Overview of Multinational Financial Management Flashcards
What are the four types of MNCs
Global decentralised
Global centralised
International Company
Transnational Company
Effects of MNCs on host countries
Infusion of investment capital, knowledge, technolocy, IP, skilled workers - good for developing countries
May put domestic businesses out fo business
MNCs pay higher wages
How are managers expected to base their decisions - overarching goal.
Managers are expected to make decisions that will maximize the stock price. Investors want a return on investment.
Maximising stock price = maximising investors wealth
What are common finance decisions managers in MNCs make?
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.
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
Foreign Product Market - exports/imports
Foreign subsidiaries - exports/imports and dividend remittence and lending
International Financial Market - investing and borrowing
Explain Agency problem Type 1 and agency costs
The conflict of goals between managers and shareholders.
Agency costs are Cost of ensuring that managers maximize shareholder wealth.
Why do MNCs have higher agency costs?
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
What is SOX?
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.
How has SOX improved corporate governance of MNCs
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
Explain centralized management structure
Allows managers of the parent to control foreign subsidiaries and therefore reduce the power of subsidiary managers
Explain decentralized managing structure
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.
What are 3 justifications for pursuing international business?
Competitive advantage (specialisation), imperfect markets (factors of production can be immobile), international product life cycle.
Name 6 methods of engaging in international business as a firm
Firms engage in international business through trade, licensing, franchising, joint ventures, acquisitions and establishing foreign subsidiary.
Why is international trade used by firms
They can do each of the following with minimal risk:
Penetrate a market (exporting)
Obtain supplied at a low cost (importing)
Explain Licensing with example
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
Explain franchising with example
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
Explain joint venture
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
Explain acquisitions as an FDI
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
What is a pro and cons of establishing subsidary
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
What are the cash inflows and out flows from an MNC to foreign subsidaries
Cash inflows from remitted earnings
Cash outflows to finance operations.
What is the domestic model for present value of expected cash flows in an MNC
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.
What is the relationship between required rate of return and cost of capital
Required rate of return should always exceed the cost of capital
What is the multinational model formula for the expected dollar cash flow received at the end of period t
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.
What is the multinational model for valuation of an MNC
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))
Describe examples of the uncertainty present in MNC valuation
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.
What metric does this uncertainty affect in the valuation formula and how?
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
