Solution Manual for International Financial Management, 10th Edition By Cheol Eun, Bruce Resnick and Tuugi Chuluun Chapter 1-21

SOLUTION MANUAL FOR m m




InternationalFinancialManagement,10thEditionEUNChapter m




m 1-21


CHAPTER1 m




GLOBALIZATIONANDTHEMULTINATIONALFIRM m m




ANSWERS & SOLUTIONS TO END-OF-CHAPTER QUESTIONS AND PROBLEMS
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QUESTIONS

1. Whyisitimportanttostudyinternationalfinancialmanagement?
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Answer: We are now living in a world where all the major economic functions, such as consumption,
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production, investment, and financing, are highly globalized.
m m m m m m m m It is thus essential for financial
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m managers tofully understand vital internationaldimensions of financialmanagement. This global shift
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m is in marked contrast to a situation that existed when the authors of this book were learning finance a
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few decades ago. At that time, most professors customarily (and safely, to some extent) ignored
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m international aspects of finance. This mode of operation has become untenable since then.
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2. Howisinternationalfinancialmanagementdifferent fromdomestic financialmanagement? m b m b




Answer: Therearethreemajordimensionsthatsetapartinternationalfinancefromdomestic finance.
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Theyare:
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1. foreignexchangeandpoliticalrisks,
2. marketimperfections,and m m




3. expandedopportunityset. m




3. Discussthemajortrendsthathaveprevailedininternationalbusinessduringthelasttwo
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m decades.

Answer: The2000sbroughtarapidintegrationofinternationalcapitalandfinancialmarkets. Impetus
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forglobalizedfinancialmarketsinitiallycamefromthegovernmentsofmajorcountriesthat hadbegunto
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deregulatetheirforeignexchangeandcapitalmarkets. Theeconomic
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,integrationandglobalizationthatbeganintheeightiesandninetiesarepickingupspeedinthe 2000s.
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Tradeliberalizationandeconomicintegrationcontinuedtoproceedatboththeregional andglobal
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levels.DespitesovereigndebtcrisisinEurope,moreEUmembercountrieshave adoptedthecommon
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currency,theeuro,thateffectivelybecamethesecondglobalcurrencyafter theU.S.dollar.Inthelastfew
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years,however,economicnationalismhasbeengainingsome popularity,asexemplifiedbytheBrexit
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decisionoftheUnitedKingdom andtheso-called
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―America First‖ policies of the Trump Administration. Totheextent that economic nationalism is a
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m populist response to the global financial crisis and Great Recession, it may subside as the world
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m economy continues torecover. m m m




4. Howisacountry‘seconomicwell-beingenhancedthroughfreeinternationaltradeingoods and
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m services?

Answer: AccordingtoDavidRicardo,withfreeinternationaltrade,itismutuallybeneficialfortwo
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m countriestoeachspecializeintheproductionofthegoodsthatitcanproducerelativelymost efficiently
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andthentradethosegoods. Bydoingso,thetwocountriescanincreasetheircombined production,
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whichallowsbothcountriestoconsumemoreofbothgoods.Thisargumentremains validevenifa
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countrycanproducebothgoodsmoreefficientlyinabsolutetermsthantheother country.
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m Internationaltradeisnota‗zero-sum‘gameinwhichonecountrybenefitsattheexpense ofanother m m m m m m m m m m m m m m




country.Rather,internationaltradecouldbean‗increasing-sum‘gamefromwhichall playersbecome
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winners.
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5. Whatconsiderationsmight limittheextenttowhichthetheoryofcomparativeadvantageis
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m realistic?

Answer: Thetheoryofcomparativeadvantagewasoriginallyadvancedbythenineteenthcentury
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m economistDavidRicardoasanexplanationforwhynationstradewithoneanother.Thetheory claims
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thateconomicwell-beingisenhancedifeachcountryproduceswhatithasacomparative advantagein
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producingrelativetoothercountries,andthentradeproducts.
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Underlyingthetheoryaretheassumptionsoffreetradebetweennationsandthatthefactorsof
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m production(labor,technologicalknow-how,andcapital)arerelativelyimmobile. Totheextentthat
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m theseassumptionsdonothold,thetheoryofcomparativeadvantagemaynotrealisticallydescribe
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m internationaltrade. Inaddition,freetradeproduceswinnersandlosersandifthelosersarenot
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m compensated,freetrademayfacespoliticalopposition from them. m m m m m m m m




