Chapter 19

International Managerial Finance

◼ Instructor’s Resources
Overview
In today’s global business environment, the financial manager must also be aware of the international aspects of
finance. A variety of international finance topics are presented in this chapter, including taxes, accounting
practices, risk, the international capital markets, and the effect on capital structure of operating in different
countries. This chapter discusses limited techniques but provides a broad overview of the financial considerations
of the multinational corporation (MNC). Chapter 19 highlights the fact that international differences in culture,
currencies, and taxes impact the student’s personal life as well as his or her future professional activities.

◼ Suggested Answer to Opener-in-Review Question

In the chapter opener you read about how appreciation of the yen against the dollar led to large currency
losses at Mazda. Suppose that Mazda’s quarterly operating profit in the United States averages $100 million
and the exchange rate is $1 = ¥116. How much would Mazda’s profit be worth in yen? What if the exchange
rate is $1 = ¥100?

At an exchange rate of 1 dollar to 116 yen the profit is worth $11.6 billion yen. If the exchange rate is 1 dollar to
100 yen, then the profit is worth $10 billion yen. Here the depreciation of the dollar (or appreciation of the yen)
reduces profits by 1.6 billion yen.

◼ Answers to Review Questions

1. One of the most important trading blocs was created by the North American Free Trade Agreement (NAFTA),
which is the treaty that establishes free trade and open markets between Canada, Mexico, and the United
States. Like NAFTA, the European Union (EU) is a trading bloc designed to eliminate tariff barriers and
create a single marketplace. Twenty-seven countries, representing almost half of a billion people, are members
of the EU. The EU has established a single currency called the euro for 13 member countries. Mercosur is a
trading bloc in Latin America. However, the largest one is ASEAN, which with China has a regional free
market including more than 1.8 billion people. Countries also participate in bilateral and regional trade
agreements.
An important component of free trade among countries, including those not part of one of the three trading
blocs, is the General Agreement on Tariffs and Trade (GATT). GATT extends free trade to broad areas of
activity—such as agriculture, financial services, and intellectual property—to any member country. GATT
also established the World Trade Organization (WTO) to police and mediate disputes between member
countries.

2. A joint venture is a partnership under which the participants have contractually agreed to contribute specified
amounts of money and expertise in exchange for stated proportions of ownership and profit. It is essential to

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use this type of arrangement in countries requiring that majority ownership of MNC joint venture projects be
held by domestically based investors.
Laws and restrictions regarding joint ventures have effects on MNC operations in four major areas:
(1) majority foreign ownership reduces management control by the MNC, (2) disputes over distribution of
income and reinvestment frequently occur, (3) ceilings cap profit remittances to parent company, and
(4) political risk exposure.

3. Note to instructors: Here is the answer to the review question from the first print run that did not incorporate
changes in the Tax Cuts and Jobs Act.

From the point of view of a U.S.-based MNC, key tax factors that need to be considered are (1) the level of
foreign taxes, (2) the definition of taxable income, and (3) the existence of tax agreements between the U.S.
and the host country. Although the U.S. government taxes MNC income regardless of source, MNCs can
typically reduce federal taxes by the taxes paid abroad.

Here is the answer to the review question as modified to focus on the Tax Cuts and Jobs Act.

The key benefits of the Tax Cuts and Jobs Act are the reduction in the corporate tax rate to 21% and the
provision that profits that a U.S. MNC earns abroad are not subject to U.S. taxes when they are repatriated
back to the U.S.

4. The emergence and the subsequent growth of the Euromarket, which provides for borrowing and lending
currencies outside the country of origin, have been attributed to the following factors: the desire by the
Russians during the Cold War to maintain their dollars outside the United States; consistent U.S. balance of
payments deficits; and the existence of certain regulations and controls on dollar deposits in the United States.
Though originally dominated by the U.S. dollar, the euro and Chinese yuan have become popular Euromarket
currencies.
Certain cities around the world⎯including London, Singapore, Hong Kong, Bahrain, Luxembourg, and
Nassau⎯have become known as major offshore centers of Euromarket business, where extensive
Eurocurrency and Eurobond activities take place. Major participants in the Euromarket include the United
States, Germany, Switzerland, Japan, France, Britain, and the OPEC nations. In recent years, developing
nations have also become part of the Euromarket.

5. FASB No. 52 requires MNCs first to convert the financial statement accounts of foreign subsidiaries into
functional currency (the currency of the economy where the entity primarily generates and spends cash and
where its accounts are maintained) and then to translate the accounts into the parent firm’s currency, using the
all-current-rate method. Under the temporal method, specific assets are translated at historical exchange rates,
and the foreign-exchange translation gains or losses are reflected in the current year’s income. By
comparison, under the all-current-rate method, gains or losses are charged to a separate component of
stockholders’ equity.

