Principles of Managerial
Finance
16th Edition
By Chad Zutter, Scott
Smart
(Solutions Manual All
Chapters 100% Original
Verified, A+ Grade)
All Chapters Arranged Reverse: 19-1
,Chapter 19
International Managerial Finance
Instructor’s Resources
Overview
In today’s global business environment, the financial manager must also be aware of the international aspects of
finance. A variety of international finance topics are presented in this chapter, including taxes, accounting
practices, risk, the international capital markets, and the effect on capital structure of operating in different
countries. This chapter discusses limited techniques but provides a broad overview of the financial considerations
of the multinational corporation (MNC). Chapter 19 highlights the fact that international differences in culture,
currencies, and taxes impact the student’s personal life as well as his or her future professional activities.
Suggested Answer to Opener-in-Review Question
In the chapter opener you read about how appreciation of the dollar against other world currencies led to
significant currency losses at WD-40. Suppose that WD-40’s quarterly operating profit in countries that use
the euro as their currency averages €4 million and the exchange rate is $1 = €0.88. How much would WD-
40’s euro-based profit be worth in dollars? What if the exchange rate is $1 = €0.95?
4 million euros converted to dollars when each dollar is worth 0.88 euros equals 4,000,000 ÷ 0.88 = $4,545,454.
But when each dollar is worth 0.95 euros, the translated value is just $4,210,526.
Answers to Review Questions
1. One of the most important trading blocs was created in 2020 when the former parties to the North American
Free Trade Agreement (NAFTA) agreed to a new compact called the United States Mexico Canada Agreement
(USMCA). This treaty establishes mostly free trade and open markets between Canada, Mexico, and the
United States, although it does contain provisions to protect some domestic industries. Like USMCA, the
European Union (EU) is a trading bloc designed to eliminate tariff barriers and create a single marketplace.
Twenty-seven countries, representing almost half a billion people, are members of the EU. The EU has
established a single currency called the euro for 19 member countries. Mercosur is a trading bloc in Latin
America. However, the largest one is the Regional Comprehensive Economic Partnership (RCEP), which
covers roughly 30% of the world’s population and GDP. Countries also participate in bilateral and regional
trade agreements.
An important component of free trade among countries, including those not part of one of the three trading
blocs, is the General Agreement on Tariffs and Trade (GATT). GATT extends free trade to broad areas of
© 2022 Pearson Education, Inc.
,438 Zutter/Smart • Principles of Managerial Finance, Sixteenth Edition
activity—such as agriculture, financial services, and intellectual property—to any member country. GATT
also established the World Trade Organization (WTO) to police and mediate disputes between member
countries.
2. A joint venture is a partnership under which the participants have contractually agreed to contribute specified
amounts of money and expertise in exchange for stated proportions of ownership and profit. It is essential to
use this type of arrangement in countries requiring that majority ownership of MNC joint venture projects be
held by domestically based investors.
Laws and restrictions regarding joint ventures have effects on MNC operations in four major areas:
(1) majority foreign ownership reduces management control by the MNC, (2) disputes over distribution of
income and reinvestment frequently occur, (3) ceilings cap profit remittances to parent company, and
(4) political risk exposure.
3. The key benefits of the Tax Cuts and Jobs Act are the reduction in the corporate tax rate to 21% and the
provision that profits that a U.S. MNC earns abroad are not subject to U.S. taxes when they are repatriated
back to the U.S.
4. The Euromarket provides multinational companies with an external (outside their country of origin)
opportunity to borrow or lend funds and to do so with less government regulation. At the beginning, the
Euromarket consisted of dollar-denominated bank deposits in European banks. Today, instruments
denominated in a wide range of currencies other than the U.S. dollar trade in this market. Those financial
instruments are not limited to basic money market instruments but also include long-term bonds and even
derivatives such as futures and swaps.
5. FASB No. 52 requires MNCs first to convert the financial statement accounts of foreign subsidiaries into
functional currency (the currency of the economy where the entity primarily generates and spends cash and
where its accounts are maintained) and then to translate the accounts into the parent firm’s currency, using the
all-current-rate method. Under the temporal method, specific assets are translated at historical exchange rates,
and the foreign-exchange translation gains or losses are reflected in the current year’s income. By
comparison, under the all-current-rate method, gains or losses are charged to a separate component of
stockholders’ equity.
