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International Financial Management: by Jeff Madura
International Financial Management: by Jeff Madura
International Financial Management: by Jeff Madura
by Jeff Madura
Reference Books
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3
Multinational Financial Management: An
1 Overview
Chapter Objectives
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4
Goal of the MNC
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Managing the MNC
6
Conflicts Against the MNC Goal
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Agency Costs
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Control of Agency Problems
10
Management Structure of MNC
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Exhibit 1.1a Management Styles of MNCs
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Exhibit 1.1b Management Styles of MNCs
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Impact of Management Control
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Constraints Interfering with the MNC’s Goal
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Why Firms Pursue International Business
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Exhibit 1.2 International Product Life Cycles
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How Firms Engage in International Business
1. International trade
2. Licensing
3. Franchising
4. Joint Ventures
5. Acquisitions of existing operations
6. Establishing new foreign subsidiaries
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International Trade
19
Licensing
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Franchising
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Joint Ventures
22
Acquisitions of Existing Operations
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Establishing New Foreign Subsidiaries
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Summary of Methods
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Degree of International Business by MNCs
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International Opportunities
Purely
Investment
Domestic
Opportunities MNC
Marginal Firm
Return on
Projects MNC
Purely
Marginal Domestic
Cost of Firm
Capital
Financing Appropriate Size
Opportunities for Purely Appropriate Size
Domestic Firm for MNC
X Y Asset Level
of Firm
International Opportunities
Opportunities in Europe
• The Single European Act of 1987.
• The removal of the Berlin Wall (Germany) in 1989.
• The inception of the euro in 1999.
Opportunities in Latin America
• The North American Free Trade Agreement (NAFTA) of 1993.
• The General Agreement on Tariffs and Trade (GATT) accord.
Opportunities in Asia
• Reduction in investment restrictions by many Asian countries during the 1990s.
• China’s potential for growth.
• The Asian economic crisis in 1997-1998.
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International business usually increases an
MNC’s exposure to:
Exchange Rate Movements
• Exchange rate fluctuations affect cash flows and
foreign demand.
Foreign Economies
• Economic conditions affect demand.
Political Risk
• Political actions affect cash flows.
Exhibit 1.3 Cash Flow Diagrams for MNCs
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Valuation Model for an MNC:
Domestic Model
E CF$,t
n
V t
t 1 1 k
Where
• V represents present value of expected cash flows
• E(CF$,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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Valuation Model for an MNC:
Multinational Model
E CF$,t E CF j ,t E S j ,t
m
j 1
Where
• CFj,t represents the amount of cash flow denominated in a
particular foreign currency j at the end of period t,
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Valuation Model for an MNC
An MNC that uses two or more currencies
E CF$,t E CF j ,t E S j ,t
m
j 1
• Derive an expected dollar cash flow value for each currency
• Combine the cash flows among currencies within a given
period
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Uncertainty Surrounding MNC Cash Flows
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How Uncertainty Affects the MNC’s cost of Capital
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Exhibit 1.4 How an MNC’s Valuation is Exposed to
Uncertainty
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Valuation Model for an MNC
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