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,SOLUTION MANUAL FOR z z
International Financial Management, 10th Edition EUN Chapter z z z z z z z
1-21
CHAPTER 1 z
GLOBALIZATION AND THE MULTINATIONAL FIRM z z z z
ANSWERS & SOLUTIONS TO END-OF-CHAPTER QUESTIONS AND PROBLEMS
z z z z z z z
QUESTIONS
1. Why is it important to study international financial management?
z z z z z z z z
Answer: We are now living in a world where all the major economic functions, such as consumption
z z z z z z z z z z z z z z z z
, production, investment, and financing, are highly globalized. It is thus essential for financial man
z z z z z z z z z z z z z z
agers to fully understand vital international dimensions of financial management. This global shift i
z z z z z z z z z z z z z
s in marked contrast to a situation that existed when the authors of this book were learning finance
z z z z z z z z z z z z z z z z z z
a few decades ago. At that time, most professors customarily (and safely, to some extent) ignored i
z z z z z z z z z z z z z z z z
nternational aspects of finance. This mode of operation has become untenable since then.
z z z z z z z z z z z z
2. How is international financial management different from domestic financial management?
z z z z z z z z z
Answer: There are three major dimensions that set apart international finance from domestic fina
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nce. They are: z z
1. foreign exchange and political risks, z z z z
2. market imperfections, and z z
3. expanded opportunity set. z z
3. Discuss the major trends that have prevailed in international business during the last two de
z z z z z z z z z z z z z z
cades.
Answer: The 2000s brought a rapid integration of international capital and financial markets. Imp
z z z z z z z z z z z z z
etus for globalized financial markets initially came from the governments of major countries that h
z z z z z z z z z z z z z z
ad begun to deregulate their foreign exchange and capital markets. The economic
z z z z z z z z z z z
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,integration and globalization that began in the eighties and nineties are picking up speed in the 20
z z z z z z z z z z z z z z z z
00s. Trade liberalization and economic integration continued to proceed at both the regional and g
z z z z z z z z z z z z z z
lobal levels. Despite sovereign debt crisis in Europe, more EU member countries have adopted th
z z z z z z z z z z z z z z
e common currency, the euro, that effectively became the second global currency after the U.S. d
z z z z z z z z z z z z z z z
ollar. In the last few years, however, economic nationalism has been gaining some popularity, as
z z z z z z z z z z z z z z z
exemplified by the Brexit decision of the United Kingdom and the so-called
z z z z z z z z z z z
―America First‖ policies of the Trump Administration. To the extent that economic nationalism is a
z z z z z z z z z z z z z z z
populist response to the global financial crisis and Great Recession, it may subside as the world e
z z z z z z z z z z z z z z z z
conomy continues to recover. z z z
4. How is a country‘s economic well-
z z z z z
being enhanced through free international trade in goods and services?
z z z z z z z z z
Answer: According to David Ricardo, with free international trade, it is mutually beneficial for two
z z z z z z z z z z z z z z z
countries to each specialize in the production of the goods that it can produce relatively most effici
z z z z z z z z z z z z z z z z
ently and then trade those goods. By doing so, the two countries can increase their combined pro
z z z z z z z z z z z z z z z z
duction, which allows both countries to consume more of both goods. This argument remains vali
z z z z z z z z z z z z z z
d even if a country can produce both goods more efficiently in absolute terms than the other countr
z z z z z z z z z z z z z z z z z
y. International trade is not a ‗zero-
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sum‘ game in which one country benefits at the expense of another country. Rather, international t
z z z z z z z z z z z z z z z
rade could be an ‗increasing- sum‘ game from which all players become winners.
z z z z z z z z z z z z
5. What considerations might limit the extent to which the theory of comparative advantage is re
z z z z z z z z z z z z z z
alistic?
