Solutions
̦̣ Manual
̦̣ for International Financial Management 15th Edition by Jeff Madura
̦̣
and Chad Zipfel
,Chapter 1
Multinational
̦̣ Financial Management: An Overview
Lecture
̦̣ Outline
̦̣
Managing the MNC
How Business
̦̣ Disciplines Are Used to Manage the MNC
Agency Problems
Management Structu
̦̣ re
̦̣ of an MNC
Why Firms Pursu
̦̣ e̦̣ International Business
̦̣
Theory of Comparative Advantage
Imperfect Markets Theory
Product
̦̣ Cycle Theory
Methods to Conduct
̦̣ International Business
̦̣
International Trade
Licensing
Franchising
Joint Ventures
̦̣
Acquisitions
̦̣ of Existing Operations
Establishing New Foreign Subsidiaries
̦̣
Summary
̦̣ of Methods
Valuation
̦̣ Model for an MNC
Domestic Valuation
̦̣ Model
Multinational
̦̣ Valu ation
̦̣ Model
Uncertainty Surrou̦̣ nding
̦̣ an MNC’s Cash Flows
How Uncertainty Affects the MNC’s Cost of Capital
Organization of the Text
, Multinational
̦̣ Financial Management: An Overview2
Chapter Theme
This chapter introduceș̣ the multinational
̦̣ corporation as having similar goals to the purely ̦̣ domestic
corporation, buț̣ a wider variety of opportunities.
̦̣ With additional opportunities
̦̣ come potential increased
returns
̦̣ and other forms of risk to consider. The potential benefits and risks are introdu ced.
̦̣
Topics to Stimulate
̦̣ Class Discussion
̦̣
1. What is the appropriate definition of an MNC?
2. Why does an MNC expand internationally?
3. What are the risks of an MNC which expands internationally?
4. Why must
̦̣ purely
̦̣ domestic firms be concerned abouț̣ the international environment?
POINT/COUNTER-POINT:
Should
̦̣ an MNC Reduce
̦̣ Its Ethical Standards to Compete Internationally?
POINT: Yes. When a U.S.-based MNC competes in some countries, ̦̣ it may encounter
̦̣ some business
̦̣
norms there that are not allowed in the U.S. For example, when competing for a government contract,
firms might provide payoffs to the government officials who will make the decision. Yet, in the United
States, a firm will sometimes take a client on an expensive golf outing
̦̣ or provide skybox tickets to
events. This is no different than a payoff. If the payoffs are bigger in some foreign countries,
̦̣ the MNC
can compete only by matching the payoffs provided by its competitors.
COUNTER-POINT: No. A U.S.-based MNC should ̦̣ maintain a standard code of ethics that applies to any
country,
̦̣ even if it is at a disadvantage in a foreign cou ntry
̦̣ that allows activities that might be viewed as
unethical.
̦̣ In this way, the MNC establishes more credibility worldwide.
WHO IS CORRECT? Use the Internet to learn more abouț̣ this issue.
̦̣ Which argument
̦̣ do you ̦̣ support?
̦̣
Offer your̦̣ own opinion on this issue.
̦̣
ANSWER: The issue̦̣ is frequently ̦̣ discussed.
̦̣ It is easy to suggest
̦̣ that the MNC should ̦̣ maintain a
standard code of ethics, buț̣ in reality, that means that it will not be able to compete in some cases. For
example, even if it submits
̦̣ the lowest bid on a specific foreign government project, it will not receive the
bid withouț̣ a payoff to the foreign government officials. The issue̦̣ is especially a concern for large
projects that may generate substantial
̦̣ cash flows for the firm that is chosen to do the project. Ideally, the
MNC can clearly demonstrate to whoever oversees the decision process that it deserves to be selected. If
there is just
̦̣ one decision-maker with no oversight, an MNC can not ensure ̦̣ that the decision will be
ethical. Buț̣ if the decision-maker must ̦̣ be accountable
̦̣ to a department who oversees the decision, the
MNC may be able to prompt the department to ensure ̦̣ that the process is ethical.
, Multinational
̦̣ Financial Management: An Overview3
Answers to End of Chapter Questions
̦̣
1.Agency Problems of MNCs.
a. Explain the agency problem of MNCs.