6. The spot exchange rate is the rate of exchange between two currencies on any given day. The forward
exchange rate is the rate at which parties agree today to trade currencies on some future date. Foreign
exchange fluctuation affects individual accounts in the financial statements; this risk is called accounting
exposure. Economic exposure is the risk arising from the potential impact of exchange rate fluctuations on a
firm’s value. Accounting exposure demonstrates paper translation losses, while economic exposure is the
potential for real loss.
7. If one country experiences a higher inflation rate than a country it trades with, the high inflation country will
experience a decline (depreciation) in the value of its currency. This depreciation results from the fact that
relatively high inflation causes the price of goods to increase. Foreign purchasers will decrease their demand
for products from the country with high inflation due to the higher cost. This decrease in demand forces the
value of the inflated currency to decline to bring the exchange-rate-adjusted price back into line with pre-
inflation prices.
© 2022 Pearson Education, Inc.
, Chapter 19 International Managerial Finance 439
8. Macro political risk means that uncertainty due to political change, all foreign firms in the country will be
affected. Micro political risk is specific to the individual firm or industry that is targeted for nationalization.
Recent years have also seen the emergence of a third path to political risk; this path encompasses “global”
events such as terrorism, antiglobalization movements, and Internet-based risks, all of which affect various
multinational corporations’ operations worldwide.
9. If cash flows are blocked by local authorities, the net present value (NPV) of a project and its level of return
is “normal,” from the subsidiary’s point of view. From the parent’s perspective, however, NPV in terms of
repatriated cash flows may actually be “zero.” The life of a project, of course, can prove to be quite important.
For longer projects, even if the cash flows are blocked during the first few years, there can still be meaningful
NPV from the parent’s point of view if later years’ cash flows are permitted to be freely repatriated back to
the parent.
10. Several factors cause MNCs’ capital structure to differ from that of purely domestic firms. Because MNCs
have access to international bond and equity markets, and therefore to a greater variety of financial
instruments, certain capital components may have lower costs. The particular currency markets to which the
MNC has access will also affect capital structure. The ability to diversify internationally also affects capital
structure and may result in either higher leverage and/or higher agency costs. The differing political, legal,
financial, and social aspects of each country can also impact capital structure considerations.
11. A foreign bond is an international bond sold primarily in the country of the currency in which it is issued. A
Eurobond is sold primarily in countries other than the country of the currency in which the issue is
denominated. Foreign bonds are generally sold by those resident underwriting institutions that normally
handle bond issues. Eurobonds are usually handled by an international syndicate of financial institutions
based in the United States or Western Europe. In the case of foreign bonds, interest rates are generally directly
correlated with the domestic rates prevailing in the respective countries. For Eurobonds, several domestic and
international (Euromarket) interest rates can influence the actual rates applicable to these bonds.
12. In terms of potential political risks and adverse actions by a host government, having more local debt (and
thus more local investors or investments) in a foreign project can prove to be a valuable protective measure
over the long run. This strategy will likely cause the local government to be less threatening in the event of
governmental or regulatory changes, since the larger amount of local sources of financing are included in the
subsidiary’s capital structure.
13. The Eurocurrency market provides short-term foreign currency financing to MNC subsidiaries. Supply and
demand are major factors influencing exchange rates in this market. In international markets, the nominal
interest rate is the stated interest rate charged when only the MNC’s parent currency is involved. Effective
interest rates are nominal rates adjusted for any forecast changes in the foreign currency relative to the parent
MNC’s currency. Consideration of effective rates of interest is critical to any MNC investment and borrowing
decisions.
14. In dealing with “third parties,” when the subsidiary’s local currency is expected to appreciate in value,
attempts must be made to increase accounts receivable and to decrease accounts payable. The net result would
be to increase the subsidiary’s resources in the local currency when it is expected to appreciate relative to the
parent MNC’s currency.
15. When it is expected that the subsidiary’s local currency will depreciate relative to the “home” currency of the
parent, intra-MNC accounts payable must be paid as soon as possible while intra-MNC accounts receivable
© 2022 Pearson Education, Inc.