Answer: The theory of comparative advantage was originally advanced by the nineteenth centur
z z z z z z z z z z z z
y economist David Ricardo as an explanation for why nations trade with one another. The theory c
z z z z z z z z z z z z z z z z
laims that economic well-
z z z
being is enhanced if each country produces what it has a comparative advantage in producing rel
z z z z z z z z z z z z z z z
ative to other countries, and then trade products.
z z z z z z z
Underlying the theory are the assumptions of free trade between nations and that the factors of pr
z z z z z z z z z z z z z z z z
oduction (labor, technological know- z z z
how, and capital) are relatively immobile. To the extent that these assumptions do not hold, the th
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eory of comparative advantage may not realistically describe international trade. In addition, free
z z z z z z z z z z z z z
trade produces winners and losers and if the losers are not compensated, free trade may faces po
z z z z z z z z z z z z z z z z
litical opposition from them.
z z z
6. What are multinational corporations (MNCs) and what economic roles do they play?
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, Answer: A multinational corporation (MNC) can be defined as a business firm incorporated in one
z z z z z z z z z z z z z z z
country that has production and sales operations in many other countries. Indeed, some MNCs ha
z z z z z z z z z z z z z z
ve operations in a few dozens of different countries. MNCs obtain financing from major money ce
z z z z z z z z z z z z z z z
nters around the world in many different currencies to finance their operations. Global operations f
z z z z z z z z z z z z z z
orce the treasurer‘s office to establish international banking relationships, to place short-
z z z z z z z z z z z
term funds in several currency denominations, and to effectively manage foreign exchange risk. B
z z z z z z z z z z z z z
y circumventing and also taking advantage of various market imperfections, such as barriers to tra
z z z z z z z z z z z z z z
de and barriers to flow of people and capital across countries, MNCs contribute to greater integrati
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on of the world economy and ing more perfect functioning of global markets.
z z z z z z z z z z z z
7. Ross Perot, a former Presidential candidate of the Reform Party, which was a third political pa
z z z z z z z z z z z z z z z
rty in the United States, had strongly objected to the creation of the North American Trade Agreem
z z z z z z z z z z z z z z z z
ent (NAFTA), which nonetheless was inaugurated in 1994. Perot feared the loss of American jobs
z z z z z z z z z z z z z z z
to Mexico where it is much cheaper to hire workers. What are the merits and demerits of Perot‘s po
z z z z z z z z z z z z z z z z z z
sition on NAFTA? Considering the recent economic developments in North America, how would y
z z z z z z z z z z z z z
ou assess Perot‘s position on NAFTA?
z z z z z
Answer: Since the inception of NAFTA, many American companies indeed have invested heavily i
z z z z z z z z z z z z z
n Mexico, sometimes relocating production from the United States to Mexico. Although this might
z z z z z z z z z z z z z z
have temporarily caused unemployment of some American workers, they were eventually rehired
z z z z z z z z z z z
z by other industries often for higher wages. At the same time, Mexico has been experiencing a maj
z z z z z z z z z z z z z z z z
or economic boom. It seems clear that both Mexico and the U.S. have benefited from NAFTA. Per
z z z z z z z z z z z z z z z z
ot‘s concern appears to have been ill founded.
z z z z z z z
8. In 1995, a working group of French chief executive officers was set up by the Confederation of
z z z z z z z z z z z z z z z z z
French Industry (CNPF) and the French Association of Private Companies (AFEP) to study the Fre
z z z z z z z z z z z z z z
nch corporate governance structure. The group reported the following, among other things: ―The
z z z z z z z z z z z z z
board of directors should not simply aim at maximizing share values as in the U.K. and the U.S. Rat
z z z z z z z z z z z z z z z z z z
her, its goal should be to serve the company, whose interests should be clearly distinguished from t
z z z z z z z z z z z z z z z z
hose of its shareholders, employees, creditors, suppliers and clients but still equated with their gen
z z z z z z z z z z z z z z
eral common interest, which is to safeguard the prosperity and continuity of the company‖. Evaluat
z z z z z z z z z z z z z z
e the above recommendation of the working group.