ANSWER: The agency problem reflects a conflict of interests between decision-making managers
and the owners of the MNC. Agency costs occur̦̣ in an effort to assure
̦̣ that managers act in the best
interest of the owners.
b.Why might agency costs be larger for an MNC than for a purely
̦̣ domestic firm?
ANSWER: The agency costs are normally larger for MNCs than purely ̦̣ domestic firms for the
following reasons. First, MNCs incur̦̣ larger agency costs in monitoring managers of distant foreign
subsidiaries.
̦̣ Second, foreign subsidiary
̦̣ managers raised in different cultu
̦̣ res
̦̣ may not follow
uniform
̦̣ goals, and some managers may focuș̣ on satisfying respective employees. Third, the sheer
size of the larger MNCs would ̦̣ also create large agency problems.
2.Comparative Advantage.
a. Explain how the theory of comparative advantage relates to the need for international business.
̦̣
ANSWER: The theory of comparative advantage implies that countries ̦̣ should̦̣ specialize in
production,
̦̣ thereby relying on other cou ntries
̦̣ for some products.
̦̣ Consequently,
̦̣ there is a need for
international business.
̦̣
b. Explain how the product
̦̣ cycle theory relates to the growth of an MNC.
ANSWER: 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.
3.Imperfect Markets.
a. Explain how the existence of imperfect markets has led to the establishment of subsidiaries
̦̣ in
foreign markets.
ANSWER: Because ̦̣ of imperfect markets, resources
̦̣ cannot be easily and freely retrieved by the
MNC. Consequently,̦̣ the MNC musț̣ sometimes go to the resources
̦̣ rather than retrieve resources
̦̣
(such
̦̣ as land, labor, etc.).
b. If perfect markets existed, would ̦̣ wages, prices, and interest rates among countries
̦̣ be more
similar or less similar than under
̦̣ conditions of imperfect markets? Why?
ANSWER: If perfect markets existed, resources ̦̣ would̦̣ be more mobile and could̦̣ therefore be
transferred to those countries
̦̣ more willing to pay a high price for them. As this occurred,̦̣ shortages
of resources
̦̣ in any particular
̦̣ country
̦̣ would
̦̣ be alleviated and the costs of such
̦̣ resources
̦̣ would
̦̣ be
similar across countries.
̦̣
4. International Opportunities.
̦̣
̦̣ Manual
̦̣ for International Financial Management 15th Edition by Jeff Madura
̦̣
and Chad Zipfel
,Chapter 1
Multinational
̦̣ Financial Management: An Overview
Lecture
̦̣ Outline
̦̣
Managing the MNC
How Business
̦̣ Disciplines Are Used to Manage the MNC
Agency Problems
Management Structu
̦̣ re
̦̣ of an MNC
Why Firms Pursu
̦̣ e̦̣ International Business
̦̣
Theory of Comparative Advantage
Imperfect Markets Theory
Product
̦̣ Cycle Theory
Methods to Conduct
̦̣ International Business
̦̣
International Trade
Licensing
Franchising
Joint Ventures
̦̣
Acquisitions
̦̣ of Existing Operations
Establishing New Foreign Subsidiaries
̦̣
Summary
̦̣ of Methods
Valuation
̦̣ Model for an MNC
Domestic Valuation
̦̣ Model
Multinational
̦̣ Valu ation
̦̣ Model
Uncertainty Surrou̦̣ nding
̦̣ an MNC’s Cash Flows
How Uncertainty Affects the MNC’s Cost of Capital
Organization of the Text
, Multinational
̦̣ Financial Management: An Overview2
Chapter Theme
This chapter introduceș̣ the multinational
̦̣ corporation as having similar goals to the purely ̦̣ domestic
corporation, buț̣ a wider variety of opportunities.
̦̣ With additional opportunities
̦̣ come potential increased
returns
̦̣ and other forms of risk to consider. The potential benefits and risks are introdu ced.
̦̣
Topics to Stimulate
̦̣ Class Discussion
̦̣
1. What is the appropriate definition of an MNC?
2. Why does an MNC expand internationally?
3. What are the risks of an MNC which expands internationally?
4. Why must
̦̣ purely
̦̣ domestic firms be concerned abouț̣ the international environment?
POINT/COUNTER-POINT:
Should
̦̣ an MNC Reduce
̦̣ Its Ethical Standards to Compete Internationally?
