SOLUTION MANUAL FOR ww ww
International Financial Management, 10th Edition EUN ww ww ww ww ww
ww Chapter 1-21 ww
CHAPTER 1 ww
GLOBALIZATION AND THE MULTINATIONAL FIRM ww ww ww ww
ANSWERS & SOLUTIONS TO END-OF-CHAPTER QUESTIONS AND PROBLEMS
ww ww ww ww ww ww ww
QUESTIONS
1. Why is it important to study international financial management?
ww ww ww ww ww ww ww ww
Answer: w w We are now living in a world where all the major economic functions, such as
ww ww ww ww ww ww ww ww ww ww ww ww ww ww
ww consumption, production, investment, and financing, are highly globalized.
ww ww ww ww ww ww ww w w It is thus
ww ww
ww essential w w for financial managers to fully understand vital international dimensions of
ww ww ww ww ww ww ww ww ww
ww financial management.
ww w w This global shift is in marked contrast to a situation that existed
ww ww ww ww ww ww ww ww ww ww ww
ww when the authors of this book were learning finance a few decades ago.
ww ww ww ww ww ww ww ww ww ww ww ww w w At that time,
ww ww
ww most professors customarily (and safely, to some extent) ignored international aspects of
ww ww ww ww ww ww ww ww ww ww ww
ww finance. w w This mode of operation has become untenable since then.
ww ww ww ww ww ww ww ww
2. How is international financial management different from domestic financial management?
ww ww ww ww ww ww ww ww ww
Answer: w w There are three major dimensions that set apart international finance from
ww ww ww ww ww ww ww ww ww ww
ww domestic finance. They are:
ww ww ww
1. foreign exchange and political risks, ww ww ww ww
2. market imperfections, and ww ww
3. expanded opportunity set. ww ww
3. Discuss the major trends that have prevailed in international business during the
ww ww ww ww ww ww ww ww ww ww ww
last two decades.
ww ww ww
Answer: w w The 2000s brought a rapid integration of international capital and financial
ww ww ww ww ww ww ww ww ww ww
ww markets. Impetus for globalized financial markets initially came from the governments of
ww ww ww ww ww ww ww ww ww ww ww
ww major countries that had begun to deregulate their foreign exchange and capital markets.
ww ww ww ww ww ww ww ww ww ww ww ww
w w The economic
ww
©MCGRAW wwHILL wwLLC. wwALL wwRIGHTS wwRESERVED. wwNO wwREPRODUCTION wwOR wwDISTRIBUTION wwWITHOUT wwTHE wwPRIOR wwWRITTEN wwCONSENT wwOF
MCGRAW HILL LLC
,integration and globalization that began in the eighties and nineties are picking up speed
ww ww ww ww ww ww ww ww ww ww ww ww ww
in the 2000s. Trade liberalization and economic integration continued to proceed at both
ww ww ww ww ww ww ww ww ww ww ww ww ww
ww the regional and global levels. Despite sovereign debt crisis in Europe, more EU
ww ww ww ww ww ww ww ww ww ww ww ww
ww member countries have adopted the common currency, the euro, that effectively became
ww ww ww ww ww ww ww ww ww ww ww
ww the second global currency after the U.S. dollar. In the last few years, however,
ww ww ww ww ww ww ww ww ww ww ww ww ww
ww economic nationalism has been gaining some popularity, as exemplified by the Brexit
ww ww ww ww ww ww ww ww ww ww ww
decision of the United Kingdom and the so-called
ww ww ww ww ww ww ww ww
―America First‖ policies of the Trump Administration. To the extent that economic
ww ww ww ww ww ww ww ww ww ww ww
nationalism is a populist response to the global financial crisis and Great Recession, it
ww ww ww ww ww ww ww ww ww ww ww ww ww ww
ww may subside as the world economy continues to recover.
ww ww ww ww ww ww ww ww
4. How is a country‘s economic well-being enhanced through free international trade in
ww ww ww ww ww ww ww ww ww ww ww
goods and services?
ww ww ww
Answer: w w According to David Ricardo, with free international trade, it is mutually
ww ww ww ww ww ww ww ww ww ww
ww beneficial for two countries to each specialize in the production of the goods that it can
ww ww ww ww ww ww ww ww ww ww ww ww ww ww ww
ww produce relatively most efficiently and then trade those goods.
ww ww ww ww ww ww ww ww w w By doing so, the two
ww ww ww ww
ww countries can increase their combined production, which allows both countries to
ww ww ww ww ww ww ww ww ww ww
ww consume more of both goods. This argument remains valid even if a country can
ww ww ww ww ww ww ww ww ww ww ww ww ww
ww produce both goods more efficiently in absolute terms than the other country.
ww ww ww ww ww ww ww ww ww ww ww
w w International trade is not a ‗zero-sum‘ game in which one country benefits at the
ww ww ww ww ww ww ww ww ww ww ww ww ww
expense of another country. Rather, international trade could be an ‗increasing- sum‘
ww ww ww ww ww ww ww ww ww ww ww ww
ww game from which all players become winners.
ww ww ww ww ww ww
5. What considerations might limit the extent to which the theory of comparative
ww ww ww ww ww ww ww ww ww ww ww
ww advantage is realistic? ww ww
Answer: w w The theory of comparative advantage was originally advanced by the
ww ww ww ww ww ww ww ww ww
ww nineteenth century economist David Ricardo as an explanation for why nations trade
ww ww ww ww ww ww ww ww ww ww ww
ww with one another. The theory claims that economic well-being is enhanced if each
ww ww ww ww ww ww ww ww ww ww ww ww
ww country produces what it has a comparative advantage in producing relative to other
ww ww ww ww ww ww ww ww ww ww ww ww
ww countries, and then trade products. ww ww ww ww
Underlying the theory are the assumptions of free trade between nations and that the
ww ww ww ww ww ww ww ww ww ww ww ww ww
factors of production (labor, technological know-how, and capital) are relatively immobile.
ww ww ww ww ww ww ww ww ww ww ww
w w To the extent that these assumptions do not hold, the theory of comparative advantage
ww ww ww ww ww ww ww ww ww ww ww ww ww
ww may not realistically describe international trade.
ww ww ww ww ww w w In addition, free trade produces
ww ww ww ww
ww winners and losers and if the losers are not compensated, free trade may faces political
ww ww ww ww ww ww ww ww ww ww ww ww ww ww
ww opposition from them. ww ww
©MCGRAW wwHILL wwLLC. wwALL wwRIGHTS wwRESERVED. wwNO wwREPRODUCTION wwOR wwDISTRIBUTION wwWITHOUT wwTHE wwPRIOR wwWRITTEN wwCONSENT wwOF
MCGRAW HILL LLC
,6. What are multinational corporations (MNCs) and what economic roles do they play?
ww ww ww ww ww ww ww ww ww ww ww
©MCGRAW wwHILL wwLLC. wwALL wwRIGHTS wwRESERVED. wwNO wwREPRODUCTION wwOR wwDISTRIBUTION wwWITHOUT wwTHE wwPRIOR wwWRITTEN wwCONSENT wwOF
MCGRAW HILL LLC
, Answer: w w A multinational corporation (MNC) can be defined as a business firm
ww ww ww ww ww ww ww ww ww ww
ww incorporated in one country that has production and sales operations in many other
ww ww ww ww ww ww ww ww ww ww ww ww
ww countries. Indeed, some MNCs have operations in a few dozens of different countries.
ww ww ww ww ww ww ww ww ww ww ww ww
w w MNCs obtain financing from major money centers around the world in many different
ww ww ww ww ww ww ww ww ww ww ww ww
ww currencies to finance their operations. Global operations force the treasurer‘s office to
ww ww ww ww ww ww ww ww ww ww ww
ww establish international banking relationships, to place short-term funds in several currency
ww ww ww ww ww ww ww ww ww ww
ww denominations, and to effectively manage foreign exchange risk.
