Solution Manual For
International Financial Management 3rd Edition by Bekaert
Chapter 1-17
evaluate students' ability to think critically and make strategic decisions.Essay/Short Answer Questions: These types of questions test the student’s ability to explain and analyze business concepts in a
detailed and coherent manner.1.3. Skills Tested in Business ExamsCritical Thinking and Problem-Solving: Business exams often include case studies that challenge students to apply theoretical knowledge
to real-life situations. These tests assess decision-making skills, as well as the ability to evaluate various business alternatives.Quantitative Analysis: For subjects like finance or economics, business exams
often require students to perform calculations and interpret data. The ability to analyze financial statements, project revenues, and manage budgets is essential.Communication and Writing Skills: Business
exams may require students to present ideas clearly and concisely. Students must convey complex concepts in a way that demonstrates their understanding of business principles.1.4. Preparing for
Business ExamsPreparing for
Chapter 1
Globalization and the Multinational
Corporation
QUESTIONS
1. Define globalization. How has it proceeded in trade in goods and services versus
capital markets?
Answer: Globalization refers to the increasing connectivity and integration of countries
and corporations and the people within them in terms of their economic, political, and
social activities. Because of globalization, multinational corporations dominate the
corporate landscape.
2. Describe fours ways that a company can supply its products to a foreign country.
How do they differ?
Answer: An MNC can supply a foreign market through exports, by licensing local firms
abroad to manufacture the company’s products, by setting up a joint venture with a
foreign company, or by foreign direct investment.
3. What is a greenfield investment?
Answer: MNCs engage in greenfield investments when they enter foreign markets by
simply establishing new operations in these countries without having a local partner and
without acquiring a local company.
4. What percentage ownership typically defines FDI?
Answer: Foreign direct investment (FDI) occurs when a company from one country
makes a significant investment that leads to at least a 10% ownership interest in a firm in
another country.
5. What is agency theory? How does corporate governance the issues raised by agency
, theory?
Answer: Agency theory explores the problems that arise because the owners of the firm
do not typically manage the firm, and it devises ways to resolve these problems. This is
often called the separation of owneship and control. A manager of a firm, in particular
the chief executive officer (CEO), is viewed as an agent who contracts with various
principals—most importantly the firm’s shareholders but also the firm’s creditors,
suppliers, clients, and employees. The principals must design contracts that motivate the
agent to perform actions and make decisions that are in the best interests of the principals.
evaluate students' ability to think critically and make strategic decisions.Essay/Short Answer Questions: These types of questions test the student’s ability to explain and analyze business concepts in a detailed and coherent
manner.1.3. Skills Tested in Business ExamsCritical Thinking and Problem-Solving: Business exams often include case studies that challenge students to apply theoretical knowledge to real-life situations. These tests assess
decision-making skills, as well as the ability to evaluate various business alternatives.Quantitative Analysis: For subjects like finance or economics, business exams often require students to perform calculations and interpret
data. The ability to analyze financial statements, project revenues, and manage budgets is essential.Communication and Writing Skills: Business exams may require students to present ideas clearly and concisely. Students must
convey complex concepts in a way that demonstrates their understanding of business principles.1.4. Preparing for Business ExamsPreparing for
6. Why is ownership more concentrated in developing countries than in developed
countries?
Answer: In many developed countries, the rule of law is strong enough to discipline
managers through legal means, for example by takeovers and proxy contests or through
contractual compensation plans. Concentrated ownership is one way in which agency
problems are mitigated in developing countries. A block of stock is held by either a
wealthy investor, a family, or a financial intermediary, which might be a bank, a holding
company, a hedge fund or a pension fund. The large shareholder clearly has a vested
interest in monitoring management and has the power to implement changes in
management. Negative aspects of this approach include possible collusion between the
large shareholder and the management to expropriate wealth from smaller shareholders
and the fact that the stock may be more difficult to trade on the stock market if a
substantial block of shares is withdrawn from the market but is still available to be sold
should the large shareholder want to sell.