Finance
16th Edition
By Chad Zutter, Scott
Smart
(Solutions Manual All
Chapters 100% Original
Verified, A+ Grade)
All Chapters Arranged Reverse: 19-1
,Chapter 19
International Managerial Finance
Instructor’s Resources
Overview
In today’s global business environment, the financial manager must also be aware of the international aspects of
finance. A variety of international finance topics are presented in this chapter, including taxes, accounting
practices, risk, the international capital markets, and the effect on capital structure of operating in different
countries. This chapter discusses limited techniques but provides a broad overview of the financial considerations
of the multinational corporation (MNC). Chapter 19 highlights the fact that international differences in culture,
currencies, and taxes impact the student’s personal life as well as his or her future professional activities.
Suggested Answer to Opener-in-Review Question
In the chapter opener you read about how appreciation of the dollar against other world currencies led to
significant currency losses at WD-40. Suppose that WD-40’s quarterly operating profit in countries that use
the euro as their currency averages €4 million and the exchange rate is $1 = €0.88. How much would WD-
40’s euro-based profit be worth in dollars? What if the exchange rate is $1 = €0.95?
4 million euros converted to dollars when each dollar is worth 0.88 euros equals 4,000,000 ÷ 0.88 = $4,545,454.
But when each dollar is worth 0.95 euros, the translated value is just $4,210,526.
Answers to Review Questions
1. One of the most important trading blocs was created in 2020 when the former parties to the North American
Free Trade Agreement (NAFTA) agreed to a new compact called the United States Mexico Canada Agreement
(USMCA). This treaty establishes mostly free trade and open markets between Canada, Mexico, and the
United States, although it does contain provisions to protect some domestic industries. Like USMCA, the
European Union (EU) is a trading bloc designed to eliminate tariff barriers and create a single marketplace.
Twenty-seven countries, representing almost half a billion people, are members of the EU. The EU has
established a single currency called the euro for 19 member countries. Mercosur is a trading bloc in Latin
America. However, the largest one is the Regional Comprehensive Economic Partnership (RCEP), which
covers roughly 30% of the world’s population and GDP. Countries also participate in bilateral and regional
trade agreements.
An important component of free trade among countries, including those not part of one of the three trading
blocs, is the General Agreement on Tariffs and Trade (GATT). GATT extends free trade to broad areas of
© 2022 Pearson Education, Inc.
,438 Zutter/Smart • Principles of Managerial Finance, Sixteenth Edition
activity—such as agriculture, financial services, and intellectual property—to any member country. GATT
also established the World Trade Organization (WTO) to police and mediate disputes between member
countries.
2. A joint venture is a partnership under which the participants have contractually agreed to contribute specified
amounts of money and expertise in exchange for stated proportions of ownership and profit. It is essential to
use this type of arrangement in countries requiring that majority ownership of MNC joint venture projects be
held by domestically based investors.
Laws and restrictions regarding joint ventures have effects on MNC operations in four major areas:
(1) majority foreign ownership reduces management control by the MNC, (2) disputes over distribution of
income and reinvestment frequently occur, (3) ceilings cap profit remittances to parent company, and
(4) political risk exposure.
3. The key benefits of the Tax Cuts and Jobs Act are the reduction in the corporate tax rate to 21% and the
provision that profits that a U.S. MNC earns abroad are not subject to U.S. taxes when they are repatriated
back to the U.S.
4. The Euromarket provides multinational companies with an external (outside their country of origin)
opportunity to borrow or lend funds and to do so with less government regulation. At the beginning, the
Euromarket consisted of dollar-denominated bank deposits in European banks. Today, instruments
denominated in a wide range of currencies other than the U.S. dollar trade in this market. Those financial
instruments are not limited to basic money market instruments but also include long-term bonds and even
derivatives such as futures and swaps.
5. FASB No. 52 requires MNCs first to convert the financial statement accounts of foreign subsidiaries into
functional currency (the currency of the economy where the entity primarily generates and spends cash and
where its accounts are maintained) and then to translate the accounts into the parent firm’s currency, using the
all-current-rate method. Under the temporal method, specific assets are translated at historical exchange rates,
and the foreign-exchange translation gains or losses are reflected in the current year’s income. By
comparison, under the all-current-rate method, gains or losses are charged to a separate component of
stockholders’ equity.
