solution_manual_for_international_financial_management__10th_edition

SOLUTION MANUAL FOR j j




InternationalFinancialManagement,10thEditionEUNChapter j




j 1-21


CHAPTER1 j




GLOBALIZATION ANDTHEMULTINATIONALFIRM j j




ANSWERS & SOLUTIONS TO END-OF-CHAPTER QUESTIONS AND PROBLEMS
b b b b b b b




QUESTIONS

1. Whyisitimportanttostudyinternationalfinancialmanagement?
j j j j j j




Answer: We are now living in a world where all the major economic functions, such as consumption,
j j j j j j j j j j j j j j j j




production, investment, and financing, are highly globalized.
j j j j j j j j It is thus essential for financial
j j j j j




j managers tofully understand vital internationaldimensions of financialmanagement. This global shift
j j j j j j j j j j j j




j is in marked contrast to a situation that existed when the authors of this book were learning finance a
j j j j j j j j j j j j j j j j j j




few decades ago. At that time, most professors customarily (and safely, to some extent) ignored
j j j j j j j j j j j j j j j




j international aspects of finance. This mode of operation has become untenable since then.
j j j j j j j j j j j j




2. Howisinternationalfinancialmanagementdifferent fromdomestic financialmanagement? j b j b




Answer: Therearethreemajordimensionsthatsetapartinternationalfinancefromdomestic finance.
j j j j j j j j j j j j j




They are:
j j




1. foreignexchangeandpoliticalrisks,
2. marketimperfections,and j j




3. expandedopportunityset. j




3. Discussthemajortrendsthathaveprevailedininternationalbusinessduringthelasttwo
j j j j j j j j j j j j j




j decades.

Answer: The2000sbroughtarapidintegrationofinternationalcapitalandfinancialmarkets. Impetus
j j j j j j j j j j j j j




forglobalizedfinancialmarketsinitiallycamefromthegovernmentsofmajorcountriesthat hadbegunto
j j j j j j j j j j j j j j j




deregulatetheirforeignexchangeandcapitalmarkets. Theeconomic
j j j j j j j j j




©MCGRAW jHILL jLLC. jALL jRIGHTS jRESERVED. jNO jREPRODUCTION jOR jDISTRIBUTION jWITHOUT jTHE jPRIOR jWRITTEN jCONSENT jOF jMCGRAW jHILL jLLC

,integrationandglobalizationthatbeganintheeightiesandninetiesarepickingupspeedinthe 2000s.
j j j j j j j j j j j j j j j j




Tradeliberalizationandeconomicintegrationcontinuedtoproceedatboththeregional andglobal
j j j j j j j j j j j j j j




levels.DespitesovereigndebtcrisisinEurope,moreEUmembercountrieshave adoptedthecommon
j j j j j j j j j j j j j j j




currency,theeuro,thateffectivelybecamethesecondglobalcurrencyafter theU.S.dollar.Inthelastfew
j j j j j j j j j j j j j j j j j j




years,however,economicnationalismhasbeengainingsome popularity,asexemplifiedbytheBrexit
j j j j j j j j j j j j j




decision oftheUnitedKingdom andtheso-called
j j j j j j j




―America First‖ policies of the Trump Administration. Totheextent that economic nationalism is a
j j j j j j j b j b j j




j populist response to the global financial crisis and Great Recession, it may subside as the world
j j j j j j j j j j j j j j j




economy continues to recover.
j j j j




4. Howisacountry‘seconomicwell-beingenhancedthroughfreeinternationaltradeingoods and
j j j j j j j j j j j j j




j services?

Answer: AccordingtoDavidRicardo,withfreeinternationaltrade,itismutuallybeneficialfortwo
j j j j j j j j j j j j j j




j countriestoeachspecializeintheproductionofthegoodsthatitcanproducerelativelymost efficiently
j j j j j j j j j j j j j j j j




andthentradethosegoods. Bydoingso,thetwocountriescanincreasetheircombined production,
j j j j j j j j j j j j j j j j




whichallowsbothcountriestoconsumemoreofbothgoods.Thisargumentremains validevenifa
j j j j j j j j j j j j j j j j j




countrycanproducebothgoodsmoreefficiently inabsolutetermsthantheother country.
j j j j j j j j j j j j j




j Internationaltradeisnota‗zero-sum‘gameinwhichonecountrybenefitsattheexpense ofanother j j j j j j j j j j j j j j




country.Rather,internationaltradecouldbean‗increasing-sum‘gamefromwhichall playersbecome
j j j j j j j j j j j j j j j




winners.
j




5. Whatconsiderationsmight limit theextenttowhichthetheoryofcomparativeadvantageis
j j j j j j j j j j j j




j realistic?