7. What is the IMF? What is its role in the world economy?
Answer: The International Monetary Fund (IMF) is an international organization of 187
member countries, based in Washington, DC, which was conceived at a United Nations
conference convened in Bretton Woods, New Hampshire, in 1944. The main goal of the
IMF is to ensure the stability of the international monetary and financial system—the
system of international payments and exchange rates among national currencies that
enables trade to take place between countries, to help resolve crises when they occur, and
to promote growth and alleviate poverty. To meet these objectives, the IMF offers
surveillance and technical assistance. Surveillance is the regular dialogue about a
country’s economic condition and policy advice that the IMF offers to each of its
members. Technical assistance and training are offered to help member countries
strengthen their capacity to design and implement effective policies, including fiscal
policy, monetary and exchange rate policies, banking and financial system supervision
and regulation, and statistics.
8. What is the World Bank? What is its role in the world economy?
Answer: The World Bank is an international institution created in 1944, as the
, International Bank for Reconstruction and Development (IBRD) to facilitate postwar
reconstruction and development. Over time, the IBRD’s focus shifted toward poverty
reduction, and in 1960, the International Development Association (IDA) was established
as an integral part of the World Bank. Whereas the IBRD focuses on middle-income
countries, the IDA focuses on the poorest countries in the world. Together they provide
low-interest loans, interest-free credits, and grants to developing countries for
investments in education, health, infrastructure, communications, and other activities.
The World Bank also provides advisory services to developing countries and is actively
involved with efforts to reduce and cancel the international debt of the poorest countries.
evaluate students' ability to think critically and make strategic decisions.Essay/Short Answer Questions: These types of questions test the student’s ability to explain and analyze business concepts in a detailed and coherent
manner.1.3. Skills Tested in Business ExamsCritical Thinking and Problem-Solving: Business exams often include case studies that challenge students to apply theoretical knowledge to real-life situations. These tests assess
decision-making skills, as well as the ability to evaluate various business alternatives.Quantitative Analysis: For subjects like finance or economics, business exams often require students to perform calculations and interpret
data. The ability to analyze financial statements, project revenues, and manage budgets is essential.Communication and Writing Skills: Business exams may require students to present ideas clearly and concisely. Students must
convey complex concepts in a way that demonstrates their understanding of business principles.1.4. Preparing for Business ExamsPreparing for
9. What are the major multilateral development banks?
Answer: The term typically refers to the World Bank Group and four regional
development banks: the African Development Bank, the Asian Development Bank, the
European Bank for Reconstruction and Development, and the Inter-American
Development Bank. These banks have a broad membership that includes both developing
countries (borrowers) and developed countries (donors), and their membership is not
limited to countries from the region of the regional development bank. While each bank
has its own independent legal and operational status, their similar mandates and a
considerable number of joint owners lead to a high level of cooperation among MDBs.
The MDBs provide financing for development in three ways. First, they provide long-
term loans at market interest rates. To fund these loans, the MDBs borrow on the
international capital markets and re-lend to borrowing governments in developing
countries. Second, the MDBs offer long-term loans (often termed credits) with interest
rates set well below market rates. These credits are funded through direct contributions of
governments in donor countries. Finally, grants are sometimes offered mostly for
technical assistance, advisory services, or project preparation.
10. What is the WTO? What is its role in the world economy?
Answer: The World Trade Organization (WTO) was founded in 1995. It is headquartered
in Geneva, Switzerland, and had 153 member countries in 2010. Whereas GATT was a
set of rules, the WTO is an institutional body. The WTO expanded its scope from traded
goods to trade within the service sector and intellectual property rights. Various WTO
agreements set the legal ground rules for international commerce to hopefully ensure that
the multilateral trading system operates smoothly. They are negotiated and signed by a
large majority of the world’s trading nations, and the agreements are ratified in the
parliaments of the member countries. If there is a trade dispute between countries, the
WTO’s dispute settlement process helps interpret the agreements and commitments, and
it ensures that countries’ trade policies conform to them.
11. What is an institutional investor? Along with individual investors, what do they
detemine?
, Answer: Institutional Investors are organizations that invest pools of money on behalf of
individual investors or other organizations. Examples include banks, insurance
companies, pension funds, mutual funds, and university endowments. Institutional
investors, together with individual investors, determine the prices of bonds and stocks
implicitly determining the expected rates of return on these assets thereby setting the
MNC’s cost of capital. The cost of capital, in turn, affects project valuations, which
determines a company’s investments.