6. The spot exchange rate is the rate of exchange between two currencies on any given day. The forward exchange
rate is the rate at which parties agree today to trade currencies on some future date. Foreign exchange
fluctuation affects individual accounts in the financial statements; this risk is called accounting exposure.
Economic exposure is the risk arising from the potential impact of exchange rate fluctuations on a firm’s
value. Accounting exposure demonstrates paper translation losses, while economic exposure is the potential
for real loss.

7. If one country experiences a higher inflation rate than a country it trades with, the high inflation country will
experience a decline (depreciation) in the value of its currency. This depreciation results from the fact that
relatively high inflation causes the price of goods to increase. Foreign purchasers will decrease their demand

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for products from the country with high inflation due to the higher cost. This decrease in demand forces the
value of the inflated currency to decline to bring the exchange-rate-adjusted price back into line with pre-
inflation prices.

8. Macro political risk means that uncertainty due to political change, all foreign firms in the country will be
affected. Micro political risk is specific to the individual firm or industry that is targeted for nationalization.
Techniques for dealing with political risk are outlined in Table 19.4 and include joint venture agreements,
prior sale agreements, international guarantees, license restrictions, and local financing.

9. If cash flows are blocked by local authorities, the net present value (NPV) of a project and its level of return
is “normal,” from the subsidiary’s point of view. From the parent’s perspective, however, NPV in terms of
repatriated cash flows may actually be “zero.” The life of a project, of course, can prove to be quite
important. For longer projects, even if the cash flows are blocked during the first few years, there can still be
meaningful NPV from the parent’s point of view if later years’ cash flows are permitted to be freely
repatriated back to the parent.

10. Several factors cause MNCs’ capital structure to differ from that of purely domestic firms. Because MNCs
have access to international bond and equity markets, and therefore to a greater variety of financial
instruments, certain capital components may have lower costs. The particular currency markets to which the
MNC has access will also affect capital structure. The ability to diversify internationally also affects capital
structure and may result in either higher leverage and/or higher agency costs. The differing political, legal,
financial, and social aspects of each country can also impact capital structure considerations.

11. A foreign bond is an international bond sold primarily in the country of the currency in which it is issued. A
Eurobond is sold primarily in countries other than the country of the currency in which the issue is
denominated. Foreign bonds are generally sold by those resident underwriting institutions that normally
handle bond issues. Eurobonds are usually handled by an international syndicate of financial institutions
based in the United States or Western Europe. In the case of foreign bonds, interest rates are generally
directly correlated with the domestic rates prevailing in the respective countries. For Eurobonds, several
domestic and international (Euromarket) interest rates can influence the actual rates applicable to these bonds.

12. In terms of potential political risks and adverse actions by a host government, having more local debt (and
thus more local investors or investments) in a foreign project can prove to be a valuable protective measure
over the long run. This strategy will likely cause the local government to be less threatening in the event of
governmental or regulatory changes, since the larger amount of local sources of financing are included in the
subsidiary’s capital structure.

13. The Eurocurrency market provides short-term foreign currency financing to MNC subsidiaries. Supply and
demand are major factors influencing exchange rates in this market. In international markets, the nominal
interest rate is the stated interest rate charged when only the MNC’s parent currency is involved. Effective
interest rates are nominal rates adjusted for any forecast changes in the foreign currency relative to the parent
MNC’s currency. Consideration of effective rates of interest is critical to any MNC investment and borrowing
decisions.

14. In dealing with “third parties,” when the subsidiary’s local currency is expected to appreciate in value, attempts
must be made to increase accounts receivable and to decrease accounts payable. The net result would be to
increase the subsidiary’s resources in the local currency when it is expected to appreciate relative to the
parent MNC’s currency.

15. When it is expected that the subsidiary’s local currency will depreciate relative to the “home” currency of the
parent, intra-MNC accounts payable must be paid as soon as possible while intra-MNC accounts receivable

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should not be collected for as long as possible. The net result would be to decrease the resources denominated
in that local currency.

16. The motives of international business combinations are much the same as for domestic combinations: growth,
diversification, synergy, fund-raising, increased managerial skills, tax considerations, and increased
ownership liquidity. Additional considerations are entry into foreign markets and a conducive legal,
corporate, and tax environment.

◼ Suggested Answer to Focus on Ethics Box: Is Fair-Trade Coffee Fair?

Suppose market research by your company shows it would be profitable to become a fair-trade retailer.
Further suppose other internal research suggests producers in developing countries and their communities
would profit little from your fair-trade practices—no matter how well designed. Would it be ethical for the
company to commit to fair trade just to enhance shareholder wealth?