z z z z z z z
Answer: The recommendations of the French working group clearly show that shareholder wealth
z z z z z z z z z z z z
maximization is not a universally accepted goal of corporate management, especially
z z z z z z z z z z z
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C
C
,SOLUTION MANUAL FOR z z
International Financial Management, 10th Edition EUN Chapter z z z z z z z
1-21
CHAPTER 1 z
GLOBALIZATION AND THE MULTINATIONAL FIRM z z z z
ANSWERS & SOLUTIONS TO END-OF-CHAPTER QUESTIONS AND PROBLEMS
z z z z z z z
QUESTIONS
1. Why is it important to study international financial management?
z z z z z z z z
Answer: We are now living in a world where all the major economic functions, such as consumption
z z z z z z z z z z z z z z z z
, production, investment, and financing, are highly globalized. It is thus essential for financial man
z z z z z z z z z z z z z z
agers to fully understand vital international dimensions of financial management. This global shift i
z z z z z z z z z z z z z
s in marked contrast to a situation that existed when the authors of this book were learning finance
z z z z z z z z z z z z z z z z z z
a few decades ago. At that time, most professors customarily (and safely, to some extent) ignored i
z z z z z z z z z z z z z z z z
nternational aspects of finance. This mode of operation has become untenable since then.
z z z z z z z z z z z z
2. How is international financial management different from domestic financial management?
z z z z z z z z z
Answer: There are three major dimensions that set apart international finance from domestic fina
z z z z z z z z z z z z z
nce. They are: z z
1. foreign exchange and political risks, z z z z
2. market imperfections, and z z
3. expanded opportunity set. z z
3. Discuss the major trends that have prevailed in international business during the last two de
z z z z z z z z z z z z z z
cades.
Answer: The 2000s brought a rapid integration of international capital and financial markets. Imp
z z z z z z z z z z z z z
etus for globalized financial markets initially came from the governments of major countries that h
z z z z z z z z z z z z z z
ad begun to deregulate their foreign exchange and capital markets. The economic
z z z z z z z z z z z
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,integration and globalization that began in the eighties and nineties are picking up speed in the 20
z z z z z z z z z z z z z z z z
00s. Trade liberalization and economic integration continued to proceed at both the regional and g
z z z z z z z z z z z z z z
lobal levels. Despite sovereign debt crisis in Europe, more EU member countries have adopted th
z z z z z z z z z z z z z z
e common currency, the euro, that effectively became the second global currency after the U.S. d
z z z z z z z z z z z z z z z
ollar. In the last few years, however, economic nationalism has been gaining some popularity, as
z z z z z z z z z z z z z z z
exemplified by the Brexit decision of the United Kingdom and the so-called
z z z z z z z z z z z
―America First‖ policies of the Trump Administration. To the extent that economic nationalism is a
z z z z z z z z z z z z z z z
populist response to the global financial crisis and Great Recession, it may subside as the world e
z z z z z z z z z z z z z z z z
conomy continues to recover. z z z
4. How is a country‘s economic well-
z z z z z
being enhanced through free international trade in goods and services?
z z z z z z z z z
Answer: According to David Ricardo, with free international trade, it is mutually beneficial for two
z z z z z z z z z z z z z z z
countries to each specialize in the production of the goods that it can produce relatively most effici
z z z z z z z z z z z z z z z z
ently and then trade those goods. By doing so, the two countries can increase their combined pro
z z z z z z z z z z z z z z z z
duction, which allows both countries to consume more of both goods. This argument remains vali
z z z z z z z z z z z z z z
d even if a country can produce both goods more efficiently in absolute terms than the other countr
z z z z z z z z z z z z z z z z z
y. International trade is not a ‗zero-
z z z z z z
sum‘ game in which one country benefits at the expense of another country. Rather, international t
z z z z z z z z z z z z z z z
rade could be an ‗increasing- sum‘ game from which all players become winners.
z z z z z z z z z z z z
5. What considerations might limit the extent to which the theory of comparative advantage is re
z z z z z z z z z z z z z z
alistic?
