Professional Documents
Culture Documents
Introduction
Introduction
FINANCIAL
MANAGEMENT
Fourth Edition
EUN / RESNICK
1-1 Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved.
Globalization & the
Multinational Firm
Objectives:
1-3 Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved.
How is international financial management different from domestic financial management?
There are three major dimensions that set apart international finance from
domestic finance. They are:
1. foreign exchange and political risks,
2. market imperfections, and
3. expanded opportunity set.
1-4 Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved.
Domestic vs. International
Financial Management
1. Scope:
1. Domestic Financial Management: Primarily deals with financial decisions within the
borders of a single country.
2. International Financial Management: Extends the scope to encompass financial decisions
that involve cross-border transactions and operations.
2. Currency:
1. Domestic: Transactions typically involve a single currency.
2. International: Involves multiple currencies, exposing companies to exchange rate risks.
3. Legal and Regulatory Environment:
1. Domestic: Governed by the laws and regulations of a single country.
2. International: Must navigate diverse legal systems, tax structures, and regulatory frameworks
across different countries.
4. Market Dynamics:
1. Domestic: Influenced by local economic conditions and market factors.
2. International: Influenced by global economic trends, geopolitical events, and international
market dynamics.
1-5 Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved.
Importance of International Financial Management
1. Global Expansion:
1. Enables companies to expand their operations and tap into new markets around the world.
2. Risk Management:
1. Helps mitigate risks associated with currency fluctuations, political instability, and diverse
economic conditions.
3. Capital Structure Optimization:
1. Facilitates the optimal mix of debt and equity on a global scale, taking into account different
market conditions.
4. Cost of Capital:
1. Allows companies to access diverse sources of capital and optimize the cost of capital.
5. Diversification:
1. Provides opportunities for portfolio diversification and risk reduction.
6. Access to Resources:
1. Grants access to a broader pool of resources, including skilled labor, technology, and raw
materials.
1-6 Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved.
Challenges of International Financial Management
1-7 Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved.
What’s Special about
“International” Finance?
Foreign Exchange Risk
Political Risk
Market Imperfections
Expanded Opportunity Set
1-8 Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved.
What’s Special about
“International” Finance?
Foreign Exchange Risk
The risk that foreign currency profits may evaporate in
dollar terms due to unanticipated unfavorable
exchange rate movements.
Suppose $1 = ¥100 and you buy 10 shares of Toyota at
¥10,000 per share.
One year later the investment is worth ten percent
more in yen: ¥110,000
But, if the yen has depreciated to $1 = ¥120, your
investment has actually lost money in dollar terms.
1-9 Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved.
What’s Special about
“International” Finance?
Political Risk
Sovereign governments have the right to regulate the
movement of goods, capital, and people across their
borders. These laws sometimes change in unexpected
ways.
1-10 Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved.
What’s Special about
“International” Finance?
Market Imperfections
Legal restrictions on movement of goods,
Shipping costs
Tax arbitrage
1-11 Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved.
The Example of Nestlé’s Market
Imperfection
Nestlé used to issue two different classes of
common stock bearer shares and registered shares.
Foreigners were only allowed to buy bearer shares.
Swiss citizens could buy registered shares.
The bearer stock was more expensive.
On November 18, 1988, Nestlé lifted restrictions
imposed on foreigners, allowing them to hold
registered shares as well as bearer shares.
1-12 Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved.
Nestlé’s Foreign Ownership Restrictions
12,000
10,000
Bearer share
8,000
6,000
SF
4,000
Registered share
2,000
0
11 20 31 9 18 24
Source: Financial Times, November 26, 1988 p.1. Adapted with permission.
1-13 Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved.
The Example of Nestlé’s Market
Imperfection
Following this, the price spread between the two
types of shares narrowed dramatically.
This implies that there was a major transfer of wealth
from foreign shareholders to Swiss shareholders.
Foreigners holding Nestlé bearer shares were
exposed to political risk in a country that is widely
viewed as a haven from such risk.
The Nestlé episode illustrates both the importance
of considering market imperfections and the peril
of political risk.
1-14 Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved.
What’s Special about
“International” Finance?
Expanded Opportunity Set
It doesn’t make sense to play in only one corner
of the sandbox.
True for corporations as well as individual
investors.
1-15 Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved.
Goals for International Financial
Management
The focus of the text is to equip the reader with
the “intellectual toolbox” of an effective global
manager—but what goal should this effective
global manager be working toward?
Maximization of shareholder wealth?
or
Other Goals?
1-16 Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved.
Maximize Shareholder Wealth
Long accepted as a goal in the Anglo-Saxon
countries, but complications arise.
Who are and where are the shareholders?
wealth?
1-17 Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved.
Other Goals
In other countries shareholders are viewed as merely one
among many “stakeholders” of the firm including:
Employees
Suppliers
Customers
In Japan, managers have typically sought to maximize the
value of the keiretsu—a family of firms to which the
individual firms belongs.
1-18 Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved.
Other Goals
As shown by a series of recent corporate scandals
at companies like Enron, WorldCom, and Global
Crossing, managers may pursue their own private
interests at the expense of shareholders when they
are not closely monitored.
These calamities have painfully reinforced the
importance of corporate governance i.e. the
financial and legal framework for regulating the
relationship between a firm’s management and its
shareholders.
1-19 Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved.
Other Goals
These types of issues can be much more serious in
many other parts of the world, especially emerging
and transitional economies, such as Indonesia,
Korea, and Russia, where legal protection of
shareholders is weak or virtually non-existing.
No matter what the other goals, they cannot be
achieved in the long term if the maximization of
shareholder wealth is not given due consideration.
1-20 Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved.
Globalization of the World Economy:
Major Trends
Emergence of Globalized Financial Markets
Emergence of the Euro as a Global Currency
Trade Liberalization and Economic Integration
Privatization
1-21 Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved.
Emergence of Globalized
Financial Markets
Deregulation of Financial Markets
coupled with
Advances in Technology
have greatly reduced information and
transactions costs, which has led to:
Financial Innovations, such as
Currency futures and options
Multi-currency bonds
Cross-border stock listings
International mutual funds
1-22 Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved.
Emergence of the Euro as a Global Currency
1-25 Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved.
Economic Integration
Over the past 50 years, international trade
increased about twice as fast as world GDP.
There has been a sea change in the attitudes of
many of the world’s governments who have
abandoned mercantilist views and embraced free
trade as the surest route to prosperity for their
citizenry.
1-26 Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved.
Liberalization of
Protectionist Legislation
The General Agreement on Tariffs and Trade
(GATT) a multilateral agreement among member
countries has reduced many barriers to trade.
The World Trade Organization has the power to
enforce the rules of international trade.
On January 1, 2005 the end of the era of quotas
on imported textiles ended.
This is an event of historic proportions.
1-27 Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved.
NAFTA
The North American Free Trade Agreement
(NAFTA) calls for phasing out impediments to
trade between Canada, Mexico and the United
States over a 15-year period.
For Mexico, the ratio of export to GDP has
increased dramatically from 2.2% in 1973 to
28.7% in 2001.
The increased trade will result in increased
numbers of jobs and a higher standard of living
for all member nations.
1-28 Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved.
Privatization
1-29 Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved.
Multinational Corporations
1-31 Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved.