©MCGRAWs!HILLs!LLC.s!ALLs!RIGHTSs!RESERVED.s!NOs!REPRODUCTIONs!ORs!DISTRIBUTIONs!WITHOUTs!THEs!PRIORs!WRITTENs!CONSENTs!OFs!MCGRAWs!H
ILLs!LLC
,SOLUTION MANUAL FOR s! s!
International Financial Management, 10th Edition EUN Chapte s! s! s! s! s! s!
r 1-21
s!
CHAPTER 1 s!
GLOBALIZATION AND THE MULTINATIONAL FIRM s! s! s! s!
ANSWERS & SOLUTIONS TO END-OF-CHAPTER QUESTIONS AND PROBLEMS
s! s! s! s! s! s! s!
QUESTIONS
1. Why is it important to study international financial management?
s! s! s! s! s! s! s! s!
Answer: We are now living in a world where all the major economic functions, such as consum
s ! s! s! s! s! s! s! s! s! s! s! s! s! s! s! s!
ption, production, investment, and financing, are highly globalized.
s! s! s! s! s! s! s! s ! It is thus essential for fina
s! s! s! s ! s!
ncial managers to fully understand vital international dimensions of financial management. This
s! s! s! s! s! s! s! s! s! s! s !
global shift is in marked contrast to a situation that existed when the authors of this book were l
s! s! s! s! s! s! s! s! s! s! s! s! s! s! s! s! s! s! s!
earning finance a few decades ago. At that time, most professors customarily (and safely, to so
s! s! s! s! s! s ! s! s! s! s! s! s! s! s! s!
me extent) ignored international aspects of finance.
s! s! s! s! s! s! s ! This mode of operation has become unten
s! s! s! s! s! s!
able since then.
s! s!
2. How is international financial management different from domestic financial management?
s! s! s! s! s! s! s! s! s!
Answer: There are three major dimensions that set apart international finance from domestic fi
s ! s! s! s! s! s! s! s! s! s! s! s! s!
nance. They are: s! s!
1. foreign exchange and political risks, s! s! s! s!
2. market imperfections, and s! s!
3. expanded opportunity set. s! s!
3. Discuss the major trends that have prevailed in international business during the last two
s! s! s! s! s! s! s! s! s! s! s! s! s!
decades.
s!
Answer: The 2000s brought a rapid integration of international capital and financial markets. I
s ! s! s! s! s! s! s! s! s! s! s! s! s!
mpetus for globalized financial markets initially came from the governments of major countries t
s! s! s! s! s! s! s! s! s! s! s! s! s!
hat had begun to deregulate their foreign exchange and capital markets. The economic
s! s! s! s! s! s! s! s! s! s! s ! s!
©MCGRAWs!HILLs!LLC.s!ALLs!RIGHTSs!RESERVED.s!NOs!REPRODUCTIONs!ORs!DISTRIBUTIONs!WITHOUTs!THEs!PRIORs!WRITTENs!CONSENTs!OFs!MCGRAWs!H
ILLs!LLC
,integration and globalization that began in the eighties and nineties are picking up speed in the
s! s! s! s! s! s! s! s! s! s! s! s! s! s! s! s
2000s. Trade liberalization and economic integration continued to proceed at both the regional
! s! s! s! s! s! s! s! s! s! s! s! s!
s! and global levels. Despite sovereign debt crisis in Europe, more EU member countries have a
s! s! s! s! s! s! s! s! s! s! s! s! s! s!
dopted the common currency, the euro, that effectively became the second global currency aft
s! s! s! s! s! s! s! s! s! s! s! s! s!
er the U.S. dollar. In the last few years, however, economic nationalism has been gaining som
s! s! s! s! s! s! s! s! s! s! s! s! s! s! s!
e popularity, as exemplified by the Brexit decision of the United Kingdom and the so-called
s! s! s! s! s! s! s! s! s! s! s! s! s! s!