12. What are anti-globalists?
Answer: Anti-globalization is an umbrella term encompassing separate social
movements, united in their opposition to the globalization of corporate economic activity
and the free trade with developing nations that results from such activity. Anti-globalists
generally believe that global laissez-faire capitalism is detrimental to poor countries and
to disadvantaged people in rich countries. Anti-globalists also criticize global financial
institutions such as the World Bank, the IMF, and the WTO. Especially under attack is
the so-called Washington consensus model of development, which, as promoted by
international financial institutions (especially the IMF), is interpreted as requiring
macroeconomic austerity, privatization, and a relatively laissez-faire approach to
economic management. Anti-globalists believe that these policies exacerbate
unemployment and poverty.
evaluate students' ability to think critically and make strategic decisions.Essay/Short Answer Questions: These types of questions test the student’s ability to explain and analyze business concepts in a detailed and coherent
manner.1.3. Skills Tested in Business ExamsCritical Thinking and Problem-Solving: Business exams often include case studies that challenge students to apply theoretical knowledge to real-life situations. These tests assess
decision-making skills, as well as the ability to evaluate various business alternatives.Quantitative Analysis: For subjects like finance or economics, business exams often require students to perform calculations and interpret
data. The ability to analyze financial statements, project revenues, and manage budgets is essential.Communication and Writing Skills: Business exams may require students to present ideas clearly and concisely. Students must
convey complex concepts in a way that demonstrates their understanding of business principles.1.4. Preparing for Business ExamsPreparing for
13. Who are Ante and Freedy Handel? How do their views on the world economy
differ?
Answer: Ante and Freedy Handel are two brothers who discuss various international
financial management problems and controversial issues in international finance in
Point–Counterpoint features. The brothers are enrolled in an international finance class.
Ante typically rails against free trade and free markets as he believes financial markets
are inefficient and that prices do not necessarily correctly reflect information about a
firm’s prospects. Freedy believes more in the power of the capitalist system to allocate
resources efficiently, and he consequently believes that financial markets by and large get
things right.
PROBLEMS
1. Go to the Web site of your favorite multinational firm and determine where it
operates thoughout the world. How many employees does it have worldwide? Has
it done any interesting cross-border mergers and acquisitions during the last year?
Answer: As an example, Siemens, http://www.siemens.com/investor/en/index.htm, has an
investor relations section in which you can find the current annual and quarterly reports.
International Financial Management 3rd Edition by Bekaert
Chapter 1-17
evaluate students' ability to think critically and make strategic decisions.Essay/Short Answer Questions: These types of questions test the student’s ability to explain and analyze business concepts in a
detailed and coherent manner.1.3. Skills Tested in Business ExamsCritical Thinking and Problem-Solving: Business exams often include case studies that challenge students to apply theoretical knowledge
to real-life situations. These tests assess decision-making skills, as well as the ability to evaluate various business alternatives.Quantitative Analysis: For subjects like finance or economics, business exams
often require students to perform calculations and interpret data. The ability to analyze financial statements, project revenues, and manage budgets is essential.Communication and Writing Skills: Business
exams may require students to present ideas clearly and concisely. Students must convey complex concepts in a way that demonstrates their understanding of business principles.1.4. Preparing for
Business ExamsPreparing for
Chapter 1
Globalization and the Multinational
Corporation
QUESTIONS
1. Define globalization. How has it proceeded in trade in goods and services versus
capital markets?
Answer: Globalization refers to the increasing connectivity and integration of countries
and corporations and the people within them in terms of their economic, political, and
social activities. Because of globalization, multinational corporations dominate the
corporate landscape.
2. Describe fours ways that a company can supply its products to a foreign country.
How do they differ?
Answer: An MNC can supply a foreign market through exports, by licensing local firms
abroad to manufacture the company’s products, by setting up a joint venture with a
foreign company, or by foreign direct investment.
3. What is a greenfield investment?
Answer: MNCs engage in greenfield investments when they enter foreign markets by
simply establishing new operations in these countries without having a local partner and
without acquiring a local company.
4. What percentage ownership typically defines FDI?
Answer: Foreign direct investment (FDI) occurs when a company from one country
makes a significant investment that leads to at least a 10% ownership interest in a firm in
another country.
5. What is agency theory? How does corporate governance the issues raised by agency
, theory?
