SOLUTION MANUAL FOR b b
International Financial Management, 10th Edition EUN Chapter b b b b b b
1-21
b
CHAPTER 1 b
GLOBALIZATION AND THE MULTINATIONAL FIRM b b b b
ANSWERS & SOLUTIONS TO END-OF-CHAPTER QUESTIONS AND PROBLEMS
b b b b b b b
QUESTIONS
1. Why is it important to study international financial management?
b b b b b b b b
Answer: We are now living in a world where all the major economic functions, such as consumption,
b b b b b b b b b b b b b b b b
production, investment, and financing, are highly globalized.
b b b b b b b b It is thus essential for financial
b b b b b
managers to fully understand vital international dimensions of financial management. This global
b b b b b b b b b b b b
shift is in marked contrast to a situation that existed when the authors of this book were learning
b b b b b b b b b b b b b b b b b b
finance a few decades ago. At that time, most professors customarily (and safely, to some extent)
b b b b b b b b b b b b b b b b
ignored international aspects of finance.
b b b b b b This mode of operation has become untenable since
b b b b b b b
then.
b
2. How is international financial management different from domestic financial management?
b b b b b b b b b
Answer: There are three major dimensions that set apart international finance from domestic
b b b b b b b b b b b b
finance. They are:
b b b
1. foreign exchange and political risks, b b b b
2. market imperfections, and b b
3. expanded opportunity set. b b
3. Discuss the major trends that have prevailed in international business during the last two
b b b b b b b b b b b b b
decades.
b
Answer: The 2000s brought a rapid integration of international capital and financial markets.
b b b b b b b b b b b b
Impetus for globalized financial markets initially came from the governments of major countries that
b b b b b b b b b b b b b b
had begun to deregulate their foreign exchange and capital markets. The economic
b b b b b b b b b b b b
©MCGRAW HILL LLC. ALL RIGHTS RESERVED. NO REPRODUCTION OR DISTRIBUTION WITHOUT THE PRIOR WRITTEN CONSENT OF MCGRAW HILL LLC
b b b b b b b b b b b b b b b b b b
,integration and globalization that began in the eighties and nineties are picking up speed in the
b b b b b b b b b b b b b b b
2000s. Trade liberalization and economic integration continued to proceed at both the regional
b b b b b b b b b b b b b
and global levels. Despite sovereign debt crisis in Europe, more EU member countries have
b b b b b b b b b b b b b b
adopted the common currency, the euro, that effectively became the second global currency after
b b b b b b b b b b b b b b
the U.S. dollar. In the last few years, however, economic nationalism has been gaining some
b b b b b b b b b b b b b b b
popularity, as exemplified by the Brexit decision of the United Kingdom and the so-called
b b b b b b b b b b b b b b
―America First‖ policies of the Trump Administration. To the extent that economic nationalism is a
b b b b b b b b b b b b b b
populist response to the global financial crisis and Great Recession, it may subside as the world
b b b b b b b b b b b b b b b b
economy continues to recover.
b b b b
4. How is a country‘s economic well-being enhanced through free international trade in goods
b b b b b b b b b b b b
and services?
b b
Answer: According to David Ricardo, with free international trade, it is mutually beneficial for two
b b b b b b b b b b b b b b
countries to each specialize in the production of the goods that it can produce relatively most
b b b b b b b b b b b b b b b b
efficiently and then trade those goods. By doing so, the two countries can increase their combined
b b b b b b b b b b b b b b b b
production, which allows both countries to consume more of both goods. This argument remains
b b b b b b b b b b b b b b
valid even if a country can produce both goods more efficiently in absolute terms than the other
b b b b b b b b b b b b b b b b b
country. International trade is not a ‗zero-sum‘ game in which one country benefits at the expense
b b b b b b b b b b b b b b b b
of another country. Rather, international trade could be an ‗increasing- sum‘ game from which all
b b b b b b b b b b b b b b b
players become winners.
