Chapter 1 Flashcards
What is an MNCS and their goal?
Firms that engage in international business with the goal of maximizing shareholder wealth.
What are Agency Problems? Causes in MNCS?
Conflict of goals between shareholders and managers, leading to agency costs.
Higher Causes due to: Distance of monitoring, different culture = different goals, size of monitoring
Agency Problem Solutions (2)
Parent Control: Implement governance to oversee subsidiary decisions and adjust compensation plans.
(fix w governance)
Corporate Control: Remove ineffective managers and involve institutional investors for oversight.
(problem w entire mgmt goal)
Impact of Sabanes-Oxley Act on MNCS
SOX promotes transparency in financial reporting.
Requires a centralized database, consistent reporting, and verification of financial statements.
Management Structures of MNC (2)
Decentralized: Offers more control to local managers but incurs higher agency costs.
Centralized: Reduces agency costs but may result in uninformed decision-making.
Motivations for Pursuing International Business (3 Theories) **
Comparitive Advantage Theory: Suggests specialization by countries can enhance global production and enable market entry.
Imperfect Markets Theory: Firms may seek foreign production factors when they are cheaper than local ones.
Product Cycle Theory: Firms start locally and expand internationally in response to foreign demand.
Methods of Conducting International Business
(From Least to Most Involved)
International Trade: Exporting or importing with the least risk.
Licensing: Providing technology for fees.
Franchising: Specialized sales strategies in exchange for periodic fees. (DFI)
Joint Ventures: Collaborative projects between firms, sharing resources and expertise. (some DFI)
Acquisitions: Purchasing existing operations, leading to varying degrees of control.
Establishing Subsidiaries: Significant direct foreign investment (DFI).
Cash Flows for MNCs (add for others?)
Cash Outflows: Payments for imports, finance/supporting subsidiaries, pay for services rcvd, and compliance with international agreements.
Cash Inflows: Revenue from exports, service fees (services provided), and subsidiary earnings (RE).
Valuation Models for MNCs
Domestic Valuation Model:
Cash flow calculations based on expected cash flows at period and weighted average cost of capital
Multinational Valuation Model:
Considers cash flows in different currencies and their exchange rates for dollar conversion.
Valuation Process:
Apply cash flow process for each period.
Discount cash flows using the weighted cost of capital.
Sum discounted cash flows to estimate total value.
Factors Impacting MNCs Valuation **
Economic Conditions: Improved conditions lead to increased income and demand; the opposite is also true.
Political Risk: Changes such as increased taxes, barriers, or consumer boycotts can impact operations.
Exchange Rate Risk: Currency fluctuations affect cash flow receipts and outflows.