6. The spot exchange rate is the rate of exchange between two currencies on any given day. The forward
exchange rate is the rate at which parties agree today to trade currencies on some future date. Foreign
exchange fluctuation affects individual accounts in the financial statements; this risk is called accounting
exposure. Economic exposure is the risk arising from the potential impact of exchange rate fluctuations on a
firm’s value. Accounting exposure demonstrates paper translation losses, while economic exposure is the
potential for real loss.
7. If one country experiences a higher inflation rate than a country it trades with, the high inflation country will
experience a decline (depreciation) in the value of its currency. This depreciation results from the fact that
relatively high inflation causes the price of goods to increase. Foreign purchasers will decrease their demand
for products from the country with high inflation due to the higher cost. This decrease in demand forces the
value of the inflated currency to decline to bring the exchange-rate-adjusted price back into line with pre-
inflation prices.
© 2022 Pearson Education, Inc.
, Chapter 19 International Managerial Finance 439
8. Macro political risk means that uncertainty due to political change, all foreign firms in the country will be
affected. Micro political risk is specific to the individual firm or industry that is targeted for nationalization.
Recent years have also seen the emergence of a third path to political risk; this path encompasses “global”
events such as terrorism, antiglobalization movements, and Internet-based risks, all of which affect various
multinational corporations’ operations worldwide.
9. If cash flows are blocked by local authorities, the net present value (NPV) of a project and its level of return
is “normal,” from the subsidiary’s point of view. From the parent’s perspective, however, NPV in terms of
repatriated cash flows may actually be “zero.” The life of a project, of course, can prove to be quite important.
For longer projects, even if the cash flows are blocked during the first few years, there can still be meaningful
NPV from the parent’s point of view if later years’ cash flows are permitted to be freely repatriated back to
the parent.
10. Several factors cause MNCs’ capital structure to differ from that of purely domestic firms. Because MNCs
have access to international bond and equity markets, and therefore to a greater variety of financial
instruments, certain capital components may have lower costs. The particular currency markets to which the
MNC has access will also affect capital structure. The ability to diversify internationally also affects capital
structure and may result in either higher leverage and/or higher agency costs. The differing political, legal,
financial, and social aspects of each country can also impact capital structure considerations.
11. A foreign bond is an international bond sold primarily in the country of the currency in which it is issued. A
Eurobond is sold primarily in countries other than the country of the currency in which the issue is
denominated. Foreign bonds are generally sold by those resident underwriting institutions that normally
handle bond issues. Eurobonds are usually handled by an international syndicate of financial institutions
based in the United States or Western Europe. In the case of foreign bonds, interest rates are generally directly
correlated with the domestic rates prevailing in the respective countries. For Eurobonds, several domestic and
international (Euromarket) interest rates can influence the actual rates applicable to these bonds.
12. In terms of potential political risks and adverse actions by a host government, having more local debt (and
thus more local investors or investments) in a foreign project can prove to be a valuable protective measure
over the long run. This strategy will likely cause the local government to be less threatening in the event of
governmental or regulatory changes, since the larger amount of local sources of financing are included in the
subsidiary’s capital structure.
13. The Eurocurrency market provides short-term foreign currency financing to MNC subsidiaries. Supply and
demand are major factors influencing exchange rates in this market. In international markets, the nominal
interest rate is the stated interest rate charged when only the MNC’s parent currency is involved. Effective
interest rates are nominal rates adjusted for any forecast changes in the foreign currency relative to the parent
MNC’s currency. Consideration of effective rates of interest is critical to any MNC investment and borrowing
decisions.
14. In dealing with “third parties,” when the subsidiary’s local currency is expected to appreciate in value,
attempts must be made to increase accounts receivable and to decrease accounts payable. The net result would
be to increase the subsidiary’s resources in the local currency when it is expected to appreciate relative to the
parent MNC’s currency.
15. When it is expected that the subsidiary’s local currency will depreciate relative to the “home” currency of the
parent, intra-MNC accounts payable must be paid as soon as possible while intra-MNC accounts receivable
© 2022 Pearson Education, Inc.