ww ww ww ww ww ww ww w w By circumventing and
ww ww
ww also taking advantage of various market imperfections, such as barriers to trade and
ww ww ww ww ww ww ww ww ww ww ww ww
ww barriers to flow of people and capital across countries, MNCs contribute to greater
ww ww ww ww ww ww ww ww ww ww ww ww
ww integration of the world economy and ing more perfect functioning of global markets.
ww ww ww ww ww ww ww ww ww ww ww ww
7. Ross Perot, a former Presidential candidate of the Reform Party, which was a third
ww ww ww ww ww ww ww ww ww ww ww ww ww
ww political party in the United States, had strongly objected to the creation of the North
ww ww ww ww ww ww ww ww ww ww ww ww ww ww
ww American Trade Agreement (NAFTA), which nonetheless was inaugurated in 1994. Perot
ww ww ww ww ww ww ww ww ww ww
ww feared the loss of American jobs to Mexico where it is much cheaper to hire workers.
ww ww ww ww ww ww ww ww ww ww ww ww ww ww ww
ww What are the merits and demerits of Perot‘s position on NAFTA? Considering the recent
ww ww ww ww ww ww ww ww ww ww ww ww ww
ww economic developments in North America, how would you assess Perot‘s position on
ww ww ww ww ww ww ww ww ww ww ww
ww NAFTA?
Answer: Since the inception of NAFTA, many American companies indeed have invested
ww ww ww ww ww ww ww ww ww ww ww
ww heavily in Mexico, sometimes relocating production from the United States to Mexico.
ww ww ww ww ww ww ww ww ww ww ww
ww Although this might have temporarily caused unemployment of some American workers,
ww ww ww ww ww ww ww ww ww ww
ww they were eventually rehired by other industries often for higher wages. At the same
ww ww ww ww ww ww ww ww ww ww ww ww ww
ww time, Mexico has been experiencing a major economic boom. It seems clear that both
ww ww ww ww ww ww ww ww ww ww ww ww ww
ww Mexico and the U.S. have benefited from NAFTA. Perot‘s concern appears to have been
ww ww ww ww ww ww ww ww ww ww ww ww ww
ww ill founded.
ww
8. In 1995, a working group of French chief executive officers was set up by the
ww ww ww ww ww ww ww ww ww ww ww ww ww ww
ww Confederation of French Industry (CNPF) and the French Association of Private
ww ww ww ww ww ww ww ww ww ww
ww Companies (AFEP) to study the French corporate governance structure. The group
ww ww ww ww ww ww ww ww ww ww
ww reported the following, among other things:
ww ww ww ww ww w w ―The board of directors should not simply
ww ww ww ww ww ww
ww aim at maximizing share values as in the U.K. and the U.S. Rather, its goal should be to
ww ww ww ww ww ww ww ww ww ww ww ww ww ww ww ww ww
ww serve the company, whose interests should be clearly distinguished from those of its
ww ww ww ww ww ww ww ww ww ww ww ww
ww shareholders, employees, creditors, suppliers and clients but still equated with their
ww ww ww ww ww ww ww ww ww ww
ww general common interest, which is to safeguard the prosperity and continuity of the
ww ww ww ww ww ww ww ww ww ww ww ww
ww company‖. Evaluate the above recommendation of the working group.