―America First‖ policies of the Trump Administration. To the extent that economic nationalism is
s! s! s! s! s! s! s! s! s! s! s! s! s! s!
a populist response to the global financial crisis and Great Recession, it may subside as the w
s! s! s! s! s! s! s! s! s! s! s! s! s! s! s! s!
orld economy continues to recover.
s! s! s! s!
4. How is a country‘s economic well-
s! s! s! s! s!
being enhanced through free international trade in goods and services?
s! s! s! s! s! s! s! s! s!
Answer: According to David Ricardo, with free international trade, it is mutually beneficial for t
s ! s! s! s! s! s! s! s! s! s! s! s! s! s!
wo countries to each specialize in the production of the goods that it can produce relatively mo
s! s! s! s! s! s! s! s! s! s! s! s! s! s! s! s!
st efficiently and then trade those goods. By doing so, the two countries can increase their co
s! s! s! s! s! s! s ! s! s! s! s! s! s! s! s! s!
mbined production, which allows both countries to consume more of both goods. This argume
s! s! s! s! s! s! s! s! s! s! s! s! s!
nt remains valid even if a country can produce both goods more efficiently in absolute terms th
s! s! s! s! s! s! s! s! s! s! s! s! s! s! s! s!
an the other country. International trade is not a ‗zero-
s! s! s! s ! s! s! s! s! s!
sum‘ game in which one country benefits at the expense of another country. Rather, internation
s! s! s! s! s! s! s! s! s! s! s! s! s! s!
al trade could be an ‗increasing- sum‘ game from which all players become winners.
s! s! s! s! s! s! s! s! s! s! s! s! s!
5. What considerations might limit the extent to which the theory of comparative advantage is
s! s! s! s! s! s! s! s! s! s! s! s! s!
s! realistic?
Answer: The theory of comparative advantage was originally advanced by the nineteenth cen
s ! s! s! s! s! s! s! s! s! s! s! s!
tury economist David Ricardo as an explanation for why nations trade with one another. The th
s! s! s! s! s! s! s! s! s! s! s! s! s! s! s!
eory claims that economic well-
s! s! s! s!
being is enhanced if each country produces what it has a comparative advantage in producing
s! s! s! s! s! s! s! s! s! s! s! s! s! s! s
relative to other countries, and then trade products.
! s! s! s! s! s! s! s!
Underlying the theory are the assumptions of free trade between nations and that the factors of
s! s! s! s! s! s! s! s! s! s! s! s! s! s! s!
s! production (labor, technological know- s! s! s!
how, and capital) are relatively immobile. To the extent that these assumptions do not hold, th
s! s! s! s! s! s ! s! s! s! s! s! s! s! s! s!
e theory of comparative advantage may not realistically describe international trade. In additio
s! s! s! s! s! s! s! s! s! s! s ! s!
n, free trade produces winners and losers and if the losers are not compensated, free trade ma
s! s! s! s! s! s! s! s! s! s! s! s! s! s! s! s!
y faces political opposition from them.
s! s! s! s! s!
6. What are multinational corporations (MNCs) and what economic roles do they play?
s! s! s! s! s! s! s! s! s! s! s!
©MCGRAWs!HILLs!LLC.s!ALLs!RIGHTSs!RESERVED.s!NOs!REPRODUCTIONs!ORs!DISTRIBUTIONs!WITHOUTs!THEs!PRIORs!WRITTENs!CONSENTs!OFs!MCGRAWs!H
ILLs!LLC
, Answer: A multinational corporation (MNC) can be defined as a business firm incorporated in
s ! s! s! s! s! s! s! s! s! s! s! s! s! s!
one country that has production and sales operations in many other countries. Indeed, some M
s! s! s! s! s! s! s! s! s! s! s! s! s! s!
