International Corporate Finance

10th Edition
by Jeff Madura

2010 South-Western/Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except
for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for
classroom use.

1
Multinational Financial Management:
An Overview
Chapter Objectives
This chapter will:
A.

Identify the management goal and organizational structure of the

Multinational Corporation (MNC).

B.

Describe the key theories that justify international business

C.

Explain the common methods used to conduct international business

D.

Provide a model for valuing the MNC

2010 South-Western/Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except
for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for
classroom use.

Multinational Corporation:
Firms that engage in some form of international business

2010 South-Western/Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except
for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for
classroom use.

Facing Agency Problems

1. Agency Problem: conflict of goals between managers
and shareholders.
2. Agency Conflict Reduced by:
a. Parent control of agency problems
b. Corporate control of agency problems
c. Sarbanes-Oxley Act (SOX) of 2002

2010 South-Western/Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except
for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for
classroom use.

Management Structure of MNC

1. Centralized
2. Decentralized

2010 South-Western/Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except
for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for
classroom use.

Why Firms Pursue International Business

1. Theory of Competitive Advantage: specialization
increases production efficiency.
2. Imperfect Markets Theory: factors of production are
somewhat immobile providing incentive to seek out
foreign opportunities.
3. Product Cycle Theory: as a firm matures, it
recognizes opportunities outside its domestic market.

2010 South-Western/Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except
for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for
classroom use.

Exhibit 1.2 International Product Life Cycles

2010 South-Western/Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except
for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for
classroom use.

How Firms Engage in International Business

1.
2.
3.
4.
5.
6.

International trade
Licensing
Franchising
Joint Ventures
Acquisitions of existing operations
Establishing new foreign subsidiaries

2010 South-Western/Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except
for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for
classroom use.


1CFk
E
V
n
$
,
t
t
1

Valuation Model for an MNC:

Domestic Model

where E(CF$,t) represents expected cash flows to be received

at the end of period t,
n represents the number of periods into the future in which
cash flows are received, and
k represents the required rate of return by investors.

2010 South-Western/Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except
for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for
classroom use.

CFES
CF
E
E

m
$,tj1j,tj,t

Valuation Model for an MNC:

International Cash Flows

10

where CFj,t represents the amount of cash flow denominated

in a particular foreign currency j at the end of period t,

Sj,t represents the exchange rate at which the foreign

currency (measured in dollars per unit of the foreign
currency) can be converted to dollars at the end of period t.

2010 South-Western/Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except
for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for
classroom use.

Exhibit 1.3 Cash Flow Diagrams for MNCs

11

2010 South-Western/Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except
for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for
classroom use.

Uncertainty Surrounding MNC Cash Flows

1. Exposure to international economic conditions
2. Exposure to international political risk
3. Exposure to exchange rate risk

12

2010 South-Western/Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except
for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for
classroom use.

Balance of Payments
1. Summary of transactions between domestic and
foreign residents for a specific country over a
specified period of time.
a. Current Account: summary of flow of funds due to purchases
of goods or services or the provision of income on financial
assets.
b. Capital Account: summary of flow of funds resulting from
the sale of assets between one specified country and all other
countries over a specified period of time.

13

2010 South-Western/Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except
for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for
classroom use.

14

2010 South-Western/Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except
for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for
classroom use.

Current Account
1. Payments for merchandise and services
2. Factor income payments
3. Transfer payments

15

2010 South-Western/Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except
for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for
classroom use.

Capital and Financial Accounts

1.
2.
3.
4.

16

Direct foreign investment

Portfolio investment
Other capital investment
Errors and omissions

2010 South-Western/Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except
for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for
classroom use.

Factors Affecting International Trade Flows

1. Inflation: current account decreases if inflation
increases relative to trade partners.
2. National Income: current account decreases if
national income increases relative to other countries.
3. Government Policies
a. Subsidies for exporters
b. Restrictions on imports
c. Lack of restriction on piracy

4. Exchange Rates: current account decreases if

currency appreciates relative to other currencies
17

2010 South-Western/Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except
for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for
classroom use.

Factors Affecting DFI

1.
2.
3.
4.
5.

18

Changes in Restrictions
Privatization
Potential Economic Growth
Tax Rates
Exchange Rates

2010 South-Western/Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except
for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for
classroom use.

Exhibit 2.7 Distribution of Global DFI across

Regions in 2007-2008

19

2010 South-Western/Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except
for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for
classroom use.

Factors Affecting International Portfolio

Investment
1. Tax rates on Interest or Dividends
2. Interest Rates
3. Exchange Rates

20

2010 South-Western/Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except
for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for
classroom use.