ww ww ww ww ww ww ww ww
Answer: The recommendations of the French working group clearly show that shareholder
ww ww ww ww ww ww ww ww ww ww ww
©MCGRAW wwHILL wwLLC. wwALL wwRIGHTS wwRESERVED. wwNO wwREPRODUCTION wwOR wwDISTRIBUTION wwWITHOUT wwTHE wwPRIOR wwWRITTEN wwCONSENT wwOF
MCGRAW HILL LLC
International Financial Management, 10th Edition EUN ww ww ww ww ww
ww Chapter 1-21 ww
CHAPTER 1 ww
GLOBALIZATION AND THE MULTINATIONAL FIRM ww ww ww ww
ANSWERS & SOLUTIONS TO END-OF-CHAPTER QUESTIONS AND PROBLEMS
ww ww ww ww ww ww ww
QUESTIONS
1. Why is it important to study international financial management?
ww ww ww ww ww ww ww ww
Answer: w w We are now living in a world where all the major economic functions, such as
ww ww ww ww ww ww ww ww ww ww ww ww ww ww
ww consumption, production, investment, and financing, are highly globalized.
ww ww ww ww ww ww ww w w It is thus
ww ww
ww essential w w for financial managers to fully understand vital international dimensions of
ww ww ww ww ww ww ww ww ww
ww financial management.
ww w w This global shift is in marked contrast to a situation that existed
ww ww ww ww ww ww ww ww ww ww ww
ww when the authors of this book were learning finance a few decades ago.
ww ww ww ww ww ww ww ww ww ww ww ww w w At that time,
ww ww
ww most professors customarily (and safely, to some extent) ignored international aspects of
ww ww ww ww ww ww ww ww ww ww ww
ww finance. w w This mode of operation has become untenable since then.
ww ww ww ww ww ww ww ww
2. How is international financial management different from domestic financial management?
ww ww ww ww ww ww ww ww ww
Answer: w w There are three major dimensions that set apart international finance from
ww ww ww ww ww ww ww ww ww ww
ww domestic finance. They are:
ww ww ww
1. foreign exchange and political risks, ww ww ww ww
2. market imperfections, and ww ww
3. expanded opportunity set. ww ww
3. Discuss the major trends that have prevailed in international business during the
ww ww ww ww ww ww ww ww ww ww ww
last two decades.
ww ww ww
Answer: w w The 2000s brought a rapid integration of international capital and financial
ww ww ww ww ww ww ww ww ww ww
ww markets. Impetus for globalized financial markets initially came from the governments of
ww ww ww ww ww ww ww ww ww ww ww
ww major countries that had begun to deregulate their foreign exchange and capital markets.
ww ww ww ww ww ww ww ww ww ww ww ww
w w The economic
ww
©MCGRAW wwHILL wwLLC. wwALL wwRIGHTS wwRESERVED. wwNO wwREPRODUCTION wwOR wwDISTRIBUTION wwWITHOUT wwTHE wwPRIOR wwWRITTEN wwCONSENT wwOF
MCGRAW HILL LLC
,integration and globalization that began in the eighties and nineties are picking up speed
ww ww ww ww ww ww ww ww ww ww ww ww ww
in the 2000s. Trade liberalization and economic integration continued to proceed at both
ww ww ww ww ww ww ww ww ww ww ww ww ww
ww the regional and global levels. Despite sovereign debt crisis in Europe, more EU
ww ww ww ww ww ww ww ww ww ww ww ww
ww member countries have adopted the common currency, the euro, that effectively became
ww ww ww ww ww ww ww ww ww ww ww
ww the second global currency after the U.S. dollar. In the last few years, however,
ww ww ww ww ww ww ww ww ww ww ww ww ww
ww economic nationalism has been gaining some popularity, as exemplified by the Brexit
ww ww ww ww ww ww ww ww ww ww ww
decision of the United Kingdom and the so-called
ww ww ww ww ww ww ww ww
―America First‖ policies of the Trump Administration. To the extent that economic
ww ww ww ww ww ww ww ww ww ww ww
nationalism is a populist response to the global financial crisis and Great Recession, it
ww ww ww ww ww ww ww ww ww ww ww ww ww ww
ww may subside as the world economy continues to recover.
ww ww ww ww ww ww ww ww
4. How is a country‘s economic well-being enhanced through free international trade in
ww ww ww ww ww ww ww ww ww ww ww
goods and services?
