CHAPTER 1

Multinational Financial Management: An Overview

Chapter Overview
A. Managing the MNC B. Why Firms Pursue International Business C. How Firms Engage in International Business D. Valuation Model for an MNC

Chapter 1 Objectives
This chapter will: A. Identify the management goal and organizational structure of the Multinational Corporation (MNC). B. Describe the key theories that justify international business C. Explain the common methods used to conduct international business D. Provide a model for valuing the MNC

Insert chart from page 2

A. Managing the MNC

1. Management and Agency Problems a. Parent Control b. Corporate Control 1.) How Sarbanes-Oxley (SOX) Improved MNCs Corporate Governance

A. Managing the MNC

2.) Common Methods to Improve Control
Establishing a centralized database of information Ensuring that all data are reported consistently among subsidiaries Implementing a system that automatically checks data for unusual discrepancies Speeding the process by which all departments and subsidiaries have access to data needed Making executives more accountable for financial statements by personally verifying accuracy
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A. Managing the MNC

3. Facing Agency Problems 4. Management Structure of an MNC a. How the Internet Facilitates Management Control

B. Why Firms Pursue International Business

1. Theory of Comparative Advantage 2. Imperfect Markets Theory 3. Product Cycle Theory

International Product Life Cycles

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C. Why Firms Engage in International Business

1. International Trade
a. How the Internet Facilitates International Trade

2. Licensing
a. How the Internet Facilitates Licensing

3. 4. 5. 6.

Franchising Joint Ventures Acquisition of Existing Operations Establishing New Foreign Subsidiaries
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C. Why Firms Engage in International Business

Summary of Methods by Risk
Franchising and Joint Ventures New Foreign Subsidiaries FDI

Foreign Acquisitions

LEAST RISK Degrees of Risk to MNC

MOST RISK

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D. Valuation Model for an MNC

1. Domestic Model

[E (CF$,t )] V = t 1= k) t =1 (
n

where E(CF$,t) represents expected cash flows to be received at the end of period t, n represents the number of periods into the future in which cash flows are received, and k represents the required rate of return by investors.
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D. Valuation Model for an MNC

2. Valuing International Cash Flows

E (CF$,t ) = E (CFj ,t ) E (S j ,t )
m j =1

where CFj,t represents the amount of cash flow denominated in a particular foreign currency j at the end of period t, Sj,t represents the exchange rate at which the foreign currency (measured in dollars per unit of the foreign currency) can be converted to dollars at the end of period t.
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D. Valuation Model for an MNC

3. MNCs Cash Flow Uncertainty a. Exposure to International Economic Conditions b. Exposure to International Political Risk

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Cash Flow Diagrams for MNCs

Insert Exhibit 1.3 from page 11

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