b b b
5. What considerations might limit the extent to which the theory of comparative advantage is
b b b b b b b b b b b b b
realistic?
b
Answer: The theory of comparative advantage was originally advanced by the nineteenth century
b b b b b b b b b b b b
economist David Ricardo as an explanation for why nations trade with one another. The theory
b b b b b b b b b b b b b b b
claims that economic well-being is enhanced if each country produces what it has a comparative
b b b b b b b b b b b b b b b
advantage in producing relative to other countries, and then trade products.
b b b b b b b b b b b
Underlying the theory are the assumptions of free trade between nations and that the factors of
b b b b b b b b b b b b b b b
production (labor, technological know-how, and capital) are relatively immobile. To the extent that
b b b b b b b b b b b b b
these assumptions do not hold, the theory of comparative advantage may not realistically describe
b b b b b b b b b b b b b b
international trade. In addition, free trade produces winners and losers and if the losers are not
b b b b b b b b b b b b b b b b
compensated, free trade may faces political opposition from them.
b b b b b b b b b
6. What are multinational corporations (MNCs) and what economic roles do they play?
b b b b b b b b b b b
©MCGRAW HILL LLC. ALL RIGHTS RESERVED. NO REPRODUCTION OR DISTRIBUTION WITHOUT THE PRIOR WRITTEN CONSENT OF MCGRAW HILL LLC
b b b b b b b b b b b b b b b b b b
,Answer: A multinational corporation (MNC) can be defined as a business firm incorporated in one
b b b b b b b b b b b b b b
country that has production and sales operations in many other countries. Indeed, some MNCs
b b b b b b b b b b b b b b
have operations in a few dozens of different countries. MNCs obtain financing from major money
b b b b b b b b b b b b b b b
centers around the world in many different currencies to finance their operations. Global operations
b b b b b b b b b b b b b b
force the treasurer‘s office to establish international banking relationships, to place short-term
b b b b b b b b b b b b
funds in several currency denominations, and to effectively manage foreign exchange risk. By
b b b b b b b b b b b b b
circumventing and also taking advantage of various market imperfections, such as barriers to trade
b b b b b b b b b b b b b b
and barriers to flow of people and capital across countries, MNCs contribute to greater integration
b b b b b b b b b b b b b b b
of the world economy and ing more perfect functioning of global markets.
b b b b b b b b b b b b
7. Ross Perot, a former Presidential candidate of the Reform Party, which was a third political
b b b b b b b b b b b b b b
party in the United States, had strongly objected to the creation of the North American Trade
b b b b b b b b b b b b b b b b
Agreement (NAFTA), which nonetheless was inaugurated in 1994. Perot feared the loss of
b b b b b b b b b b b b b
American jobs to Mexico where it is much cheaper to hire workers. What are the merits and
b b b b b b b b b b b b b b b b b
demerits of Perot‘s position on NAFTA? Considering the recent economic developments in North
b b b b b b b b b b b b b
America, how would you assess Perot‘s position on NAFTA?
b b b b b b b b b
Answer: Since the inception of NAFTA, many American companies indeed have invested heavily
b b b b b b b b b b b b
in Mexico, sometimes relocating production from the United States to Mexico. Although this might
b b b b b b b b b b b b b b
have temporarily caused unemployment of some American workers, they were eventually rehired
b b b b b b b b b b b b
by other industries often for higher wages. At the same time, Mexico has been experiencing a
b b b b b b b b b b b b b b b b
major economic boom. It seems clear that both Mexico and the U.S. have benefited from NAFTA.
b b b b b b b b b b b b b b b b
Perot‘s concern appears to have been ill founded.