Answer: Agency theory explores the problems that arise because the owners of the firm
do not typically manage the firm, and it devises ways to resolve these problems. This is
often called the separation of owneship and control. A manager of a firm, in particular
the chief executive officer (CEO), is viewed as an agent who contracts with various
principals—most importantly the firm’s shareholders but also the firm’s creditors,
suppliers, clients, and employees. The principals must design contracts that motivate the
agent to perform actions and make decisions that are in the best interests of the principals.
evaluate students' ability to think critically and make strategic decisions.Essay/Short Answer Questions: These types of questions test the student’s ability to explain and analyze business concepts in a detailed and coherent
manner.1.3. Skills Tested in Business ExamsCritical Thinking and Problem-Solving: Business exams often include case studies that challenge students to apply theoretical knowledge to real-life situations. These tests assess
decision-making skills, as well as the ability to evaluate various business alternatives.Quantitative Analysis: For subjects like finance or economics, business exams often require students to perform calculations and interpret
data. The ability to analyze financial statements, project revenues, and manage budgets is essential.Communication and Writing Skills: Business exams may require students to present ideas clearly and concisely. Students must
convey complex concepts in a way that demonstrates their understanding of business principles.1.4. Preparing for Business ExamsPreparing for
6. Why is ownership more concentrated in developing countries than in developed
countries?
Answer: In many developed countries, the rule of law is strong enough to discipline
managers through legal means, for example by takeovers and proxy contests or through
contractual compensation plans. Concentrated ownership is one way in which agency
problems are mitigated in developing countries. A block of stock is held by either a
wealthy investor, a family, or a financial intermediary, which might be a bank, a holding
company, a hedge fund or a pension fund. The large shareholder clearly has a vested
interest in monitoring management and has the power to implement changes in
management. Negative aspects of this approach include possible collusion between the
large shareholder and the management to expropriate wealth from smaller shareholders
and the fact that the stock may be more difficult to trade on the stock market if a
substantial block of shares is withdrawn from the market but is still available to be sold
should the large shareholder want to sell.
7. What is the IMF? What is its role in the world economy?
Answer: The International Monetary Fund (IMF) is an international organization of 187
member countries, based in Washington, DC, which was conceived at a United Nations
conference convened in Bretton Woods, New Hampshire, in 1944. The main goal of the
IMF is to ensure the stability of the international monetary and financial system—the
system of international payments and exchange rates among national currencies that
enables trade to take place between countries, to help resolve crises when they occur, and
to promote growth and alleviate poverty. To meet these objectives, the IMF offers
surveillance and technical assistance. Surveillance is the regular dialogue about a
country’s economic condition and policy advice that the IMF offers to each of its
members. Technical assistance and training are offered to help member countries
strengthen their capacity to design and implement effective policies, including fiscal
policy, monetary and exchange rate policies, banking and financial system supervision
and regulation, and statistics.
8. What is the World Bank? What is its role in the world economy?
Answer: The World Bank is an international institution created in 1944, as the
, International Bank for Reconstruction and Development (IBRD) to facilitate postwar
reconstruction and development. Over time, the IBRD’s focus shifted toward poverty
reduction, and in 1960, the International Development Association (IDA) was established
as an integral part of the World Bank. Whereas the IBRD focuses on middle-income
countries, the IDA focuses on the poorest countries in the world. Together they provide
low-interest loans, interest-free credits, and grants to developing countries for
investments in education, health, infrastructure, communications, and other activities.
The World Bank also provides advisory services to developing countries and is actively
involved with efforts to reduce and cancel the international debt of the poorest countries.
evaluate students' ability to think critically and make strategic decisions.Essay/Short Answer Questions: These types of questions test the student’s ability to explain and analyze business concepts in a detailed and coherent
manner.1.3. Skills Tested in Business ExamsCritical Thinking and Problem-Solving: Business exams often include case studies that challenge students to apply theoretical knowledge to real-life situations. These tests assess
decision-making skills, as well as the ability to evaluate various business alternatives.Quantitative Analysis: For subjects like finance or economics, business exams often require students to perform calculations and interpret
data. The ability to analyze financial statements, project revenues, and manage budgets is essential.Communication and Writing Skills: Business exams may require students to present ideas clearly and concisely. Students must
convey complex concepts in a way that demonstrates their understanding of business principles.1.4. Preparing for Business ExamsPreparing for
9. What are the major multilateral development banks?
Answer: The term typically refers to the World Bank Group and four regional
development banks: the African Development Bank, the Asian Development Bank, the
European Bank for Reconstruction and Development, and the Inter-American
Development Bank. These banks have a broad membership that includes both developing
countries (borrowers) and developed countries (donors), and their membership is not
limited to countries from the region of the regional development bank. While each bank
has its own independent legal and operational status, their similar mandates and a
considerable number of joint owners lead to a high level of cooperation among MDBs.
