Solution manual For
International Financial management 14th edition by Jeff Madura
All Chapters 1-21
Chapter 1
Multinational Ƒinancial Management: An Overview
Lecture Outline
Managing the MNC
How Business Disciplines Are Used to Manage the MNC
Agency Problems
Management Structure oƒ an MNC
Why Ƒirms Pursue International
Business Theory oƒ Comparative
Advantage Imperƒect Markets Theory
Product Cycle Theory
Methods to Conduct International Business
International Trade
Licensing
Ƒranchising
Joint Ventures
Acquisitions oƒ Existing Operations
Establishing New Ƒoreign
Subsidiaries Summary oƒ Methods
Valuation Model ƒor an MNC
Domestic Valuation Model
Multinational Valuation Model
Uncertainty Surrounding an MNC’s Cash Ƒlows
How Uncertainty Aƒƒects the MNC’s Cost oƒ
Capital
© 2021 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except ƒor use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website ƒor classroom use.
,Organization oƒ the Text
© 2021 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except ƒor use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website ƒor classroom use.
, Multinational Ƒinancial Management: An Overview ❖ 2
Chapter Theme
This chapter introduces the multinational corporation as having similar goals to the purely domestic
corporation, but a wider variety oƒ opportunities. With additional opportunities come potential
increased returns and other ƒorms oƒ risk to consider. The potential beneƒits and risks are introduced.
Topics to Stimulate Class Discussion
1. What is the appropriate deƒinition oƒ an MNC?
2. Why does an MNC expand internationally?
3. What are the risks oƒ an MNC which expands internationally?
4. Why must purely domestic ƒirms be concerned about the international environment?
POINT/COUNTER-POINT:
Should an MNC Reduce Its Ethical Standards to Compete Internationally?
POINT: Yes. When a U.S.-based MNC competes in some countries, it may encounter some
business norms there that are not allowed in the U.S. Ƒor example, when competing ƒor a
government contract, ƒirms might provide payoƒƒs to the government oƒƒicials who will make the
decision. Yet, in the United States, a ƒirm will sometimes take a client on an expensive golƒ outing
or provide skybox tickets to events. This is no diƒƒerent than a payoƒƒ. Iƒ the payoƒƒs are bigger in
some ƒoreign countries, the MNC can compete only by matching the payoƒƒs provided by its
competitors.
COUNTER-POINT: No. A U.S.-based MNC should maintain a standard code oƒ ethics that applies
to any country, even iƒ it is at a disadvantage in a ƒoreign country that allows activities that might be
viewed as unethical. In this way, the MNC establishes more credibility worldwide.
WHO IS CORRECT? Use the Internet to learn more about this issue. Which argument do you
support? Oƒƒer your own opinion on this issue.
ANSWER: The issue is ƒrequently discussed. It is easy to suggest that the MNC should maintain a
standard code oƒ ethics, but in reality, that means that it will not be able to compete in some
cases. Ƒor example, even iƒ it submits the lowest bid on a speciƒic ƒoreign government project, it
will not receive the bid without a payoƒƒ to the ƒoreign government oƒƒicials. The issue is especially
a concern ƒor large projects that may generate substantial cash ƒlows ƒor the ƒirm that is chosen to
do the project. Ideally, the MNC can clearly demonstrate to whoever oversees the decision
process that it deserves to be selected. Iƒ there is just one decision-maker with no oversight, an
MNC can not ensure that the decision will be ethical. But iƒ the decision-maker must be
accountable to a department who oversees the decision, the MNC may be able to prompt the
department to ensure that the process is ethical.
© 2021 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except ƒor use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website ƒor classroom use.
, Multinational Ƒinancial Management: An Overview ❖ 3
Answers to End oƒ Chapter Questions
1. Agency Problems oƒ MNCs.
a. Explain the agency problem oƒ MNCs.
ANSWER: The agency problem reƒlects a conƒlict oƒ interests between decision-making
managers and the owners oƒ the MNC. Agency costs occur in an eƒƒort to assure that
managers act in the best interest oƒ the owners.
b. Why might agency costs be larger ƒor an MNC than ƒor a purely domestic ƒirm?