b b b b b b b b
8. In 1995, a working group of French chief executive officers was set up by the Confederation of
b b b b b b b b b b b b b b b b
French Industry (CNPF) and the French Association of Private Companies (AFEP) to study the
b b b b b b b b b b b b b b
French corporate governance structure. The group reported the following, among other things:
b b b b b b b b b b b b
b ―The board of directors should not simply aim at maximizing share values as in the U.K. and the
b b b b b b b b b b b b b b b b b
U.S. Rather, its goal should be to serve the company, whose interests should be clearly
b b b b b b b b b b b b b b b
distinguished from those of its shareholders, employees, creditors, suppliers and clients but still
b b b b b b b b b b b b b
equated with their general common interest, which is to safeguard the prosperity and continuity of
b b b b b b b b b b b b b b b
the company‖. Evaluate the above recommendation of the working group.
b b b b b b b b b b
Answer: The recommendations of the French working group clearly show that shareholder wealth
b b b b b b b b b b b b
maximization is not a universally accepted goal of corporate management, especially
b b b b b b b b b b b
©MCGRAW HILL LLC. ALL RIGHTS RESERVED. NO REPRODUCTION OR DISTRIBUTION WITHOUT THE PRIOR WRITTEN CONSENT OF MCGRAW HILL LLC
b b b b b b b b b b b b b b b b b b
, outside the United States and possibly a few other Anglo-Saxon countries including the United
b b b b b b b b b b b b b
b Kingdom and Canada. To some extent, this may reflect the fact that share ownership is not wide
b b b b b b b b b b b b b b b b
b spread in most other countries.
b b b b
9. Emphasizing the importance of voluntary compliance, as opposed to enforcement, in the b b b b b b b b b b b
b aftermath of such corporate scandals as those involving Enron and WorldCom, U.S. President
b b b b b b b b b b b b
b George W. Bush stated that while tougher laws might help, ―ultimately, the ethics of American
b b b b b b b b b b b b b b
b business depends on the conscience of America‘s business leaders.‖ Describe your view on this
b b b b b b b b b b b b b
b statement.
Answer: There can be different answers to this question. If business leaders always behave with a
b b b b b b b b b b b b b b b
b high ethical standard, many of the corporate scandals we have seen lately might not have
b b b b b b b b b b b b b b
b happened. Since we cannot fully depend on the ethical behavior on the part of individual business
b b b b b b b b b b b b b b b
b leaders, the society should protect itself by adopting the rules/regulations and governance structure
b b b b b b b b b b b b
b that would induce business leaders to behave in the interest of the society at large. But at the same
b b b b b b b b b b b b b b b b b b
b time, we need to make sure that excessive regulations do not stymy free enterprises, an important
b b b b b b b b b b b b b b b
b engine of economic growth. It is important to strike the right balance.
b b b b b b b b b b b
10. Suppose you are interested in investing in shares of Samsung Electronics of Korea, which is a
b b b b b b b b b b b b b b b
b world leader in mobile phones, TVs, and home appliances. But before you make investment
b b b b b b b b b b b b b
b decision, you would like to learn about the company. Visit the website of Yahoo
b b b b b b b b b b b b b
b (http://finance.yahoo.com) and collect information about Samsung Electronics, including the b b b b b b b b
b recent stock price history and analysts‘ views of the company. Discuss what you learn about the
b b b b b b b b b b b b b b b
b company. Also discuss how the instantaneous access to information via internet would affect the
b b b b b b b b b b b b b
b nature and workings of financial markets.
b b b b b
Answer: As students might have learned from visiting the website, information is readily available
b b b b b b b b b b b b b
even for foreign companies like Samsung Electronics. Ready access to international information
b b b b b b b b b b b b
b helps integrate financial markets, dismantling barriers to international investment and financing.
b b b b b b b b b b
b Integration, however, may help a financial shock in one market to be quickly transmitted to other
b b b b b b b b b b b b b b b
b markets.
