Chapter 1 Flashcards
What is Financial Management mainly concerned about?
With how to optimally make various corporate financial decisions, such as those pertaining to investment, financing, dividend policy, and working capital management, with a view to achieving a set of given corporate objectives.
Name an example of why we are now living in a highly globalized and integrated world economy.
American consumers, for example, routmely purchase oil imported from Saudi Arabia and Nigeria, TV sets from automobiles from Germany and Japan, garments from Chma, shoes from Indonesia, pasta from Italy, and wine from France.
What do integration in financial markets has allowed?
ThIs development allows investors to diversify their investment portfolios.
What are the major economic functions?
Consumption, production, and investment
What are the three dimensions that set international finance apart from domestic finance?
- Foreign exchange and political risks.
- Market imperfections.
- Expanded opportunity set.
What happens when when finns and individuals are engaged in cross-border transactions?
They are potentially exposed to foreign exchange risk and political risk.
Name examples of foreign exchange risk.
- Hungarians have borrowed in terms of the euro or Swiss franc to purchase houses. They were initially attracted by the easy availability and low interest rates for foreign currency mortgage loans. However, as the Hungarian currency, forint, was falling against the euro and Swiss franc during the recent global financial crisis, the burden of mortgage payments in terms of forint has increased sharply.
- Mexico is a major export market for your company and the Mexican peso depre- ciates drastically against the U.S. dollar, this means that your company’s products can be priced out of the Mexican market.
What was the year in which fixed exchange rates were abandoned?
1970
What does Political risk mean?
Political risk arises from the fact that a sovereign country can change the “rules of the game”. It ranges from unexpected changes in tax rules to outright expropriation of assets held by foreigners.
Name a case of Political Risk.
In 1992, for example, the Enron Development Corporation, a subsidiary of a Houston-based energy company, signed a contract to build India’s largest power plant. After Enron had spent nearly $300 million, the project was canceled in 1995 by nationalist politicians in the Maharashtra state who argued India didn’t need the power plant.
What barriers still hamper free movements of people, goods, services, and capital across national boundaries.?
These barriers include legal restrictions, excessive transaction and transportation costs, information asymmetry, and discriminatory taxation.
What do we call market imperfections?
To the various frictions and impediments preventing markets from functioning perfectly, play an important in motivating MNCs to locate production overseas.
When can firms benefit from an expanded opportunity set?
When firms venture into the arena of global markets.
What is a ‘Swap’?
A swap is a derivative contract through which two parties exchange financial instruments. These instruments can be almost anything, but most swaps involve cash flows based on a notional principal amount that both parties agree to.
What are benefits from a swap?
To mitigate interest rate risk or to speculate.
What is Shareholder wealth maximization?
It means that the firm makes all business decisions and investments with an eye toward making the owners of the firm «the shareholders» better off financially, or more wealthy, than they were before.
Where is Shareholder wealth maximization commonly used?
In “Anglo-Saxon” countries, such as Australia, Canada, the United Kingdom, and especially the United States.
How is financial management in Europe?
In countries like France and Germany, for example, shareholders are generally viewed as one of the “stakeholders” of the firm, others being employees, customers, suppliers, banks, and so forth.
How is financial management in Japan?
In Japan many companies form a small number of interlocking business groups called keiretsu, such as Mitsubishi, Mitsui, and Sumitomo, which arose from consolidation of family-owned business empires.
What is corporate governance?
The financial and legal framework for regulating the relationship between a company’s management and Its shareholders.
In what type of countries can corporate governance be a great problem and why?
It’s a problem especially in emerging and transition economies, such as Indonesia, Korea, China, and Russia, where legal protection of shareholders is weak or virtually nonexistent.
What happens with corporate ownership in countries where shareholders do not have strong legal rights?
It tends to be concentrated. The concentrated ownership of the firm, in turn, may give rise to the conflicts of interest between dominant shareholders (often the founding family) and small outside shareholders.