Answer: Thetheoryofcomparativeadvantagewasoriginallyadvancedbythenineteenthcentury
j j j j j j j j j j j j




j economistDavidRicardoasanexplanationforwhynationstradewithoneanother.Thetheory claims
j j j j j j j j j j j j j j j




thateconomicwell-beingisenhancedifeachcountryproduceswhatithasacomparative advantagein
j j j j j j j j j j j j j j j j




producingrelative to othercountries,and thentradeproducts.
j j j j j j j j j




Underlyingthetheoryaretheassumptionsoffreetradebetweennationsandthatthefactorsof
j j j j j j j j j j j j j j j




j production(labor,technologicalknow-how,andcapital)arerelativelyimmobile. Totheextentthat
j j j j j j j j j j j j




j theseassumptionsdonothold,thetheoryofcomparativeadvantagemaynotrealisticallydescribe
j j j j j j j j j j j j j




j internationaltrade. Inaddition,freetradeproduceswinnersandlosersandifthelosersarenot j j j j j j j j j j j j j j j




j compensated,freetrademay faces political opposition from them. j j j j j j j j




6. Whataremultinationalcorporations(MNCs)andwhateconomicrolesdotheyplay?
j j j j j j j




©MCGRAW jHILL jLLC. jALL jRIGHTS jRESERVED. jNO jREPRODUCTION jOR jDISTRIBUTION jWITHOUT jTHE jPRIOR jWRITTEN jCONSENT jOF jMCGRAW jHILL jLLC

,Answer: Amultinationalcorporation(MNC)canbedefinedasabusinessfirmincorporatedinone j j j j j j j j j j j j j j




j countrythathasproductionandsalesoperationsinmanyothercountries.Indeed,someMNCs have
j j j j j j j j j j j j j j




operationsinafewdozensofdifferentcountries. MNCsobtainfinancingfrommajormoney centers
j j j j j j j j j j j j j j j j




aroundtheworldinmanydifferentcurrenciestofinancetheiroperations.Globaloperations forcethe
j j j j j j j j j j j j j j j




treasurer‘sofficetoestablishinternationalbankingrelationships,toplaceshort-term fundsinseveral
j j j j j j j j j j j j j




currencydenominations,andtoeffectivelymanageforeignexchangerisk. By circumventingand
j j j j j j j j j j j j




alsotakingadvantageofvariousmarketimperfections,suchasbarrierstotrade andbarrierstoflowof
j j j j j j j j j j j j j j j j j




peopleandcapitalacrosscountries,MNCscontributetogreaterintegration oftheworldeconomyand
j j j j j j j j j j j j j j j




ingmoreperfectfunctioningofglobalmarkets.
j j j j j j j




7. RossPerot,aformerPresidentialcandidateoftheReformParty,whichwasathirdpolitical party
j j j j j j j j j j j j j j j




j intheUnitedStates,hadstronglyobjectedtothecreationoftheNorthAmericanTrade Agreement
j j j j j j j j j j j j j j j




(NAFTA),whichnonethelesswasinauguratedin1994.Perotfearedthelossof Americanjobsto
j j j j j j j j j j j j j j j




Mexicowhereitismuchcheapertohireworkers.Whatarethemeritsand demeritsofPerot‘sposition
j j j j j j j j j j j j j j j j j j




onNAFTA?ConsideringtherecenteconomicdevelopmentsinNorth America, how would you
j j j j j j j j j j j j j




assess Perot‘s position on NAFTA?
j j j j j




Answer:SincetheinceptionofNAFTA,manyAmericancompaniesindeedhaveinvestedheavily in
j j j j j j j j j j j j j




Mexico,sometimesrelocatingproductionfromtheUnitedStatestoMexico.Althoughthismight have
j j j j j j j j j j j j j j




temporarilycausedunemployment ofsomeAmericanworkers,theywereeventuallyrehired byother
j j j b j j j j j j j j j




industriesoftenforhigherwages.Atthesametime,Mexicohasbeenexperiencinga majoreconomic
j j j j j j j j j j j j j j j j




boom.ItseemsclearthatbothMexicoandtheU.S.havebenefitedfromNAFTA. Perot‘s concern
j j j j j j j j j j j j j j j j




appears to have been ill founded.
j j j j j j




8. In1995,aworkinggroupofFrenchchiefexecutiveofficerswassetupbytheConfederationof
j j j j j j j j j j j j j j j j




j FrenchIndustry(CNPF)andtheFrenchAssociationofPrivateCompanies(AFEP)tostudythe
j j j j j j j j j j j j j




j Frenchcorporategovernancestructure.Thegroupreportedthefollowing,amongotherthings:
j j j j j j j j j j j




