Solution Manual For International Financial Management 14th Edition by Jeff Madura [2025!!]

Chapter1 v




Multinational Financial Management: An Overview v v v v




Lecture Outline v




Managing the MNC v v


How Business Disciplines Are Used to Manage the MNC
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Agency Problems
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Management Structure of an MNC v v v v




Why Firms Pursue International Business
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Theory of Comparative Advantage
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Imperfect Markets Theory
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Product Cycle Theory
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Methods to Conduct International Business
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International Trade v


Licensing
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Franchising
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Joint Ventures
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Acquisitions of Existing Operations v v v


Establishing New Foreign Subsidiaries
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Summary of Methods
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Valuation Model for an MNC
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Domestic Valuation Model
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Multinational Valuation
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Model
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Uncertainty Surrounding an MNC’s Cash Flows
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How Uncertainty Affects the MNC’s Cost of
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Capital
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Organization of the Text v v v




© v 2021 v Cengage v Learning. v All v Rights v Reserved. v May v not v be v copied, v scanned, v or v duplicated, v in v whole v or v in v part, v except
v for v use vas v permitted v in v a v license v distributed v with v a v certain v product v or v service v or v otherwise v on v a v password-protected

v website v for

, Multinational Financial Management: An Overview 2 v v v v v




Chapter Theme v




This chapter introduces the multinational corporation as having similar goals to the purely domestic
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vcorporation, but a wider variety of opportunities. With additional opportunities come potential increased
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vreturns and other forms of risk to consider. The potential benefits and risks are introduced.
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Topics to Stimulate Class Discussion
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1. What is the appropriate definition of an MNC?
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2. Why does an MNC expand internationally?
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3. What are the risks of an MNC which expands internationally?
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4. Why must purely domestic firms be concerned about the international environment?
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POINT/COUNTER-POINT:
Should an MNC Reduce Its Ethical Standards to Compete Internationally?
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POINT: Yes. When a U.S.-based MNC competes in some countries, it may encounter some business
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vnorms there that are not allowed in the U.S. For example, when competing for a government contract,
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vfirms might provide payoffs to the government officials who will make the decision. Yet, in the
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vUnited States, a firm will sometimes take a client on an expensive golf outing or provide skybox
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vtickets to events. This is no different than a payoff. If the payoffs are bigger in some foreign countries,
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vthe MNC can compete only by matching the payoffs provided by its competitors.
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COUNTER-POINT: No. A U.S.-based MNC should maintain a standard code of ethics that applies to v v v v v v v v v v v v v v


vany country, even if it is at a disadvantage in a foreign country that allows activities that might be
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vviewed as unethical. In this way, the MNC establishes more credibility worldwide.
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WHO IS CORRECT? Use the Internet to learn more about this issue. Which argument do you support?
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Offer your own opinion on this issue.
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ANSWER: The issue is frequently discussed. It is easy to suggest that the MNC should maintain a
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standard code of ethics, but in reality, that means that it will not be able to compete in some cases. For
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example, even if it submits the lowest bid on a specific foreign government project, it will not receive
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the bid without a payoff to the foreign government officials. The issue is especially a concern for
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large projects that may generate substantial cash flows for the firm that is chosen to do the project.
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vIdeally, the MNC can clearly demonstrate to whoever oversees the decision process that it deserves
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to be selected. If there is just one decision-maker with no oversight, an MNC can not ensure that the
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decision will be ethical. But if the decision-maker must be accountable to a department who oversees
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the decision, the MNC may be able to prompt the department to ensure that the process is ethical.
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© v 2021 v Cengage v Learning. v All v Rights v Reserved. v May v not v be v copied, v scanned, v or v duplicated, v in v whole v or v in v part, v except
v for v use vas v permitted v in v a v license v distributed v with v a v certain v product v or v service v or v otherwise v on v a v password-protected

v website v for

, Multinational Financial Management: An Overview 3 v v v v v




Answers to End of Chapter Questions
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1. Agency Problems of MNCs. v v v




a. Explain the agency problem of MNCs. v v v v v




ANSWER: The agency problem reflects a conflict of interests between decision-making managers
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and the owners of the MNC. Agency costs occur in an effort to assure that managers act in the
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best interest of the owners.
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b. Why might agency costs be larger for an MNC than for a purely domestic firm?
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ANSWER: The agency costs are normally larger for MNCs than purely domestic firms for the
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following reasons. First, MNCs incur larger agency costs in monitoring managers of distant
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foreign subsidiaries. Second, foreign subsidiary managers raised in different cultures may not
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follow uniform goals, and some managers may focus on satisfying respective employees. Third,
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the sheer size of the larger MNCs would also create large agency problems.
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2. Comparative Advantage. v