11. Most companies make corporate decisions to maximize their profits, without taking into
b b b b b b b b b b b
consideration the possibly negative effects of corporate activities on the environments, thereby
b b b b b b b b b b b b
©MCGRAW HILL LLC. ALL RIGHTS RESERVED. NO REPRODUCTION OR DISTRIBUTION WITHOUT THE PRIOR WRITTEN CONSENT OF MCGRAW HILL LLC
b b b b b b b b b b b b b b b b b b
International Financial Management, 10th Edition EUN Chapter b b b b b b
1-21
b
CHAPTER 1 b
GLOBALIZATION AND THE MULTINATIONAL FIRM b b b b
ANSWERS & SOLUTIONS TO END-OF-CHAPTER QUESTIONS AND PROBLEMS
b b b b b b b
QUESTIONS
1. Why is it important to study international financial management?
b b b b b b b b
Answer: We are now living in a world where all the major economic functions, such as consumption,
b b b b b b b b b b b b b b b b
production, investment, and financing, are highly globalized.
b b b b b b b b It is thus essential for financial
b b b b b
managers to fully understand vital international dimensions of financial management. This global
b b b b b b b b b b b b
shift is in marked contrast to a situation that existed when the authors of this book were learning
b b b b b b b b b b b b b b b b b b
finance a few decades ago. At that time, most professors customarily (and safely, to some extent)
b b b b b b b b b b b b b b b b
ignored international aspects of finance.
b b b b b b This mode of operation has become untenable since
b b b b b b b
then.
b
2. How is international financial management different from domestic financial management?
b b b b b b b b b
Answer: There are three major dimensions that set apart international finance from domestic
b b b b b b b b b b b b
finance. They are:
b b b
1. foreign exchange and political risks, b b b b
2. market imperfections, and b b
3. expanded opportunity set. b b
3. Discuss the major trends that have prevailed in international business during the last two
b b b b b b b b b b b b b
decades.
b
Answer: The 2000s brought a rapid integration of international capital and financial markets.
b b b b b b b b b b b b
Impetus for globalized financial markets initially came from the governments of major countries that
b b b b b b b b b b b b b b
had begun to deregulate their foreign exchange and capital markets. The economic
b b b b b b b b b b b b
©MCGRAW HILL LLC. ALL RIGHTS RESERVED. NO REPRODUCTION OR DISTRIBUTION WITHOUT THE PRIOR WRITTEN CONSENT OF MCGRAW HILL LLC
b b b b b b b b b b b b b b b b b b
,integration and globalization that began in the eighties and nineties are picking up speed in the
b b b b b b b b b b b b b b b
2000s. Trade liberalization and economic integration continued to proceed at both the regional
b b b b b b b b b b b b b
and global levels. Despite sovereign debt crisis in Europe, more EU member countries have
b b b b b b b b b b b b b b
adopted the common currency, the euro, that effectively became the second global currency after
b b b b b b b b b b b b b b
the U.S. dollar. In the last few years, however, economic nationalism has been gaining some
b b b b b b b b b b b b b b b
popularity, as exemplified by the Brexit decision of the United Kingdom and the so-called
b b b b b b b b b b b b b b
―America First‖ policies of the Trump Administration. To the extent that economic nationalism is a
b b b b b b b b b b b b b b
populist response to the global financial crisis and Great Recession, it may subside as the world
b b b b b b b b b b b b b b b b
economy continues to recover.
b b b b
4. How is a country‘s economic well-being enhanced through free international trade in goods
b b b b b b b b b b b b
and services?
b b
Answer: According to David Ricardo, with free international trade, it is mutually beneficial for two
b b b b b b b b b b b b b b
countries to each specialize in the production of the goods that it can produce relatively most
b b b b b b b b b b b b b b b b
efficiently and then trade those goods. By doing so, the two countries can increase their combined
b b b b b b b b b b b b b b b b
production, which allows both countries to consume more of both goods. This argument remains
b b b b b b b b b b b b b b
valid even if a country can produce both goods more efficiently in absolute terms than the other
b b b b b b b b b b b b b b b b b
country. International trade is not a ‗zero-sum‘ game in which one country benefits at the expense
b b b b b b b b b b b b b b b b
of another country. Rather, international trade could be an ‗increasing- sum‘ game from which all
b b b b b b b b b b b b b b b
players become winners.
b b b
5. What considerations might limit the extent to which the theory of comparative advantage is
b b b b b b b b b b b b b
realistic?
