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 Exporting & Importing Product Markets Dividend Remittance & Financing Subsidiaries Investing & Financing International Financial Markets CHAPTER 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 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 firm’s 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 Ô The markets for the various resources used in production are imperfect. Ô ã Theories of International Business • Product Cycle Theory Firm creates product to accommodate local demand Firm exports product to accommodate foreign demand 4a Firm differentiates product from competitors and/or expands product line in foreign country or 4b Firm’s foreign business declines as its competitive advantages are eliminated Firm establishes foreign subsidiary to establish presence in foreign country and possibly to reduce costs 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 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) 10 International Opportunities Cost-benefit Evaluation for Purely Domestic Firms versus MNCs Purely Domestic Firm Marginal Return on Projects MNC MNC Purely Domestic Firm Marginal Cost of Capital Appropriate Size for Purely Domestic Firm X Appropriate Size for MNC Y Asset Level of Firm International Opportunities • Opportunities in Europe Single European Act of 1987 Ô Removal of the Berlin Wall in 1989 Ô Single currency system in 1999 ã Opportunities in Latin America Ô North American Free Trade Agreement (NAFTA) of 1993 Ô General Agreement on Tariffs and Trade (GATT) accord Ô 12 International Opportunities ã Opportunities in Asia Ô Ô Significant growth expected for China Asian economic crisis in 1997-1998 13 Exposure to International Risk • Exposure to Exchange Rate Movements exchange rate fluctuations affect cash flows and foreign demand Exposure to Foreign Economies Ô economic conditions affect demand Exposure to Political Risk Ô political actions affect cash flows Ô ã ã 14 Overview of an MNCs Cash Flows Profile A: MNCs focused on International Trade U.S.based MNC $ for products U.S Customers $ for supplies U.S Businesses $ for exports Foreign Importers $ for imports Foreign Exporters 15 Overview of an MNC’s Cash Flows Profile B: MNCs focused on International Trade and International Arrangements U.S.based MNC $ for products U.S Customers $ for supplies U.S Businesses $ for exports Foreign Importers $ for imports Foreign Exporters $ for service cost of service Foreign Firms 16 Overview of an MNC’s Cash Flows Profile C: MNCs focused on International Trade, International Arrangements, and Direct Foreign Investment U.S.based MNC $ for products U.S Customers $ for supplies U.S Businesses $ for exports Foreign Importers $ for imports Foreign Exporters $ for service cost of service Foreign Firms funds remitted funds invested Foreign Subsidiaries 17 Valuation Model for an MNC • Domestic Model n Value = ∑ t =1 E ( CF$, t ) ( + k) t where E (CF$,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 18 Valuation Model for an MNC • Valuing International Cash Flows [ m ∑ E ( CFj , t ) × E ( ER j , t ) n j =1 Value = ∑ t t =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 MNC’s Value New International Opportunities More Exposure to Foreign Economies More Exposure to Exchange Rate Risk More Exposure to Political Risk [ m ∑ E ( CFj , t ) × E ( ER j , t ) n j =1 Value = ∑ t t =1 + k ( ) ] 20 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 Ô Ô Ô Ô Conflicts against the MNC Goal Impact of MNC’s Management Style on Agency Costs Impact of Corporate Control on Agency Costs Constraints Interfering with the MNC’s Goal 22 Chapter Review • Theories of International Business Theory of Comparative Advantage Ô Imperfect Markets Theory Ô Product Cycle Theory ã International Business Methods Ô International Trade Ô Licensing ¤ Franchising ¤ Joint Ventures ¤ Acquisitions of Existing Operations ¤ Establishing New Foreign Subsidiaries ¤ 23 Chapter Review • International Opportunities Opportunities in Europe Ô Opportunities in Latin America ¤ Opportunities in Asia Exposure to International Risk ¤ Exposure to Exchange Rate Movements Ô Exposure to Foreign Economies Ô Exposure to Political Risk Ô ã 24 Chapter Review ã Overview of an MNC’s Cash Flows • Valuation Model for an MNC Ô Ô Ô Domestic Model Valuing International Cash Flows How Chapters Relate to Valuation 25 ... Dividend Remittance & Financing Subsidiaries Investing & Financing International Financial Markets CHAPTER Multinational Financial Management: An Overview Chapter Objectives • To identify the main... 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... Chapter Review • Theories of International Business Theory of Comparative Advantage Ô Imperfect Markets Theory Ô Product Cycle Theory ã International Business Methods ¤ International Trade ¤ Licensing