Answer: The theory of comparative advantage was originally advanced by the nineteenth centur
z z z z z z z z z z z z
y economist David Ricardo as an explanation for why nations trade with one another. The theory c
z z z z z z z z z z z z z z z z
laims that economic well-
z z z
being is enhanced if each country produces what it has a comparative advantage in producing rel
z z z z z z z z z z z z z z z
ative to other countries, and then trade products.
z z z z z z z
Underlying the theory are the assumptions of free trade between nations and that the factors of pr
z z z z z z z z z z z z z z z z
oduction (labor, technological know- z z z
how, and capital) are relatively immobile. To the extent that these assumptions do not hold, the th
z z z z z z z z z z z z z z z z
eory of comparative advantage may not realistically describe international trade. In addition, free
z z z z z z z z z z z z z
trade produces winners and losers and if the losers are not compensated, free trade may faces po
z z z z z z z z z z z z z z z z
litical opposition from them.
z z z
6. What are multinational corporations (MNCs) and what economic roles do they play?
z z z z z z z z z z z
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, Answer: A multinational corporation (MNC) can be defined as a business firm incorporated in one
z z z z z z z z z z z z z z z
country that has production and sales operations in many other countries. Indeed, some MNCs ha
z z z z z z z z z z z z z z
ve operations in a few dozens of different countries. MNCs obtain financing from major money ce
z z z z z z z z z z z z z z z
nters around the world in many different currencies to finance their operations. Global operations f
z z z z z z z z z z z z z z
orce the treasurer‘s office to establish international banking relationships, to place short-
z z z z z z z z z z z
term funds in several currency denominations, and to effectively manage foreign exchange risk. B
z z z z z z z z z z z z z
y circumventing and also taking advantage of various market imperfections, such as barriers to tra
z z z z z z z z z z z z z z
de and barriers to flow of people and capital across countries, MNCs contribute to greater integrati
z z z z z z z z z z z z z z z
on of the world economy and ing more perfect functioning of global markets.
z z z z z z z z z z z z
7. Ross Perot, a former Presidential candidate of the Reform Party, which was a third political pa
z z z z z z z z z z z z z z z
rty in the United States, had strongly objected to the creation of the North American Trade Agreem
z z z z z z z z z z z z z z z z
ent (NAFTA), which nonetheless was inaugurated in 1994. Perot feared the loss of American jobs
z z z z z z z z z z z z z z z
to Mexico where it is much cheaper to hire workers. What are the merits and demerits of Perot‘s po
z z z z z z z z z z z z z z z z z z
sition on NAFTA? Considering the recent economic developments in North America, how would y
z z z z z z z z z z z z z
ou assess Perot‘s position on NAFTA?
z z z z z
Answer: Since the inception of NAFTA, many American companies indeed have invested heavily i
z z z z z z z z z z z z z
n Mexico, sometimes relocating production from the United States to Mexico. Although this might
z z z z z z z z z z z z z z
have temporarily caused unemployment of some American workers, they were eventually rehired
z z z z z z z z z z z
z by other industries often for higher wages. At the same time, Mexico has been experiencing a maj
z z z z z z z z z z z z z z z z
or economic boom. It seems clear that both Mexico and the U.S. have benefited from NAFTA. Per
z z z z z z z z z z z z z z z z
ot‘s concern appears to have been ill founded.
z z z z z z z
8. In 1995, a working group of French chief executive officers was set up by the Confederation of
z z z z z z z z z z z z z z z z z
French Industry (CNPF) and the French Association of Private Companies (AFEP) to study the Fre
z z z z z z z z z z z z z z
nch corporate governance structure. The group reported the following, among other things: ―The
z z z z z z z z z z z z z
board of directors should not simply aim at maximizing share values as in the U.K. and the U.S. Rat
z z z z z z z z z z z z z z z z z z
her, its goal should be to serve the company, whose interests should be clearly distinguished from t
z z z z z z z z z z z z z z z z
hose of its shareholders, employees, creditors, suppliers and clients but still equated with their gen
z z z z z z z z z z z z z z
eral common interest, which is to safeguard the prosperity and continuity of the company‖. Evaluat
z z z z z z z z z z z z z z
e the above recommendation of the working group.
z z z z z z z
Answer: The recommendations of the French working group clearly show that shareholder wealth
z z z z z z z z z z z z
maximization is not a universally accepted goal of corporate management, especially
z z z z z z z z z z z
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