold based on rule of games or "Gold Standard" [...]... Mercantilism of 19th Century - Need for IMS : Europe adapted the IMS in 1870 & the U.S in 1879  $20.67/Ounce of Gold, £4.274/Ounce:  $20.67/£4.2474=£4.8665/$  Limitation of gold reserve & supply of money  Limit the flow of goods and gold & suspension of GS Inter War Years: 1914-1944 :  Free Fluctuating of Exchange Rates with consideration of the gold and par value of other currencies  Short sell of week... System has officially adopted & continued until present time Chapter 2 International Monetary System (IMS) s s Louvre Agreement s Content Plaza Agreement http://www.econ.iastate.edu /classes/econ355/ choi/cur.htm Chapter 3 Balance of Payment (BOP) s Definition of BOP: Record of transactions between residents of one country & rest of the world s Functions of BOP: s s It is a poor description of National... creation of Eurobond s Mandatory control of direct foreign investment ,control of foreign lending by U.S banks,& high U.S deficit s Content EFTA (1957) & EEC (1959), rapid increase in world trade Official Currency Swaps: Group of Ten Industrialized Nations as a interest credit between central banks Chapter 2 s International Monetary System (IMS) Monetary Development: (1944-1971) s s U.S lost one-third of. .. 5 currency s Content Distribution of the quota is prelude to distribution of vote First $/SDR determined then value of other currencies are measured Chapter 2 s International Monetary System (IMS) Monetary Development: (1944-1971) s s U.S deficit of 1959 & International Monetary Reserve dilemma: BOP deficit to create more reserve for LDCs s Doubt of convertibility of major reserve currencies s "Interest... week currencies, re-evaluation of £, the collapse of the Austrian banking system-total abandonment of GS  s Content Chapter 2 s Content International Monetary System (IMS) The Bretton Wood Agreement: (1944):  Dollar based Monetary System (par value based on $)  Fixed value in term of $, but not required to convert  Only $ remained convertible to gold: $35/Ounce  Only 1% of par allowed for fluctuation... Types of Quotations: (FEM)  Direct Quotation : • Home currency in terms of foreign currency • $/€ =$1.18/€: American Way  Indirect Quotation: • Foreign currency in terms of home currency • €/$= €0.8474/$  Bid & ask spread: • Buy (bid) at €0.8474/$ & ask (offer) at €0.8474/$ • Difference between bid-ask is dealer • Premium=transaction cost Content Chapter 4 Foreign Exchange Market  Types of Quotations:... rate:DG2.9000/$,Forward Rate=DG2.8000/$ Make profit of 2965 or14.82%/Year Forward Market Speculation   Buy back $ at DG2.7=$41,481  Content Buy $40,000*DG2.8=DG112000 Profit=$1,481 Chapter 4 Factors to be considered in forecasting the ER 1 2 3 4 5 6 7 8 9 10 Content Expected changes in spot rate, Inflation rate differential, Interest rate differential, BOP problems, Growth of Money supply Business Cycle, Change in International... National Economy s Content Helps to understand the currency fluctuation of a country s s Helps forecast market potential of a country Useful in measuring economic performance if there is FER $ was indexed at 100 at 1970: If index is greater than 100,$ gain VS other countries currencies Chapter 3 Balance of Payment (BOP) s Accounts of BOP: s Trade Balance : Net balance in merchandise traded s Current... capital +Error & Omission s Unilateral Transfer: no corresponding flow of G&S-non military goods, grants, foreign aids, donation, inheritance s Content Basic Balance: Current account +long term capital (such as direct investment) Capital account: record of investment & payments Chapter 3 Balance of Payment (BOP) s Macro Modeling of BOP: s s C = Agg Consumption & S = Agg Saving s Aggregate Expenditure:... decline : less import means less demand for foreign currency, less supply of domestic currency, and an increase in value of domestic goods, which mean less export Chapter 3 Balance of Payment (BOP) s s No capital account surplus means interest rate will increase & investment & income will decline s Content End Foreign ownership of domestic assets Stimulate savings : If S is greater than Id, we will . Essential of Multinational Essential of Multinational Business Finance Business Finance Practical Approach Practical Approach Professor M. Vaziri Professor M. Vaziri Content Content Content Content  Chapter. 3 Chapter 3 Balance of Payment (BOP) Balance of Payment (BOP) ■ Definition of BOP: Record of transactions between residents of one country & rest of the world ■ Functions of BOP: ■ Helps forecast. one-third of her official gold & president Nixon suspended U.S lost one-third of her official gold & president Nixon suspended convertibility of $ to gold convertibility of $ to gold ■ U.S.