―TheboardofdirectorsshouldnotsimplyaimatmaximizingsharevaluesasintheU.K.andthe
j j j j j j j j j j j j j j j j j




U.S.Rather,itsgoalshouldbetoservethecompany,whoseinterestsshouldbeclearly distinguished
j j j j j j j j j j j j j j j




fromthoseofitsshareholders,employees,creditors,suppliersandclientsbutstill equatedwiththeir
j j j j j j j j j j j j j j j




generalcommoninterest,whichistosafeguardtheprosperityandcontinuityof the company‖.Evaluate
j j j j j j j j j j j j j j j




theaboverecommendation oftheworkinggroup.
j j j j j j j




Answer:TherecommendationsoftheFrenchworkinggroupclearlyshowthatshareholder wealth
j j j j j j j j j j j j




maximizationisnotauniversallyacceptedgoalofcorporatemanagement,especially
j j j j j j j j j j j




©MCGRAW jHILL jLLC. jALL jRIGHTS jRESERVED. jNO jREPRODUCTION jOR jDISTRIBUTION jWITHOUT jTHE jPRIOR jWRITTEN jCONSENT jOF jMCGRAW jHILL jLLC

, outsidetheUnitedStatesandpossiblyafewotherAnglo-SaxoncountriesincludingtheUnited Kingdom
j j j j j j j j j j j j j j




andCanada.Tosomeextent,thismayreflectthefactthatshareownershipisnotwide spread in most
j j j j j j j j j j j j j j j j j j j




other countries.
j j




9. Emphasizingtheimportanceofvoluntarycompliance, asopposedtoenforcement, inthe j j j j j j j j j j j




j aftermathofsuchcorporatescandalsasthoseinvolvingEnronandWorldCom,U.S.President
j j j j j j j j j j j j




j GeorgeW.Bushstatedthatwhiletougherlawsmighthelp,―ultimately,theethicsofAmerican j j j j j j j j j j j j j




j businessdependsontheconscienceofAmerica‘sbusinessleaders.‖ Describeyourviewonthis
j j j j j j j j j j j j j




j statement.

Answer: There can be different answers to this question. If business leaders always behave with a high
j j j j j j j j j j j j j j j j




j ethical standard, many of the corporate scandals we have seen lately might not have happened.
j j j j j j j j j j j j j j




Since we cannot fully depend on the ethical behavior on the part of individual business leaders, the
j j j j j j j j j j j j j j j j j




society should protect itself by adopting the rules/regulations and governance structure that would
j j j j j j j j j j j j j




induce business leaders to behave in the interest of the society at large. But at the same time, we need to
j j j j j j j j j j j j j j j j j j j j j




make sure that excessive regulations do not stymy free enterprises, an important engine of economic
j j j j j j j j j j j j j j j




growth.Itisimportanttostriketherightbalance.
j j j j j j j j j




10. SupposeyouareinterestedininvestinginsharesofSamsungElectronicsofKorea,which isa j j j j j j j j j j j j j j j




j worldleaderinmobilephones,TVs,andhomeappliances.Butbeforeyoumakeinvestment decision,
j j j j j j j j j j j j j j




youwouldliketolearnaboutthecompany.VisitthewebsiteofYahoo (http://finance.yahoo.com)and
j j j j j j j j j j j j j j j




collect informationabout SamsungElectronics, including the recentstock pricehistoryandanalysts‘
j j j j j j j j j b j j j




viewsofthecompany.Discusswhatyoulearnaboutthe company.Alsodiscusshowtheinstantaneous
j j j j j j j j j j j j j j j j




accesstoinformationviainternetwouldaffect the nature and workings of financial markets.
j j j j j j j j j j j j j j




Answer:Asstudentsmighthavelearnedfromvisitingthewebsite,informationisreadilyavailable even
j j j j j j j j j j j j j j




forforeigncompanieslikeSamsungElectronics.Readyaccesstointernationalinformation helps
j j j j j j j j j j j




integratefinancialmarkets,dismantlingbarrierstointernationalinvestmentandfinancing. Integration,
j j j j j j j j j j j




however,mayhelpafinancialshockinonemarkettobequicklytransmittedtoother markets.
j j j j j j j j j j j j j j j j




11. Most companies make corporate decisions to maximize their profits, without taking into
b b b b b b b b b b b




consideration the possibly negative effects of corporate activities on the environments, thereby
b b b b b b b b b b b




©MCGRAW jHILL jLLC. jALL jRIGHTS jRESERVED. jNO jREPRODUCTION jOR jDISTRIBUTION jWITHOUT jTHE jPRIOR jWRITTEN jCONSENT jOF jMCGRAW jHILL jLLC