BM024-3.

5-3-ICFIN

International Corporate Finance

Chapter: INTERNATIONAL CORPORATE FINANCE (Revision)

ANSWER 1 The product cycle theory suggests that at some point in time, the firm will attempt to capitalize on its perceived advantages in markets other than where it was initially established. *Students to draw the product life cycle diagram.

ANSWER 2 Governments can place tariffs or quotas on imports to restrict imports. They can also place taxes on income from foreign securities, thereby discouraging investors from purchasing foreign securities. If they loosen restrictions, they can encourage international payments among countries.

ANSWER 3 i. Quantity of pounds that would be demanded at various exchange rates at a specific period of time. Downward sloping because MNCs and individuals (U.S. consumers) will be encouraged to purchase more UK goods when the pounds worth less. Positive relationship between the value of pounds and quantity of pounds for sale (supplied). When the pound is valued high, UK consumers are more likely to purchase U.S. goods. Thus, they supply a greater number of pounds to the market. At $1.50 (lower value), quantity pounds demanded exceed the supply of pounds for sale. Banks experienced a shortage of pounds at that rate. At $1.60 (higher value), quantity pounds demanded would be less than the supply of pounds for sale. Banks experienced a surplus of pounds at that rate. Demand and supply schedule are combined. At $1.55 (middle value), this equates the quantity of pounds demanded with the supply of pounds for sale, at equilibrium point.

ii.

iii.

ANSWER 4 Advantages of fixed exchange rates: Promotes International Trade Necessary for Small Nations Removes Speculation Economic Stabilization Not Permanently Fixed

BM024-3.5-3-ICFIN

International Corporate Finance

Fixed or stable exchange rates ensure certainty about the foreign payments and inspire confidence among the importers and exporters. This helps to promote international trade. Fixed exchange rates are even more essential for the smaller nations like the U.K., Denmark, Belgium, in whose economies foreign trade plays a dominant role. Fluctuating exchange rates will seriously affect the process of economic growth in these economies. Fixed exchange rates eliminate the speculative activities in the international transactions. There is no possibility of panic flight of capital from one country to another in the system of fixed exchange rates. Fixed foreign exchange rate ensures internal economic stabilization and checks unwarranted changes in the prices within the economy. In a system of flexible exchange rates, the liquidity preference is high because the businessmen will like to enjoy wind fall gains from the fluctuating exchange rates. This tends to increase price and hoarding activities in country. Under the fixed exchange rate system, the exchange rate does not remain fixed or is permanently frozen. Rather the rate is changed at the appropriate time to correct the fundamental disequilibrium in the balance of payments. Advantages of floating exchange rates: Independent Monetary Policy Promotes Economic Development Solutions to Balance of Payment Problems Promotes International Trade Market Forces at Work

Under flexible exchange rate system, a country is free to adopt an independent policy to conduct properly the domestic economic affairs. The monetary policy of a country is not limited or affected by the economic conditions of other countries. The flexible exchange rate system promotes economic development and helps to achieve full employment in the country. The exchange rates can be changed in accordance with the requirements of the monetary policy of the country to achieve the planned national objectives. The system of flexible exchange rates automatically removes the disequilibrium in the balance of payments. When, there is deficit in the balance of payments, the external value of a country's currency falls. As a result, exports are encouraged, and imports are discouraged thereby, establishing equilibrium in the balance of payment. The system of flexible exchange rates does not permit exchange control and promotes free trade. Restrictions on international trade are removed and there is free movement of capital and money between countries.

BM024-3.5-3-ICFIN

International Corporate Finance

Under the flexible exchange rate system, the foreign exchange rates are determined by the market forces of demand and supply. Market is cleared off automatically through changes in exchange rates and the possibility of scarcity or surplus of any currency does not exist.

ANSWER 5 Securities Commission. Registrar of Companies. Foreign Investment Committee. KLSE/Bursa Malaysia.

ANSWER 6 i. Regulatory barriers each country enforces its own regulatory constraints pertaining to taxes, currency convertibility, earnings remittance, employee rights, and other policies. Industry barriers local firms may have substantial influence on the government and may use their influence to prevent competition from MNCs

ii.

ANSWER 7 Attitude of consumers in the host country a tendency of residents to purchase only locally produced goods. Actions of the host government A host government might impose pollution control standards and additional corporate taxes, as well as withholding taxes and fund transfer restrictions. Blockage of fund transfers A host government may block fund transfers, which could force subsidiaries to undertake projects that are not optimal (just to make use of the funds). Currency inconvertibility Some governments do not allow the home currency to be exchanged into other currencies. War Conflicts with neighboring countries or internal turmoil can affect the safety of employees hired by an MNCs subsidiary or by salespeople who attempt to establish export markets for the MNC Inefficient bureaucracy Bureaucracy can delay an MNCs efforts to establish a new subsidiary or expand business in a country. Corruption Corruption can occur at the firm level or with firm-government interactions. Transparency International has derived a corruption index for most countries.

BM024-3.5-3-ICFIN

International Corporate Finance

ANSWER 8 o o o o o Prepayment (cash in advance) Letter of credit Consignment Open account Drafts (sight/time)

ANSWER 9 Commercial Invoice exporters (sellers) description (true value; assessment of duties and taxes) of the merchandise being sold to the buyer is the commercial invoice, which contains: Name and address of seller Name and address of buyer Date Terms of payment Price, including freight, handling, and insurance if applicable Quantity, weight, packaging, etc. Shipping information

ANSWER 10 Centralization is said to be a process where the concentration of decision making is in a few hands. All the important decision and actions at the lower level, all subjects and actions at the lower level are subject to the approval of top management. The implication of centralization can be: Reservation of decision making power at top level. Reservation of operating authority with the middle level managers. Reservation of operation at lower level at the directions of the top level.

Under centralization, the important and key decisions are taken by the top management and the other levels are into implementations as per the directions of top level. Decentralization is a systematic delegation of authority at all levels of management and in all of the organization. In a decentralization concern, authority in retained by the top management for taking major decisions and framing policies concerning the whole concern. Rest of the authority may be delegated to the middle level and lower level of management. The degree of centralization and decentralization will depend upon the amount of authority delegated to the lowest level.