NCs have operations in a few dozens of different countries.
s! s! s! s! s! s! s! s! s! s ! MNCs obtain financing from majo s! s! s! s!
r money centers around the world in many different currencies to finance their operations. Glob
s! s! s! s! s! s! s! s! s! s! s! s! s! s!
al operations force the treasurer‘s office to establish international banking relationships, to plac
s! s! s! s! s! s! s! s! s! s! s! s!
e short-
s!
term funds in several currency denominations, and to effectively manage foreign exchange risk.
s! s! s! s! s! s! s! s! s! s! s! s!
s ! By circumventing and also taking advantage of various market imperfections, such as barriers
s! s! s! s! s! s! s! s! s! s! s! s!
s! to trade and barriers to flow of people and capital across countries, MNCs contribute to greater
s! s! s! s! s! s! s! s! s! s! s! s! s! s! s! s
integration of the world economy and ing more perfect functioning of global markets.
! s! s! s! s! s! s! s! s! s! s! s! s!
7. Ross Perot, a former Presidential candidate of the Reform Party, which was a third political
s! s! s! s! s! s! s! s! s! s! s! s! s! s!
s! party in the United States, had strongly objected to the creation of the North American Trade
s! s! s! s! s! s! s! s! s! s! s! s! s! s! s! s!
Agreement (NAFTA), which nonetheless was inaugurated in 1994. Perot feared the loss of Am
s! s! s! s! s! s! s! s! s! s! s! s! s!
erican jobs to Mexico where it is much cheaper to hire workers. What are the merits and demer
s! s! s! s! s! s! s! s! s! s! s! s! s! s! s! s! s!
its of Perot‘s position on NAFTA? Considering the recent economic developments in North Am
s! s! s! s! s! s! s! s! s! s! s! s! s!
erica, how would you assess Perot‘s position on NAFTA?
s! s! s! s! s! s! s! s!
Answer: Since the inception of NAFTA, many American companies indeed have invested heav
s! s! s! s! s! s! s! s! s! s! s! s!
ily in Mexico, sometimes relocating production from the United States to Mexico. Although this
s! s! s! s! s! s! s! s! s! s! s! s! s! s!
might have temporarily caused unemployment of some American workers, they were eventuall
s! s! s! s! s! s! s! s! s! s! s!
y rehired by other industries often for higher wages. At the same time, Mexico has been experi
s! s! s! s! s! s! s! s! s! s! s! s! s! s! s! s!
encing a major economic boom. It seems clear that both Mexico and the U.S. have benefited fr
s! s! s! s! s! s! s! s! s! s! s! s! s! s! s! s!
om NAFTA. Perot‘s concern appears to have been ill founded.
s! s! s! s! s! s! s! s! s!
8. In 1995, a working group of French chief executive officers was set up by the Confederation
s! s! s! s! s! s! s! s! s! s! s! s! s! s! s!
s! of French Industry (CNPF) and the French Association of Private Companies (AFEP) to study t
s! s! s! s! s! s! s! s! s! s! s! s! s! s!
he French corporate governance structure. The group reported the following, among other thing
s! s! s! s! s! s! s! s! s! s! s! s!
s: ―The board of directors should not simply aim at maximizing share values as in the U.K. and
s ! s! s! s! s! s! s! s! s! s! s! s! s! s! s! s! s!
s! the U.S. Rather, its goal should be to serve the company, whose interests should be clearly dis
s! s! s! s! s! s! s! s! s! s! s! s! s! s! s! s!
tinguished from those of its shareholders, employees, creditors, suppliers and clients but still eq
s! s! s! s! s! s! s! s! s! s! s! s! s!
uated with their general common interest, which is to safeguard the prosperity and continuity of
s! s! s! s! s! s! s! s! s! s! s! s! s! s! s!
the company‖. Evaluate the above recommendation of the working group.
s! s! s! s! s! s! s! s! s!
Answer: The recommendations of the French working group clearly show that shareholder we
s! s! s! s! s! s! s! s! s! s! s! s!
alth maximization is not a universally accepted goal of corporate management, especially
s! s! s! s! s! s! s! s! s! s! s!