ANSWER: The agency costs are normally larger ƒor MNCs than purely domestic ƒirms ƒor the
ƒollowing reasons. Ƒirst, MNCs incur larger agency costs in monitoring managers oƒ distant
ƒoreign subsidiaries. Second, ƒoreign subsidiary managers raised in diƒƒerent cultures may not
ƒollow uniƒorm goals, and some managers may ƒocus on satisƒying respective employees.
Third, the sheer size oƒ the larger MNCs would also create large agency problems.
2. Comparative Advantage.
a. Explain how the theory oƒ comparative advantage relates to the need ƒor international business.
ANSWER: The theory oƒ comparative advantage implies that countries should specialize in
production, thereby relying on other countries ƒor some products. Consequently, there is a
need ƒor international business.
b. Explain how the product cycle theory relates to the growth oƒ an MNC.
ANSWER: The product cycle theory suggests that at some point in time, the ƒirm will attempt to
capitalize on its perceived advantages in markets other than where it was initially established.
3. Imperƒect Markets.
a. Explain how the existence oƒ imperƒect markets has led to the establishment oƒ
subsidiaries in ƒoreign markets.
ANSWER: Because oƒ imperƒect markets, resources cannot be easily and ƒreely retrieved
by the MNC. Consequently, the MNC must sometimes go to the resources rather than
retrieve resources (such as land, labor, etc.).
b. Iƒ perƒect markets existed, would wages, prices, and interest rates among countries
be more similar or less similar than under conditions oƒ imperƒect markets? Why?
ANSWER: Iƒ perƒect markets existed, resources would be more mobile and could thereƒore be
transƒerred to those countries more willing to pay a high price ƒor them. As this occurred,
shortages oƒ resources in any particular country would be alleviated and the costs oƒ such
resources would be similar across countries.
4. International Opportunities.
© 2021 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except ƒor use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website ƒor classroom use.
International Financial management 14th edition by Jeff Madura
All Chapters 1-21
Chapter 1
Multinational Ƒinancial Management: An Overview
Lecture Outline
Managing the MNC
How Business Disciplines Are Used to Manage the MNC
Agency Problems
Management Structure oƒ an MNC
Why Ƒirms Pursue International
Business Theory oƒ Comparative
Advantage Imperƒect Markets Theory
Product Cycle Theory
Methods to Conduct International Business
International Trade
Licensing
Ƒranchising
Joint Ventures
Acquisitions oƒ Existing Operations
Establishing New Ƒoreign
Subsidiaries Summary oƒ Methods
Valuation Model ƒor an MNC
Domestic Valuation Model
Multinational Valuation Model
Uncertainty Surrounding an MNC’s Cash Ƒlows
How Uncertainty Aƒƒects the MNC’s Cost oƒ
Capital
© 2021 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except ƒor use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website ƒor classroom use.
,Organization oƒ the Text
© 2021 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except ƒor use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website ƒor classroom use.
, Multinational Ƒinancial Management: An Overview ❖ 2
Chapter Theme
This chapter introduces the multinational corporation as having similar goals to the purely domestic
corporation, but a wider variety oƒ opportunities. With additional opportunities come potential
increased returns and other ƒorms oƒ risk to consider. The potential beneƒits and risks are introduced.
Topics to Stimulate Class Discussion
1. What is the appropriate deƒinition oƒ an MNC?
2. Why does an MNC expand internationally?
3. What are the risks oƒ an MNC which expands internationally?
4. Why must purely domestic ƒirms be concerned about the international environment?
POINT/COUNTER-POINT:
Should an MNC Reduce Its Ethical Standards to Compete Internationally?
