SEMESTER: FALL 2022

COURSE CODE & TITLE: FIN4010A: INTERNATIONAL MANAGERIAL

FINANCE
NAME: ATTE EDICHI LINNE GRACE
ID NUMBER: 661522

ASSIGNMENT 1

Question one
a) Features of International Financial Management

 Market imperfection: This is an important feature that differentiate International

Finance from Domestic Finance. The world market today is highly imperfect. It helps
investors to diversify their portfolio and they often offer international firms plenty of
opportunities. Along with they can raise funds in the capital market where cost of
capital is the lowest.
 Globalization of firm: It encompasses the nuances and economic factors of
conducting business internationally and existing global economy. International
business covers currency convertibility, exchange rates and foreign exchange markets.
Even if your company operates domestically, globalization can influence the way you
do business.
 Opening of new economies: Most economic sectors recorded substantial year over
year increases in the value of their trade. Aspects or sectors of an economy that are
producing or intensely using innovative or new technologies.
 Political risk: Political risk ranges from loss risk to unforeseen government actions or
other events of political character such as act of terrorism. Multinational corporations
must access the political environment not only in countries where they are doing
business but also where they expect to do.
 Foreign exchange Risk: Understanding of foreign exchange risk is essential for
managers and investors in the modern day environment of unforeseen changes in
foreign exchange rate.

b) Objectives of International Financial Management of the firm

 Achieve higher rate of profits: International companies search for foreign markets that
hold promise for higher rate of profits. Thus, the objective of profit affects and
motivates the business to expand its operations to foreign countries.
  Expansion of productive capacities: Some of the domestic companies expanded their
production capacities more than the demand for the product in the domestic counties.
These companies in such cases are forced to sell their excess production in foreign
developed countries. Toyota enterprise is an example.
 Availability of technology and skilled human resources: Availability of advanced
technology and competent human resources, in some countries act as pulling factors
for international companies.
 Nearness to raw materials: The source of highly qualitative raw materials and bulk
raw materials is a major factor for attracting companies from various foreign
countries.
 Increased market share: Some of the large scale international companies like to
enhance their market share in the world market by expanding and intensifying their
operations in various foreign companies.

c) i) Agency relationship
One in which a party acts on behalf of another party. The principal authorizes the agent to
act on his behalf. Principal is responsible for the actions of the agent done in furtherance
of their duties.
ii) Four types of agency relationship in financial management
 Shareholders and managers
 Shareholders and creditors
 Shareholders and the Government
 Board of directors and CEO
ii) Agency costs and how they are mitigated
Managers should act in the best interest of shareholders. However, in reality managers may
try to maximize their individual goals such as high salary, allowance, bonus, job security…
etc. But what shareholders want would be high share price, high dividend and high profit.
This would cause managers to act in ways that do not always benefit the firm’s shareholders.
Solving agency problem
Fist the company may implement management compensation plans. Managers will be
rewarded, if the share price goes up: For example, the granting of stock options.
Secondly, managers are given a special right to purchase the company’s shares at a
predetermined price within a stipulated period usually a cheaper price. Most likely they will
put in effort to work their best to make the share price go up. So that they can earn the best
return from the stock options.
Question two
a) Companies go multinational for various reasons:
- Increasing sales: Organizations are drawn to international activity for the increase earning
potential it offers. They select markets and design products to maximize profit on a global
range.
- Acquiring Resources and Knowledge: By connecting business internationally organizations
gain access to additional natural resources, lower production costs and higher quality goods
and services and untapped genius in new markets. Beyond the tangible benefits, connecting
business in a foreign country exposes organizations to innovative business methods and
thoughtful processes that meet customer needs.
- Reducing risk: A global organization can more easily find sales in other markets in case one
of the countries face an economic downturn. International businesses also reduce the risk
that their competitors achieve competitive advantage through international businesses of their
own.
- Cost controls: When operating globally enterprises face lower taxation, lower labour costs,
reduce transportation fees
-Foreign networking and access to foreign markets: MNCs enable foreign networking by
linking the local economy with the world economy in ways that would hard to accomplish by
firms of purely local origin.
-Higher income: Multinational companies provide higher paying jobs than might be available
to local inhabitants and thus raise the standard of living.
b) Challenges faced by multinational companies
-Monopoly power: Some MNCs are larger and often more powerful than the countries they
invest in and therefore seek to control policies in their favour.
- Limited skills development: MNCs only further low level skill development in least
developed countries.
-Profits repatriated in foreign exchange; Profits of MCNs are repatriated in foreign exchange
usually American dollars that developing countries cannot afford to lose.
-Environmental damage: Multinational companies work with lower standards for labour and
environment in developing countries.
-Loss of revenue: Very often they bargain for advantages in terms of tax rebated and tax
holidays thus depriving the governments of developing countries of much needed revenue.
The repatriated profits become a part of the developed nation’s national income.
c) Strategies used by MCNs
-Multidomestic strategy: A firm using a multidomestic strategy sacrifices efficiency in favour
of emphasizing responsiveness to local requirements within each of its markets.
- Global Strategy: A firm using a global strategy sacrifices responsiveness to local
requirements within each of its markets in favour of emphasizing efficiency. This strategy is
the complete opposite of a multidomestic strategy. Some minor modifications to products and
services may be made in various markets, but a global strategy stresses the need to gain
economies of scale by offering essentially the same products or services in each market.
-Transnational Strategy: A firm using a transnational strategy seeks a middle ground between
a multidomestic strategy and a global strategy. Such a firm tries to balance the desire for
efficiency with the need to adjust to local preferences within various countries.