©MCGRAWs!HILLs!LLC.s!ALLs!RIGHTSs!RESERVED.s!NOs!REPRODUCTIONs!ORs!DISTRIBUTIONs!WITHOUTs!THEs!PRIORs!WRITTENs!CONSENTs!OFs!MCGRAWs!H
ILLs!LLC
ILLs!LLC
,SOLUTION MANUAL FOR s! s!
International Financial Management, 10th Edition EUN Chapte s! s! s! s! s! s!
r 1-21
s!
CHAPTER 1 s!
GLOBALIZATION AND THE MULTINATIONAL FIRM s! s! s! s!
ANSWERS & SOLUTIONS TO END-OF-CHAPTER QUESTIONS AND PROBLEMS
s! s! s! s! s! s! s!
QUESTIONS
1. Why is it important to study international financial management?
s! s! s! s! s! s! s! s!
Answer: We are now living in a world where all the major economic functions, such as consum
s ! s! s! s! s! s! s! s! s! s! s! s! s! s! s! s!
ption, production, investment, and financing, are highly globalized.
s! s! s! s! s! s! s! s ! It is thus essential for fina
s! s! s! s ! s!
ncial managers to fully understand vital international dimensions of financial management. This
s! s! s! s! s! s! s! s! s! s! s !
global shift is in marked contrast to a situation that existed when the authors of this book were l
s! s! s! s! s! s! s! s! s! s! s! s! s! s! s! s! s! s! s!
earning finance a few decades ago. At that time, most professors customarily (and safely, to so
s! s! s! s! s! s ! s! s! s! s! s! s! s! s! s!
me extent) ignored international aspects of finance.
s! s! s! s! s! s! s ! This mode of operation has become unten
s! s! s! s! s! s!
able since then.
s! s!
2. How is international financial management different from domestic financial management?
s! s! s! s! s! s! s! s! s!
Answer: There are three major dimensions that set apart international finance from domestic fi
s ! s! s! s! s! s! s! s! s! s! s! s! s!
nance. They are: s! s!
1. foreign exchange and political risks, s! s! s! s!
2. market imperfections, and s! s!
3. expanded opportunity set. s! s!
3. Discuss the major trends that have prevailed in international business during the last two
s! s! s! s! s! s! s! s! s! s! s! s! s!
decades.
s!
Answer: The 2000s brought a rapid integration of international capital and financial markets. I
s ! s! s! s! s! s! s! s! s! s! s! s! s!
mpetus for globalized financial markets initially came from the governments of major countries t
s! s! s! s! s! s! s! s! s! s! s! s! s!
hat had begun to deregulate their foreign exchange and capital markets. The economic
s! s! s! s! s! s! s! s! s! s! s ! s!
©MCGRAWs!HILLs!LLC.s!ALLs!RIGHTSs!RESERVED.s!NOs!REPRODUCTIONs!ORs!DISTRIBUTIONs!WITHOUTs!THEs!PRIORs!WRITTENs!CONSENTs!OFs!MCGRAWs!H
ILLs!LLC
,integration and globalization that began in the eighties and nineties are picking up speed in the
s! s! s! s! s! s! s! s! s! s! s! s! s! s! s! s
2000s. Trade liberalization and economic integration continued to proceed at both the regional
! s! s! s! s! s! s! s! s! s! s! s! s!
s! and global levels. Despite sovereign debt crisis in Europe, more EU member countries have a
s! s! s! s! s! s! s! s! s! s! s! s! s! s!
dopted the common currency, the euro, that effectively became the second global currency aft
s! s! s! s! s! s! s! s! s! s! s! s! s!
er the U.S. dollar. In the last few years, however, economic nationalism has been gaining som
s! s! s! s! s! s! s! s! s! s! s! s! s! s! s!
e popularity, as exemplified by the Brexit decision of the United Kingdom and the so-called
s! s! s! s! s! s! s! s! s! s! s! s! s! s!
―America First‖ policies of the Trump Administration. To the extent that economic nationalism is
s! s! s! s! s! s! s! s! s! s! s! s! s! s!
a populist response to the global financial crisis and Great Recession, it may subside as the w
s! s! s! s! s! s! s! s! s! s! s! s! s! s! s! s!
orld economy continues to recover.
s! s! s! s!