POINT: Yes. When a U.S.-based MNC competes in some countries, ̦̣ it may encounter
̦̣ some business
̦̣
norms there that are not allowed in the U.S. For example, when competing for a government contract,
firms might provide payoffs to the government officials who will make the decision. Yet, in the United
States, a firm will sometimes take a client on an expensive golf outing
̦̣ or provide skybox tickets to
events. This is no different than a payoff. If the payoffs are bigger in some foreign countries,
̦̣ the MNC
can compete only by matching the payoffs provided by its competitors.
COUNTER-POINT: No. A U.S.-based MNC should ̦̣ maintain a standard code of ethics that applies to any
country,
̦̣ even if it is at a disadvantage in a foreign cou ntry
̦̣ that allows activities that might be viewed as
unethical.
̦̣ In this way, the MNC establishes more credibility worldwide.
WHO IS CORRECT? Use the Internet to learn more abouț̣ this issue.
̦̣ Which argument
̦̣ do you ̦̣ support?
̦̣
Offer your̦̣ own opinion on this issue.
̦̣
ANSWER: The issue̦̣ is frequently ̦̣ discussed.
̦̣ It is easy to suggest
̦̣ that the MNC should ̦̣ maintain a
standard code of ethics, buț̣ in reality, that means that it will not be able to compete in some cases. For
example, even if it submits
̦̣ the lowest bid on a specific foreign government project, it will not receive the
bid withouț̣ a payoff to the foreign government officials. The issue̦̣ is especially a concern for large
projects that may generate substantial
̦̣ cash flows for the firm that is chosen to do the project. Ideally, the
MNC can clearly demonstrate to whoever oversees the decision process that it deserves to be selected. If
there is just
̦̣ one decision-maker with no oversight, an MNC can not ensure ̦̣ that the decision will be
ethical. Buț̣ if the decision-maker must ̦̣ be accountable
̦̣ to a department who oversees the decision, the
MNC may be able to prompt the department to ensure ̦̣ that the process is ethical.
, Multinational
̦̣ Financial Management: An Overview3
Answers to End of Chapter Questions
̦̣
1.Agency Problems of MNCs.
a. Explain the agency problem of MNCs.
ANSWER: The agency problem reflects a conflict of interests between decision-making managers
and the owners of the MNC. Agency costs occur̦̣ in an effort to assure
̦̣ that managers act in the best
interest of the owners.
b.Why might agency costs be larger for an MNC than for a purely
̦̣ domestic firm?
ANSWER: The agency costs are normally larger for MNCs than purely ̦̣ domestic firms for the
following reasons. First, MNCs incur̦̣ larger agency costs in monitoring managers of distant foreign
subsidiaries.
̦̣ Second, foreign subsidiary
̦̣ managers raised in different cultu
̦̣ res
̦̣ may not follow
uniform
̦̣ goals, and some managers may focuș̣ on satisfying respective employees. Third, the sheer
size of the larger MNCs would ̦̣ also create large agency problems.
2.Comparative Advantage.
a. Explain how the theory of comparative advantage relates to the need for international business.
̦̣
ANSWER: The theory of comparative advantage implies that countries ̦̣ should̦̣ specialize in
production,
̦̣ thereby relying on other cou ntries
̦̣ for some products.
̦̣ Consequently,
̦̣ there is a need for
international business.
̦̣
b. Explain how the product
̦̣ cycle theory relates to the growth of an MNC.
ANSWER: 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.
3.Imperfect Markets.
a. Explain how the existence of imperfect markets has led to the establishment of subsidiaries
̦̣ in
foreign markets.
ANSWER: Because ̦̣ of imperfect markets, resources
̦̣ cannot be easily and freely retrieved by the
MNC. Consequently,̦̣ the MNC musț̣ sometimes go to the resources
̦̣ rather than retrieve resources
̦̣
(such
̦̣ as land, labor, etc.).
b. If perfect markets existed, would ̦̣ wages, prices, and interest rates among countries
̦̣ be more
similar or less similar than under
̦̣ conditions of imperfect markets? Why?
ANSWER: If perfect markets existed, resources ̦̣ would̦̣ be more mobile and could̦̣ therefore be
transferred to those countries
̦̣ more willing to pay a high price for them. As this occurred,̦̣ shortages
of resources
̦̣ in any particular
̦̣ country
̦̣ would
̦̣ be alleviated and the costs of such
̦̣ resources
̦̣ would
̦̣ be
similar across countries.
̦̣
4. International Opportunities.
̦̣