ww ww ww
Answer: w w According to David Ricardo, with free international trade, it is mutually
ww ww ww ww ww ww ww ww ww ww
ww beneficial for two countries to each specialize in the production of the goods that it can
ww ww ww ww ww ww ww ww ww ww ww ww ww ww ww
ww produce relatively most efficiently and then trade those goods.
ww ww ww ww ww ww ww ww w w By doing so, the two
ww ww ww ww
ww countries can increase their combined production, which allows both countries to
ww ww ww ww ww ww ww ww ww ww
ww consume more of both goods. This argument remains valid even if a country can
ww ww ww ww ww ww ww ww ww ww ww ww ww
ww produce both goods more efficiently in absolute terms than the other country.
ww ww ww ww ww ww ww ww ww ww ww
w w International trade is not a ‗zero-sum‘ game in which one country benefits at the
ww ww ww ww ww ww ww ww ww ww ww ww ww
expense of another country. Rather, international trade could be an ‗increasing- sum‘
ww ww ww ww ww ww ww ww ww ww ww ww
ww game from which all players become winners.
ww ww ww ww ww ww
5. What considerations might limit the extent to which the theory of comparative
ww ww ww ww ww ww ww ww ww ww ww
ww advantage is realistic? ww ww
Answer: w w The theory of comparative advantage was originally advanced by the
ww ww ww ww ww ww ww ww ww
ww nineteenth century economist David Ricardo as an explanation for why nations trade
ww ww ww ww ww ww ww ww ww ww ww
ww with one another. The theory claims that economic well-being is enhanced if each
ww ww ww ww ww ww ww ww ww ww ww ww
ww country produces what it has a comparative advantage in producing relative to other
ww ww ww ww ww ww ww ww ww ww ww ww
ww countries, and then trade products. ww ww ww ww
Underlying the theory are the assumptions of free trade between nations and that the
ww ww ww ww ww ww ww ww ww ww ww ww ww
factors of production (labor, technological know-how, and capital) are relatively immobile.
ww ww ww ww ww ww ww ww ww ww ww
w w To the extent that these assumptions do not hold, the theory of comparative advantage
ww ww ww ww ww ww ww ww ww ww ww ww ww
ww may not realistically describe international trade.
ww ww ww ww ww w w In addition, free trade produces
ww ww ww ww
ww winners and losers and if the losers are not compensated, free trade may faces political
ww ww ww ww ww ww ww ww ww ww ww ww ww ww
ww opposition from them. ww ww
©MCGRAW wwHILL wwLLC. wwALL wwRIGHTS wwRESERVED. wwNO wwREPRODUCTION wwOR wwDISTRIBUTION wwWITHOUT wwTHE wwPRIOR wwWRITTEN wwCONSENT wwOF
MCGRAW HILL LLC
,6. What are multinational corporations (MNCs) and what economic roles do they play?
ww ww ww ww ww ww ww ww ww ww ww
©MCGRAW wwHILL wwLLC. wwALL wwRIGHTS wwRESERVED. wwNO wwREPRODUCTION wwOR wwDISTRIBUTION wwWITHOUT wwTHE wwPRIOR wwWRITTEN wwCONSENT wwOF
MCGRAW HILL LLC
, Answer: w w A multinational corporation (MNC) can be defined as a business firm
ww ww ww ww ww ww ww ww ww ww
ww incorporated in one country that has production and sales operations in many other
ww ww ww ww ww ww ww ww ww ww ww ww
ww countries. Indeed, some MNCs have operations in a few dozens of different countries.
ww ww ww ww ww ww ww ww ww ww ww ww
w w MNCs obtain financing from major money centers around the world in many different
ww ww ww ww ww ww ww ww ww ww ww ww
ww currencies to finance their operations. Global operations force the treasurer‘s office to
ww ww ww ww ww ww ww ww ww ww ww
ww establish international banking relationships, to place short-term funds in several currency
ww ww ww ww ww ww ww ww ww ww
ww denominations, and to effectively manage foreign exchange risk.