4. How is a country‘s economic well-
s! s! s! s! s!
being enhanced through free international trade in goods and services?
s! s! s! s! s! s! s! s! s!
Answer: According to David Ricardo, with free international trade, it is mutually beneficial for t
s ! s! s! s! s! s! s! s! s! s! s! s! s! s!
wo countries to each specialize in the production of the goods that it can produce relatively mo
s! s! s! s! s! s! s! s! s! s! s! s! s! s! s! s!
st efficiently and then trade those goods. By doing so, the two countries can increase their co
s! s! s! s! s! s! s ! s! s! s! s! s! s! s! s! s!
mbined production, which allows both countries to consume more of both goods. This argume
s! s! s! s! s! s! s! s! s! s! s! s! s!
nt remains valid even if a country can produce both goods more efficiently in absolute terms th
s! s! s! s! s! s! s! s! s! s! s! s! s! s! s! s!
an the other country. International trade is not a ‗zero-
s! s! s! s ! s! s! s! s! s!
sum‘ game in which one country benefits at the expense of another country. Rather, internation
s! s! s! s! s! s! s! s! s! s! s! s! s! s!
al trade could be an ‗increasing- sum‘ game from which all players become winners.
s! s! s! s! s! s! s! s! s! s! s! s! s!
5. What considerations might limit the extent to which the theory of comparative advantage is
s! s! s! s! s! s! s! s! s! s! s! s! s!
s! realistic?
Answer: The theory of comparative advantage was originally advanced by the nineteenth cen
s ! s! s! s! s! s! s! s! s! s! s! s!
tury economist David Ricardo as an explanation for why nations trade with one another. The th
s! s! s! s! s! s! s! s! s! s! s! s! s! s! s!
eory claims that economic well-
s! s! s! s!
being is enhanced if each country produces what it has a comparative advantage in producing
s! s! s! s! s! s! s! s! s! s! s! s! s! s! s
relative to other countries, and then trade products.
! s! s! s! s! s! s! s!
Underlying the theory are the assumptions of free trade between nations and that the factors of
s! s! s! s! s! s! s! s! s! s! s! s! s! s! s!
s! production (labor, technological know- s! s! s!
how, and capital) are relatively immobile. To the extent that these assumptions do not hold, th
s! s! s! s! s! s ! s! s! s! s! s! s! s! s! s!
e theory of comparative advantage may not realistically describe international trade. In additio
s! s! s! s! s! s! s! s! s! s! s ! s!
n, free trade produces winners and losers and if the losers are not compensated, free trade ma
s! s! s! s! s! s! s! s! s! s! s! s! s! s! s! s!
y faces political opposition from them.
s! s! s! s! s!
6. What are multinational corporations (MNCs) and what economic roles do they play?
s! s! s! s! s! s! s! s! s! s! s!
©MCGRAWs!HILLs!LLC.s!ALLs!RIGHTSs!RESERVED.s!NOs!REPRODUCTIONs!ORs!DISTRIBUTIONs!WITHOUTs!THEs!PRIORs!WRITTENs!CONSENTs!OFs!MCGRAWs!H
ILLs!LLC
, Answer: A multinational corporation (MNC) can be defined as a business firm incorporated in
s ! s! s! s! s! s! s! s! s! s! s! s! s! s!
one country that has production and sales operations in many other countries. Indeed, some M
s! s! s! s! s! s! s! s! s! s! s! s! s! s!
NCs have operations in a few dozens of different countries.
s! s! s! s! s! s! s! s! s! s ! MNCs obtain financing from majo s! s! s! s!
r money centers around the world in many different currencies to finance their operations. Glob
s! s! s! s! s! s! s! s! s! s! s! s! s! s!
al operations force the treasurer‘s office to establish international banking relationships, to plac
s! s! s! s! s! s! s! s! s! s! s! s!
e short-
s!
term funds in several currency denominations, and to effectively manage foreign exchange risk.
s! s! s! s! s! s! s! s! s! s! s! s!
s ! By circumventing and also taking advantage of various market imperfections, such as barriers
s! s! s! s! s! s! s! s! s! s! s! s!
s! to trade and barriers to flow of people and capital across countries, MNCs contribute to greater
s! s! s! s! s! s! s! s! s! s! s! s! s! s! s! s
integration of the world economy and ing more perfect functioning of global markets.