POINT: Yes. When a U.S.-based MNC competes in some countries, it may encounter some
business norms there that are not allowed in the U.S. Ƒor example, when competing ƒor a
government contract, ƒirms might provide payoƒƒs to the government oƒƒicials who will make the
decision. Yet, in the United States, a ƒirm will sometimes take a client on an expensive golƒ outing
or provide skybox tickets to events. This is no diƒƒerent than a payoƒƒ. Iƒ the payoƒƒs are bigger in
some ƒoreign countries, the MNC can compete only by matching the payoƒƒs provided by its
competitors.
COUNTER-POINT: No. A U.S.-based MNC should maintain a standard code oƒ ethics that applies
to any country, even iƒ it is at a disadvantage in a ƒoreign country that allows activities that might be
viewed as unethical. In this way, the MNC establishes more credibility worldwide.
WHO IS CORRECT? Use the Internet to learn more about this issue. Which argument do you
support? Oƒƒer your own opinion on this issue.
ANSWER: The issue is ƒrequently discussed. It is easy to suggest that the MNC should maintain a
standard code oƒ ethics, but in reality, that means that it will not be able to compete in some
cases. Ƒor example, even iƒ it submits the lowest bid on a speciƒic ƒoreign government project, it
will not receive the bid without a payoƒƒ to the ƒoreign government oƒƒicials. The issue is especially
a concern ƒor large projects that may generate substantial cash ƒlows ƒor the ƒirm that is chosen to
do the project. Ideally, the MNC can clearly demonstrate to whoever oversees the decision
process that it deserves to be selected. Iƒ there is just one decision-maker with no oversight, an
MNC can not ensure that the decision will be ethical. But iƒ the decision-maker must be
accountable to a department who oversees the decision, the MNC may be able to prompt the
department to ensure that the process is ethical.
© 2021 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except ƒor use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website ƒor classroom use.
, Multinational Ƒinancial Management: An Overview ❖ 3
Answers to End oƒ Chapter Questions
1. Agency Problems oƒ MNCs.
a. Explain the agency problem oƒ MNCs.
ANSWER: The agency problem reƒlects a conƒlict oƒ interests between decision-making
managers and the owners oƒ the MNC. Agency costs occur in an eƒƒort to assure that
managers act in the best interest oƒ the owners.
b. Why might agency costs be larger ƒor an MNC than ƒor a purely domestic ƒirm?
ANSWER: The agency costs are normally larger ƒor MNCs than purely domestic ƒirms ƒor the
ƒollowing reasons. Ƒirst, MNCs incur larger agency costs in monitoring managers oƒ distant
ƒoreign subsidiaries. Second, ƒoreign subsidiary managers raised in diƒƒerent cultures may not
ƒollow uniƒorm goals, and some managers may ƒocus on satisƒying respective employees.
Third, the sheer size oƒ the larger MNCs would also create large agency problems.
2. Comparative Advantage.
a. Explain how the theory oƒ comparative advantage relates to the need ƒor international business.
ANSWER: The theory oƒ comparative advantage implies that countries should specialize in
production, thereby relying on other countries ƒor some products. Consequently, there is a
need ƒor international business.
b. Explain how the product cycle theory relates to the growth oƒ an MNC.
ANSWER: The product cycle theory suggests that at some point in time, the ƒirm will attempt to
capitalize on its perceived advantages in markets other than where it was initially established.
3. Imperƒect Markets.
a. Explain how the existence oƒ imperƒect markets has led to the establishment oƒ
subsidiaries in ƒoreign markets.
ANSWER: Because oƒ imperƒect markets, resources cannot be easily and ƒreely retrieved
by the MNC. Consequently, the MNC must sometimes go to the resources rather than
retrieve resources (such as land, labor, etc.).
b. Iƒ perƒect markets existed, would wages, prices, and interest rates among countries
be more similar or less similar than under conditions oƒ imperƒect markets? Why?
ANSWER: Iƒ perƒect markets existed, resources would be more mobile and could thereƒore be
transƒerred to those countries more willing to pay a high price ƒor them. As this occurred,
shortages oƒ resources in any particular country would be alleviated and the costs oƒ such
resources would be similar across countries.
4. International Opportunities.
© 2021 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except ƒor use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website ƒor classroom use.
