Overview of Multinational Financial Management

Question 1

What are the four types of MNCs

Answer 1

Global decentralised
Global centralised
International Company
Transnational Company

Question 2

Effects of MNCs on host countries

Answer 2

Infusion of investment capital, knowledge, technolocy, IP, skilled workers - good for developing countries
May put domestic businesses out fo business
MNCs pay higher wages

Question 3

How are managers expected to base their decisions - overarching goal.

Answer 3

Managers are expected to make decisions that will maximize the stock price. Investors want a return on investment.
Maximising stock price = maximising investors wealth

Question 4

What are common finance decisions managers in MNCs make?

Answer 4

Discontinuing operations in a particular country - this might be because its not profitable, the demand, the pricing, competitors or market share.
If they should pursue new business/expansion in a particular country
How to finance expansion in a particular country.

Question 5

What interaction do the following have with MNCs (all go through the foreign exchange markets as middle step):
Foreign Product Market
Foreign subsidiaries
International Financial Market

Answer 5

Foreign Product Market - exports/imports
Foreign subsidiaries - exports/imports and dividend remittence and lending
International Financial Market - investing and borrowing

Question 6

Explain Agency problem Type 1 and agency costs

Answer 6

The conflict of goals between managers and shareholders.
Agency costs are Cost of ensuring that managers maximize shareholder wealth.

Question 7

Why do MNCs have higher agency costs?

Answer 7

Monitoring managers of subsidiaries in foreign countries is more difficult.
Foreign subsidiary managers raised in different cultures may not follow uniform goals.
Sheer size of larger MNCs - larger problems

Question 8

What is SOX?

Answer 8

Sarbanes Oxlet Act (SOX) is a United States Federal law that Ensures a more transparent process for managers to report on the productivity and financial condition of their firm - protects owners and fights against agency problems.

Question 9

How has SOX improved corporate governance of MNCs

Answer 9

Centralized database of information
All data are reported consistently among subsidiaries
Automatically checks for unusual discrepancies relative to norms
Speeding up the process by which all departments and subsidiaries have access to all the data they need
Making executives more accountable for financial statements

Question 10

Explain centralized management structure

Answer 10

Allows managers of the parent to control foreign subsidiaries and therefore reduce the power of subsidiary managers

Question 11

Explain decentralized managing structure

Answer 11

Gives more control to subsidiary managers who are closer to the subsidiary’s operation and environment. If the finance manager of subsidiary is trustworthy and capable this is more effective because the subsidiary manager knows the market better.

Question 12

What are 3 justifications for pursuing international business?

Answer 12

Competitive advantage (specialisation), imperfect markets (factors of production can be immobile), international product life cycle.

Question 13

Name 6 methods of engaging in international business as a firm

Answer 13

Firms engage in international business through trade, licensing, franchising, joint ventures, acquisitions and establishing foreign subsidiary.

Question 14

Why is international trade used by firms

Answer 14

They can do each of the following with minimal risk:
Penetrate a market (exporting)
Obtain supplied at a low cost (importing)

Question 15

Explain Licensing with example

Answer 15

Obligates a firm to provide its technology (copyrights, patents, trademarks, or trade
names) in exchange for fees or some other specified benefits.
Allows firms to use their technology in foreign markets without a major investment and without exporting costs
Difficult to ensure quality control
Different to franchising as licensing company does not control the business operations.
Ex: Starbucks use licensing

Question 16

Explain franchising with example

Answer 16

Obligates firm to provide a specialized sales or service strategy, support assistance, and possibly an initial investment in the franchise in exchange for periodic fees.
Franchiser maintains a considerable degre eof control over opetationsaand processes used byt eh franchisee.
Allows penetration into foreign markets without a major investment
Ex: McDonalds

Question 17

Explain joint venture

Answer 17

A venture that is jointly owned and operated by two or more firms. A firm may enter the foreign market engaging in a joint venture with firms that reside in those markets.
Ex: Hulu

Question 18

Explain acquisitions as an FDI

Answer 18

Foreign direct investment (FDI) is an ownership stake in a foreign company or project made by an investor, company, or government from another country.
Acquisitions of firms in foreign countries allows firms to have full control over their foreign businesses and to quickly obtain a large portion of foreign market share
There is risk of large losses

Question 19

What is a pro and cons of establishing subsidary

Answer 19

This method of penetrating foreign country requires a lot of investment.
Acquiring new as opposed to buying existing allows operations to be tailored exactly to the firms needs

Question 20

What are the cash inflows and out flows from an MNC to foreign subsidaries

Answer 20

Cash inflows from remitted earnings
Cash outflows to finance operations.

Question 21

What is the domestic model for present value of expected cash flows in an MNC

Answer 21

V= sum from t=1,n (E(CF $,t)/(1+k)^t)
where E(CF) is expected cash flows to be received at end of period T and K is the required rate of return by investors, and n is the number of periods into the future in which cash flows are received.

Question 22

What is the relationship between required rate of return and cost of capital

Answer 22

Required rate of return should always exceed the cost of capital

Question 23

What is the multinational model formula for the expected dollar cash flow received at the end of period t

Answer 23

Sum as j=1, m (E(CF j,t) x E(S j,t))
with CF j,t as cash flow denominated in foreign currency j at end of period t and S representing the exchange rate measured in dollars per unit of the foreign currency.

Question 24

What is the multinational model for valuation of an MNC

Answer 24

V= sum from t=1,n (E(CF $,t)/(1+k)^t) where
E(CF $,t)= Sum as j=1, m (E(CF j,t) x E(S j,t))

Question 25

Describe examples of the uncertainty present in MNC valuation

Answer 25

Exposure to international economic conditions - If economic conditions in a foreign country weaken, purchase of products decline.
Exposure to international political risk – A foreign government may increase taxes or impose barriers on the MNC’s subsidiary.
Exposure to exchange rate risk – If foreign currencies weaken against the U.S. dollar, the MNC will receive a lower amount of dollar cash flows.

Question 26

What metric does this uncertainty affect in the valuation formula and how?

Answer 26

This uncertainty affects the MNC cost of capital as required rate of return increases, decreasing the valuation.

MNC’s required rate of return decreases then valuation is favourably affected