ww ww ww ww ww ww ww w w By circumventing and
ww ww
ww also taking advantage of various market imperfections, such as barriers to trade and
ww ww ww ww ww ww ww ww ww ww ww ww
ww barriers to flow of people and capital across countries, MNCs contribute to greater
ww ww ww ww ww ww ww ww ww ww ww ww
ww integration of the world economy and ing more perfect functioning of global markets.
ww ww ww ww ww ww ww ww ww ww ww ww
7. Ross Perot, a former Presidential candidate of the Reform Party, which was a third
ww ww ww ww ww ww ww ww ww ww ww ww ww
ww political party in the United States, had strongly objected to the creation of the North
ww ww ww ww ww ww ww ww ww ww ww ww ww ww
ww American Trade Agreement (NAFTA), which nonetheless was inaugurated in 1994. Perot
ww ww ww ww ww ww ww ww ww ww
ww feared the loss of American jobs to Mexico where it is much cheaper to hire workers.
ww ww ww ww ww ww ww ww ww ww ww ww ww ww ww
ww What are the merits and demerits of Perot‘s position on NAFTA? Considering the recent
ww ww ww ww ww ww ww ww ww ww ww ww ww
ww economic developments in North America, how would you assess Perot‘s position on
ww ww ww ww ww ww ww ww ww ww ww
ww NAFTA?
Answer: Since the inception of NAFTA, many American companies indeed have invested
ww ww ww ww ww ww ww ww ww ww ww
ww heavily in Mexico, sometimes relocating production from the United States to Mexico.
ww ww ww ww ww ww ww ww ww ww ww
ww Although this might have temporarily caused unemployment of some American workers,
ww ww ww ww ww ww ww ww ww ww
ww they were eventually rehired by other industries often for higher wages. At the same
ww ww ww ww ww ww ww ww ww ww ww ww ww
ww time, Mexico has been experiencing a major economic boom. It seems clear that both
ww ww ww ww ww ww ww ww ww ww ww ww ww
ww Mexico and the U.S. have benefited from NAFTA. Perot‘s concern appears to have been
ww ww ww ww ww ww ww ww ww ww ww ww ww
ww ill founded.
ww
8. In 1995, a working group of French chief executive officers was set up by the
ww ww ww ww ww ww ww ww ww ww ww ww ww ww
ww Confederation of French Industry (CNPF) and the French Association of Private
ww ww ww ww ww ww ww ww ww ww
ww Companies (AFEP) to study the French corporate governance structure. The group
ww ww ww ww ww ww ww ww ww ww
ww reported the following, among other things:
ww ww ww ww ww w w ―The board of directors should not simply
ww ww ww ww ww ww
ww aim at maximizing share values as in the U.K. and the U.S. Rather, its goal should be to
ww ww ww ww ww ww ww ww ww ww ww ww ww ww ww ww ww
ww serve the company, whose interests should be clearly distinguished from those of its
ww ww ww ww ww ww ww ww ww ww ww ww
ww shareholders, employees, creditors, suppliers and clients but still equated with their
ww ww ww ww ww ww ww ww ww ww
ww general common interest, which is to safeguard the prosperity and continuity of the
ww ww ww ww ww ww ww ww ww ww ww ww
ww company‖. Evaluate the above recommendation of the working group.
ww ww ww ww ww ww ww ww
Answer: The recommendations of the French working group clearly show that shareholder
ww ww ww ww ww ww ww ww ww ww ww
©MCGRAW wwHILL wwLLC. wwALL wwRIGHTS wwRESERVED. wwNO wwREPRODUCTION wwOR wwDISTRIBUTION wwWITHOUT wwTHE wwPRIOR wwWRITTEN wwCONSENT wwOF
MCGRAW HILL LLC