b
Answer: The theory of comparative advantage was originally advanced by the nineteenth century
b b b b b b b b b b b b
economist David Ricardo as an explanation for why nations trade with one another. The theory
b b b b b b b b b b b b b b b
claims that economic well-being is enhanced if each country produces what it has a comparative
b b b b b b b b b b b b b b b
advantage in producing relative to other countries, and then trade products.
b b b b b b b b b b b
Underlying the theory are the assumptions of free trade between nations and that the factors of
b b b b b b b b b b b b b b b
production (labor, technological know-how, and capital) are relatively immobile. To the extent that
b b b b b b b b b b b b b
these assumptions do not hold, the theory of comparative advantage may not realistically describe
b b b b b b b b b b b b b b
international trade. In addition, free trade produces winners and losers and if the losers are not
b b b b b b b b b b b b b b b b
compensated, free trade may faces political opposition from them.
b b b b b b b b b
6. What are multinational corporations (MNCs) and what economic roles do they play?
b b b b b b b b b b b
©MCGRAW HILL LLC. ALL RIGHTS RESERVED. NO REPRODUCTION OR DISTRIBUTION WITHOUT THE PRIOR WRITTEN CONSENT OF MCGRAW HILL LLC
b b b b b b b b b b b b b b b b b b
,Answer: A multinational corporation (MNC) can be defined as a business firm incorporated in one
b b b b b b b b b b b b b b
country that has production and sales operations in many other countries. Indeed, some MNCs
b b b b b b b b b b b b b b
have operations in a few dozens of different countries. MNCs obtain financing from major money
b b b b b b b b b b b b b b b
centers around the world in many different currencies to finance their operations. Global operations
b b b b b b b b b b b b b b
force the treasurer‘s office to establish international banking relationships, to place short-term
b b b b b b b b b b b b
funds in several currency denominations, and to effectively manage foreign exchange risk. By
b b b b b b b b b b b b b
circumventing and also taking advantage of various market imperfections, such as barriers to trade
b b b b b b b b b b b b b b
and barriers to flow of people and capital across countries, MNCs contribute to greater integration
b b b b b b b b b b b b b b b
of the world economy and ing more perfect functioning of global markets.
b b b b b b b b b b b b
7. Ross Perot, a former Presidential candidate of the Reform Party, which was a third political
b b b b b b b b b b b b b b
party in the United States, had strongly objected to the creation of the North American Trade
b b b b b b b b b b b b b b b b
Agreement (NAFTA), which nonetheless was inaugurated in 1994. Perot feared the loss of
b b b b b b b b b b b b b
American jobs to Mexico where it is much cheaper to hire workers. What are the merits and
b b b b b b b b b b b b b b b b b
demerits of Perot‘s position on NAFTA? Considering the recent economic developments in North
b b b b b b b b b b b b b
America, how would you assess Perot‘s position on NAFTA?
b b b b b b b b b
Answer: Since the inception of NAFTA, many American companies indeed have invested heavily
b b b b b b b b b b b b
in Mexico, sometimes relocating production from the United States to Mexico. Although this might
b b b b b b b b b b b b b b
have temporarily caused unemployment of some American workers, they were eventually rehired
b b b b b b b b b b b b
by other industries often for higher wages. At the same time, Mexico has been experiencing a
b b b b b b b b b b b b b b b b
major economic boom. It seems clear that both Mexico and the U.S. have benefited from NAFTA.
b b b b b b b b b b b b b b b b
Perot‘s concern appears to have been ill founded.
b b b b b b b b
8. In 1995, a working group of French chief executive officers was set up by the Confederation of
b b b b b b b b b b b b b b b b
French Industry (CNPF) and the French Association of Private Companies (AFEP) to study the
b b b b b b b b b b b b b b
French corporate governance structure. The group reported the following, among other things:
b b b b b b b b b b b b
b ―The board of directors should not simply aim at maximizing share values as in the U.K. and the
b b b b b b b b b b b b b b b b b
U.S. Rather, its goal should be to serve the company, whose interests should be clearly
b b b b b b b b b b b b b b b
distinguished from those of its shareholders, employees, creditors, suppliers and clients but still
b b b b b b b b b b b b b
equated with their general common interest, which is to safeguard the prosperity and continuity of
b b b b b b b b b b b b b b b
the company‖. Evaluate the above recommendation of the working group.