! s! s! s! s! s! s! s! s! s! s! s! s!
7. Ross Perot, a former Presidential candidate of the Reform Party, which was a third political
s! s! s! s! s! s! s! s! s! s! s! s! s! s!
s! party in the United States, had strongly objected to the creation of the North American Trade
s! s! s! s! s! s! s! s! s! s! s! s! s! s! s! s!
Agreement (NAFTA), which nonetheless was inaugurated in 1994. Perot feared the loss of Am
s! s! s! s! s! s! s! s! s! s! s! s! s!
erican jobs to Mexico where it is much cheaper to hire workers. What are the merits and demer
s! s! s! s! s! s! s! s! s! s! s! s! s! s! s! s! s!
its of Perot‘s position on NAFTA? Considering the recent economic developments in North Am
s! s! s! s! s! s! s! s! s! s! s! s! s!
erica, how would you assess Perot‘s position on NAFTA?
s! s! s! s! s! s! s! s!
Answer: Since the inception of NAFTA, many American companies indeed have invested heav
s! s! s! s! s! s! s! s! s! s! s! s!
ily in Mexico, sometimes relocating production from the United States to Mexico. Although this
s! s! s! s! s! s! s! s! s! s! s! s! s! s!
might have temporarily caused unemployment of some American workers, they were eventuall
s! s! s! s! s! s! s! s! s! s! s!
y rehired by other industries often for higher wages. At the same time, Mexico has been experi
s! s! s! s! s! s! s! s! s! s! s! s! s! s! s! s!
encing a major economic boom. It seems clear that both Mexico and the U.S. have benefited fr
s! s! s! s! s! s! s! s! s! s! s! s! s! s! s! s!
om NAFTA. Perot‘s concern appears to have been ill founded.
s! s! s! s! s! s! s! s! s!
8. In 1995, a working group of French chief executive officers was set up by the Confederation
s! s! s! s! s! s! s! s! s! s! s! s! s! s! s!
s! of French Industry (CNPF) and the French Association of Private Companies (AFEP) to study t
s! s! s! s! s! s! s! s! s! s! s! s! s! s!
he French corporate governance structure. The group reported the following, among other thing
s! s! s! s! s! s! s! s! s! s! s! s!
s: ―The board of directors should not simply aim at maximizing share values as in the U.K. and
s ! s! s! s! s! s! s! s! s! s! s! s! s! s! s! s! s!
s! the U.S. Rather, its goal should be to serve the company, whose interests should be clearly dis
s! s! s! s! s! s! s! s! s! s! s! s! s! s! s! s!
tinguished from those of its shareholders, employees, creditors, suppliers and clients but still eq
s! s! s! s! s! s! s! s! s! s! s! s! s!
uated with their general common interest, which is to safeguard the prosperity and continuity of
s! s! s! s! s! s! s! s! s! s! s! s! s! s! s!
the company‖. Evaluate the above recommendation of the working group.
s! s! s! s! s! s! s! s! s!
Answer: The recommendations of the French working group clearly show that shareholder we
s! s! s! s! s! s! s! s! s! s! s! s!
alth maximization is not a universally accepted goal of corporate management, especially
s! s! s! s! s! s! s! s! s! s! s!
©MCGRAWs!HILLs!LLC.s!ALLs!RIGHTSs!RESERVED.s!NOs!REPRODUCTIONs!ORs!DISTRIBUTIONs!WITHOUTs!THEs!PRIORs!WRITTENs!CONSENTs!OFs!MCGRAWs!H
ILLs!LLC