The MDBs provide financing for development in three ways. First, they provide long-
term loans at market interest rates. To fund these loans, the MDBs borrow on the
international capital markets and re-lend to borrowing governments in developing
countries. Second, the MDBs offer long-term loans (often termed credits) with interest
rates set well below market rates. These credits are funded through direct contributions of
governments in donor countries. Finally, grants are sometimes offered mostly for
technical assistance, advisory services, or project preparation.
10. What is the WTO? What is its role in the world economy?
Answer: The World Trade Organization (WTO) was founded in 1995. It is headquartered
in Geneva, Switzerland, and had 153 member countries in 2010. Whereas GATT was a
set of rules, the WTO is an institutional body. The WTO expanded its scope from traded
goods to trade within the service sector and intellectual property rights. Various WTO
agreements set the legal ground rules for international commerce to hopefully ensure that
the multilateral trading system operates smoothly. They are negotiated and signed by a
large majority of the world’s trading nations, and the agreements are ratified in the
parliaments of the member countries. If there is a trade dispute between countries, the
WTO’s dispute settlement process helps interpret the agreements and commitments, and
it ensures that countries’ trade policies conform to them.
11. What is an institutional investor? Along with individual investors, what do they
detemine?
, Answer: Institutional Investors are organizations that invest pools of money on behalf of
individual investors or other organizations. Examples include banks, insurance
companies, pension funds, mutual funds, and university endowments. Institutional
investors, together with individual investors, determine the prices of bonds and stocks
implicitly determining the expected rates of return on these assets thereby setting the
MNC’s cost of capital. The cost of capital, in turn, affects project valuations, which
determines a company’s investments.
12. What are anti-globalists?
Answer: Anti-globalization is an umbrella term encompassing separate social
movements, united in their opposition to the globalization of corporate economic activity
and the free trade with developing nations that results from such activity. Anti-globalists
generally believe that global laissez-faire capitalism is detrimental to poor countries and
to disadvantaged people in rich countries. Anti-globalists also criticize global financial
institutions such as the World Bank, the IMF, and the WTO. Especially under attack is
the so-called Washington consensus model of development, which, as promoted by
international financial institutions (especially the IMF), is interpreted as requiring
macroeconomic austerity, privatization, and a relatively laissez-faire approach to
economic management. Anti-globalists believe that these policies exacerbate
unemployment and poverty.
evaluate students' ability to think critically and make strategic decisions.Essay/Short Answer Questions: These types of questions test the student’s ability to explain and analyze business concepts in a detailed and coherent
manner.1.3. Skills Tested in Business ExamsCritical Thinking and Problem-Solving: Business exams often include case studies that challenge students to apply theoretical knowledge to real-life situations. These tests assess
decision-making skills, as well as the ability to evaluate various business alternatives.Quantitative Analysis: For subjects like finance or economics, business exams often require students to perform calculations and interpret
data. The ability to analyze financial statements, project revenues, and manage budgets is essential.Communication and Writing Skills: Business exams may require students to present ideas clearly and concisely. Students must
convey complex concepts in a way that demonstrates their understanding of business principles.1.4. Preparing for Business ExamsPreparing for
13. Who are Ante and Freedy Handel? How do their views on the world economy
differ?
Answer: Ante and Freedy Handel are two brothers who discuss various international
financial management problems and controversial issues in international finance in
Point–Counterpoint features. The brothers are enrolled in an international finance class.
Ante typically rails against free trade and free markets as he believes financial markets
are inefficient and that prices do not necessarily correctly reflect information about a
firm’s prospects. Freedy believes more in the power of the capitalist system to allocate
resources efficiently, and he consequently believes that financial markets by and large get
things right.
PROBLEMS
1. Go to the Web site of your favorite multinational firm and determine where it
operates thoughout the world. How many employees does it have worldwide? Has
it done any interesting cross-border mergers and acquisitions during the last year?
Answer: As an example, Siemens, http://www.siemens.com/investor/en/index.htm, has an
investor relations section in which you can find the current annual and quarterly reports.