b b b b b b b b b b
Answer: The recommendations of the French working group clearly show that shareholder wealth
b b b b b b b b b b b b
maximization is not a universally accepted goal of corporate management, especially
b b b b b b b b b b b
©MCGRAW HILL LLC. ALL RIGHTS RESERVED. NO REPRODUCTION OR DISTRIBUTION WITHOUT THE PRIOR WRITTEN CONSENT OF MCGRAW HILL LLC
b b b b b b b b b b b b b b b b b b
, outside the United States and possibly a few other Anglo-Saxon countries including the United
b b b b b b b b b b b b b
b Kingdom and Canada. To some extent, this may reflect the fact that share ownership is not wide
b b b b b b b b b b b b b b b b
b spread in most other countries.
b b b b
9. Emphasizing the importance of voluntary compliance, as opposed to enforcement, in the b b b b b b b b b b b
b aftermath of such corporate scandals as those involving Enron and WorldCom, U.S. President
b b b b b b b b b b b b
b George W. Bush stated that while tougher laws might help, ―ultimately, the ethics of American
b b b b b b b b b b b b b b
b business depends on the conscience of America‘s business leaders.‖ Describe your view on this
b b b b b b b b b b b b b
b statement.
Answer: There can be different answers to this question. If business leaders always behave with a
b b b b b b b b b b b b b b b
b high ethical standard, many of the corporate scandals we have seen lately might not have
b b b b b b b b b b b b b b
b happened. Since we cannot fully depend on the ethical behavior on the part of individual business
b b b b b b b b b b b b b b b
b leaders, the society should protect itself by adopting the rules/regulations and governance structure
b b b b b b b b b b b b
b that would induce business leaders to behave in the interest of the society at large. But at the same
b b b b b b b b b b b b b b b b b b
b time, we need to make sure that excessive regulations do not stymy free enterprises, an important
b b b b b b b b b b b b b b b
b engine of economic growth. It is important to strike the right balance.
b b b b b b b b b b b
10. Suppose you are interested in investing in shares of Samsung Electronics of Korea, which is a
b b b b b b b b b b b b b b b
b world leader in mobile phones, TVs, and home appliances. But before you make investment
b b b b b b b b b b b b b
b decision, you would like to learn about the company. Visit the website of Yahoo
b b b b b b b b b b b b b
b (http://finance.yahoo.com) and collect information about Samsung Electronics, including the b b b b b b b b
b recent stock price history and analysts‘ views of the company. Discuss what you learn about the
b b b b b b b b b b b b b b b
b company. Also discuss how the instantaneous access to information via internet would affect the
b b b b b b b b b b b b b
b nature and workings of financial markets.
b b b b b
Answer: As students might have learned from visiting the website, information is readily available
b b b b b b b b b b b b b
even for foreign companies like Samsung Electronics. Ready access to international information
b b b b b b b b b b b b
b helps integrate financial markets, dismantling barriers to international investment and financing.
b b b b b b b b b b
b Integration, however, may help a financial shock in one market to be quickly transmitted to other
b b b b b b b b b b b b b b b
b markets.
11. Most companies make corporate decisions to maximize their profits, without taking into
b b b b b b b b b b b
consideration the possibly negative effects of corporate activities on the environments, thereby
b b b b b b b b b b b b
©MCGRAW HILL LLC. ALL RIGHTS RESERVED. NO REPRODUCTION OR DISTRIBUTION WITHOUT THE PRIOR WRITTEN CONSENT OF MCGRAW HILL LLC
b b b b b b b b b b b b b b b b b b