6. Whataremultinationalcorporations(MNCs)andwhateconomicrolesdotheyplay?
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,Answer: Amultinationalcorporation(MNC)canbedefinedasabusinessfirmincorporatedinone
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m countrythathasproductionandsalesoperationsinmanyothercountries.Indeed,someMNCs have
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operationsinafewdozensofdifferentcountries. MNCsobtainfinancingfrommajormoney centers
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aroundtheworldinmanydifferentcurrenciestofinancetheiroperations.Globaloperations forcethe
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treasurer‘sofficetoestablishinternationalbankingrelationships,toplaceshort-term fundsinseveral
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currencydenominations,andtoeffectivelymanageforeignexchangerisk. By circumventingand
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alsotakingadvantageofvariousmarketimperfections,suchasbarrierstotrade andbarrierstoflowof
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peopleandcapitalacrosscountries,MNCscontributetogreaterintegration oftheworldeconomyand
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ingmoreperfectfunctioningofglobalmarkets.
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7. RossPerot,aformerPresidentialcandidateoftheReformParty,whichwasathirdpolitical party
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m intheUnitedStates,hadstronglyobjectedtothecreationoftheNorthAmericanTrade Agreement
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(NAFTA),whichnonethelesswasinauguratedin1994.Perotfearedthelossof Americanjobsto
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Mexicowhereitismuchcheapertohireworkers.Whatarethemeritsand demeritsofPerot‘sposition
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onNAFTA?ConsideringtherecenteconomicdevelopmentsinNorth America, howwould you
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assess Perot‘s positionon NAFTA?
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Answer:SincetheinceptionofNAFTA,manyAmericancompaniesindeedhaveinvestedheavily in
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Mexico,sometimesrelocatingproductionfromtheUnitedStatestoMexico.Althoughthismight have
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temporarilycausedunemployment ofsomeAmericanworkers,theywereeventuallyrehired byother
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industriesoftenforhigherwages.Atthesametime,Mexicohasbeenexperiencinga majoreconomic
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boom.ItseemsclearthatbothMexicoandtheU.S.havebenefitedfromNAFTA. Perot‘s concern
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appears to have been ill founded.
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8. In1995,aworkinggroupofFrenchchiefexecutiveofficerswassetupbytheConfederationof
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m FrenchIndustry(CNPF)andtheFrenchAssociationofPrivateCompanies(AFEP)tostudythe
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m Frenchcorporategovernancestructure.Thegroupreportedthefollowing,amongotherthings:
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―TheboardofdirectorsshouldnotsimplyaimatmaximizingsharevaluesasintheU.K.andthe
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U.S.Rather,itsgoalshouldbetoservethecompany,whoseinterestsshouldbeclearly distinguished
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fromthoseofitsshareholders,employees,creditors,suppliersandclientsbutstill equatedwiththeir
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generalcommoninterest,whichistosafeguardtheprosperityandcontinuityof thecompany‖.Evaluate
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theaboverecommendation oftheworkinggroup.
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Answer:TherecommendationsoftheFrenchworkinggroupclearlyshowthatshareholderwealth
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maximizationisnotauniversallyacceptedgoalofcorporatemanagement,especially
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, outsidetheUnitedStatesandpossiblyafewotherAnglo-SaxoncountriesincludingtheUnited Kingdom
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andCanada.Tosomeextent,thismayreflectthefactthatshareownershipisnotwide spread in most other
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m countries.

9. Emphasizingtheimportanceofvoluntarycompliance,asopposedtoenforcement,inthe m m m m m m m m m m m




m aftermathofsuchcorporatescandalsasthoseinvolvingEnronandWorldCom,U.S.President
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m GeorgeW.Bushstatedthatwhiletougherlawsmighthelp,―ultimately,theethicsofAmerican
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m businessdependsontheconscienceofAmerica‘sbusinessleaders.‖ Describeyourviewonthis
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m statement.

Answer: There can be different answers to this question. If business leaders always behave with a high
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m ethical standard, many of the corporate scandals we have seen lately might not have happened.
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Since we cannot fully depend on the ethical behavior on the part of individual business leaders, the
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societyshould protectitself byadoptingtherules/regulationsandgovernancestructure that would induce
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business leaders to behave in the interest of the society at large. But at the same time, we need to make
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sure that excessive regulations do not stymy free enterprises, an important engineof economic growth.
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Itisimportanttostriketherightbalance.
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10. SupposeyouareinterestedininvestinginsharesofSamsungElectronicsofKorea,which isa m m m m m m m m m m m m m m m




m worldleaderinmobilephones,TVs,andhomeappliances.Butbeforeyoumakeinvestment decision,
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youwouldliketolearnaboutthecompany.VisitthewebsiteofYahoo (http://finance.yahoo.com)and
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collectinformationabout SamsungElectronics, including the recentstock pricehistoryandanalysts‘
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viewsofthecompany.Discusswhatyoulearnaboutthe company.Alsodiscusshowtheinstantaneous
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accesstoinformationviainternetwouldaffect the nature and workings of financial markets.
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Answer:Asstudentsmighthavelearnedfromvisitingthewebsite,informationisreadilyavailable even
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forforeigncompanieslikeSamsungElectronics.Readyaccesstointernationalinformation helps
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integratefinancialmarkets,dismantlingbarrierstointernationalinvestmentandfinancing. Integration,
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however,mayhelpafinancialshockinonemarkettobequicklytransmittedtoother markets.
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11. Most companies make corporate decisions to maximize their profits, without taking into
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consideration the possibly negative effects of corporate activities on the environments, thereby
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