a. Explain how the theory of comparative advantage relates to the need for international business.
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ANSWER: The theory of comparative advantage implies that countries should specialize in
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production, thereby relying on other countries for some products. Consequently, there is a need
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for international business.
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b. Explain how the product cycle theory relates to the growth of an MNC.
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ANSWER: The product cycle theory suggests that at some point in time, the firm will attempt to
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capitalize on its perceived advantages in markets other than where it was initially established.
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3. Imperfect Markets. v




a. Explain how the existence of imperfect markets has led to the establishment of subsidiaries
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in foreign markets.
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ANSWER: Because of imperfect markets, resources cannot be easily and freely retrieved
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by the MNC. Consequently, the MNC must sometimes go to the resources rather than retrieve
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resources (such as land, labor, etc.).
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b. If perfect markets existed, would wages, prices, and interest rates among countries be
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more similar or less similar than under conditions of imperfect markets? Why?
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ANSWER: If perfect markets existed, resources would be more mobile and could therefore be
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transferred to those countries more willing to pay a high price for them. As this occurred,
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shortages of resources in any particular country would be alleviated and the costs of such
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resources would be similar across countries.
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4. International Opportunities. v




© v 2021 v Cengage v Learning. v All v Rights v Reserved. v May v not v be v copied, v scanned, v or v duplicated, v in v whole v or v in v part, v except
v for v use vas v permitted v in v a v license v distributed v with v a v certain v product v or v service v or v otherwise v on v a v password-protected

v website v for

, Multinational Financial Management: An Overview 4 v v v v v




a. Do you think that either the acquisition of a foreign firm or licensing will result in greater
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growth for an MNC? Which alternative is likely to have more risk?
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ANSWER: An acquisition will typically result in greater growth, but it is riskier because it normally
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requires a larger investment and the decision can not be easily reversed once the acquisition is made.
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b. Describe a scenario in which the size of a corporation is not affected by access to
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international opportunities.
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ANSWER: Some firms may avoid opportunities because they lack knowledge about foreign markets
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or expect that the risks are excessive. Thus, the size of these firms is not affected by the
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opportunities.
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c. Explain why MNCs such as Coca Cola and PepsiCo still have numerous opportunities
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for international expansion.
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ANSWER: Coca Cola and PepsiCo still have new international opportunities because countries are at
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various stages of development. Some countries have just recently opened their borders to MNCs.
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Many of these countries do not offer sufficient food or drink products to their consumers.
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5. International Opportunities Due to the Internet. v v v v v




a. What factors cause some firms to become more internationalized than others?
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ANSWER: The operating characteristics of the firm (what it produces or sells) and the risk perception
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of international business will influence the degree to which a firm becomes internationalized.
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vSeveral other factors such as access to capital could also be relevant here. Firms that are labor-
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intensive could more easily capitalize on low-wage countries while firms that rely on technological
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advances could not.
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b. Why might the Internet have resulted in more international business.
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ANSWER: The Internet allows for easy and low-cost communication between countries, so that
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firms could now develop contacts with potential customers overseas by having a website. Many
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firms use their website to identify the products that they sell, along with the prices for each
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product. This allows them to easily advertise their products to potential importers anywhere in the
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world without mailing brochures to various countries. In addition, they can add to their product
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line and change prices by simply revising their website, so importers are kept abreast of the
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exporter’s product information by monitoring the exporter’s website periodically. Firms can also
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use their websites to accept orders online. Some firms with an international reputation use their
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brand name to advertise products over the internet. They may use manufacturers in some foreign
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countries to produce some of their products subject to their specification
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6. Impact of Exchange Rate Movements. Plak Co. of Chicago has several European subsidiaries
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that remit earnings to it each year. Explain how appreciation of the euro (the currency used in
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many European countries) would affect Plak's valuation.
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ANSWER: Plak’s valuation should increase because the appreciation of the euro will increase the
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dollar value of the cash flows remitted by the European subsidiaries.
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© v 2021 v Cengage v Learning. v All v Rights v Reserved. v May v not v be v copied, v scanned, v or v duplicated, v in v whole v or v in v part, v except
v for v use vas v permitted v in v a v license v distributed v with v a v certain v product v or v service v or v otherwise v on v a v password-protected

v website v for