Chapter 1— Intoduction to Multinational Finance

Question 1

Define MNC

Answer 1

Multinational Corporations are firms that operate in more than one country

Question 2

List MNC stakeholders

How do they claim part of the firm’s revenue?

Answer 2

3SMGDEL

Shareholders(dividends and/or capital gains)
Government (taxes and other levies)
Debt holders (interest and/or capital gains)
Managers (salaries,bonuses and or capital gains)
Employees (wages)
Suppliers (cost of goods sold)
Litigants (compensation after successful legal battle)
Service providers ( operational expenses)

Question 3

Agency Cost

Answer 3

Any loss in firm value resulting from conflicts of interest between managers and other stakeholders particularly shareholders

Question 4

Primary Goal of a firm

Answer 4

Maximize shareholders’ wealth

Question 5

How do cultural differences affect MNCs conduct of business?

Answer 5

Societal, verbal and bogus he language barriers can make it hard to conduct business in another country.

Not respecting can ostracize individuals and other bodies

Question 6

In What areas do MNCs encounter differences in their cross-border operations?

Answer 6

Legal, accounting and tax systems

Personnel management

Marketing— Disney parks in Europe No alcohol

Distribution

Financial Markets—Islamic states v the rest of the world, also volumes vary across countries

Corporate governance— mechanisms stakeholders use to control a firm

Question 7

Country risk

Answer 7

Risk companies bear by being in another country where conditions can change unexpectedly.

Country risk is made up of Political and Financial risk

Question 8

Political risk

Sources of political risk:

Answer 8

Risk that business environment will change due to unexpected political events.

Eg. elections, repatriation policies, restrictions on foreign ownership, business and bankruptcy laws, Forex controls, etc.

Question 9

Financial Risk

Answer 9

The risk of unexpected changes in the economic and financial environment in the host country. FR is influenced by political and other financial risk factors such as FX risk.

Question 10

Foreign Exchange risk

Answer 10

Risk resulting from unexpected changes in currency value

Question 11

Discounted cash flow

Answer 11

Way to value a company. It involves finding the value of an entity’s future cash-flows in the present

Question 12

What are some Investment opportunities available to MNCs that are unavailable to local firms

Answer 12

MNCs have more revenue-enhancing and cost-cutting opportunities than local firms.

Revenue enhancing: Global Branding, Marketing Flexibility, Advantages of scale, and scope.

Cost-cutting opportunities: Raw materials, labor, global site selection, sourcing and production, economies of scale, economies of scope, and economies of vertical integration.

Question 13

Economies of scale

Answer 13

Savings in costs arising from increased production of a particular good in a company

Question 14

Economies of Scope

Answer 14

Savings in costs arising from manufacturing two or more complementary goods

Question 15

Economies of vertical integration

Answer 15

Savings created by companies that own a vertically integrated supply chain.
ie. Samsung producing its own flagships rather than outsourcing their production process.

Question 16

Risk exposure

Answer 16

Likelihood of outcomes differing from expectations in asset and libilities value as a result of business conditions variations

Question 17

Perfect Financial Market assumptions

Answer 17

A frictionless market in which all information and prices are available to rational investors preventing anyone from gaining an advantage

Question 18

What are PFM Assumptions

Answer 18

Frictionless market: No transaction cost; No government intervention, No taxes, No agency costs, No costs of Financial distress

Equal access to market prices: Perfect competition and no barrier to entry

Rational investors: prefer more return and abhor increased risk

Equal access to costless information: instantaneous access to information

Question 19

What is needed in the Financial management of multinationals?

Answer 19

Multinational Financial management requires extensive knowledge about various fields of business, including law, human resources, marketing, finance, accounting, etc., as well as of the culture of the host countries

Question 20

Implications of PFM implications for MNC’s financial management?

Answer 20

Because Financial markets are imperfect, financing tactics can offer MNCs an edge.
Financial Market arbitrage
Hedging policy
MNC cost of capital when capital flow barriers are present
Tax reductions through multinational operations
Capital flow barriers
Currency risk and cost of capital