The primary ethical duty of managers is to shareholders, so taking action that make shareholders better off while at
least doing no harm to communities in developing countries may be justified. However, managers should consider
the consequences if the public learns that its fair-trade policies are motivated only by profit. If the fair-trade
practices themselves do not improve conditions abroad, managers might consider the potential benefits of assisting
firm and individuals in those markets in a more direct way, winning goodwill abroad and perhaps at home too if
customers value that type of corporate action.

◼ Suggested Answer to Global Focus Box: Take an Overseas Assignment

to Take a Step Up the Corporate Ladder
If going abroad for a full-immersion assignment is not possible, what are some substitutes for a global
assignment that may provide some—albeit limited—global experience?

International experience can begin as early as your college years if you seek out a study abroad program or
international internship. Once in the workforce, even though you may not be initially assigned to an overseas job,
there are several things you can do to gain some global experience. You may want to get involved in
internationally focused business groups in your area. The Chicago Council on Foreign Relations and the World
Council in Maine are just two examples of such groups.

Another way to develop global experience is to develop expertise in a particular area such as U.S. GAAP,
valuation, or turnaround management. Those skills are often needed at a foreign business location where local
skills are not developed in those subjects.

Finally, at most large companies, global audit, treasury, and international M&A staffs offer the best international
exposure with shorter but more frequent trips overseas to a variety of locations.

◼ Answers to Warm-Up Exercises

E19-1. Taxation of income of a foreign subsidiary

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Answer: Subsidiary income before local taxes €4,000,000

Foreign income tax at 15% −600,000
Dividend available to be declared €3,400,000
a. Raiffeisen’s receipt of dividends €3,400,000
Austrian tax liability at 25% 850,000
Foreign taxes available to
be used as a credit −600,000
Austrian taxes due 250,000
Net funds available to Raiffeisen €3,150,000

b. Foreign taxes cannot be applied against the Austrian tax liability.

Raiffeisen’s receipt of dividends €3,400,000

Austrian tax liability at 25% 850,000
Net funds available to Raiffeisen €2,350,000
E19-2. Currency valuation
Answer: a. Dollar price for the Swedish krona = 1 / 6.39 = $0.1565
b. Calculate the exchange rates 1 year from now
Assume a basket of goods costs $100 in the United States and 639 kr in Sweden. One year from
now the expected cost of the same basket of goods will be:
United States $100  1.024 = $102.4
Sweden 639 kr  1.006 = 642.83 kr
Dollar price of the Swedish kr 1 year from now = $102.4  642.83 kr = $0.15929
Swedish kr price of the U.S dollar 1 year from now = 642.83 kr  $102.4 = 6.277636 kr
Based on expected inflation rates, the dollar is expected to depreciate in value against
the Swedish krona, and the krona is expected to appreciate in value against the U.S. dollar over the
next year.
E19-3. Effective interest rate of a foreign currency loan
Answer: E = N + F + (N  F) = 0.04 + 0.15 + (0.04  0.15) = 0.1860 = 18.60%

E19-4. Effective interest rate of a foreign loan

Answer: F = Forecast percentage change of the yen = 9.09%

E = N + F + (N  F) = 0.03 + 0.0909 + (0.03  0.0909) = 0.1236 = 12.36%

E19-5. Comparing effective interest rates of two loans
Answer: EEuro = N + F + (N  F) = 0.005 − 0.10 + (0.005  0.10) = 0.110 = .00%
EKrone = N + F + (N  F) = 0.03 + 0.01 + (0.03  -0.01) = 0.01007 = 1.01%
The loan in Norwegian krone has the lower effective annual interest rate.

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◼ Solutions to Problems
P19-1. Note to instructors: This problem was dramatically changed in the print run after the Tax Cuts and Jobs
Act became effective. The original question, answered below, focused on tax issues that applied before the
new tax law was passed. The revised question, also answered below, had an entirely different focus on
exchange rate movements.
Tax credits
LG 1; Intermediate
Meridiani’s receipt of dividends can be calculated as follows:
Subsidiary income before local taxes €1,000,000
Foreign income tax at 15% 150,000
Dividend available to be declared €850,000
Foreign dividend withholding tax at 15% 127,500
Meridiani’s receipt of dividends €722,500
a. If tax credits are allowed, then the so-called “grossing up”
procedure will be applied:
Additional Meridiani income €722,500
Italian tax liability at 24% € 173,400
Total foreign taxes paid (credit)
(150,000 + 127,500) (277,500) (104,100)
Italian taxes due 0
Net funds available to the MNC €722,500
b. If no tax credits are permitted, then:
Meridiani’s receipt of dividends €722,500
Italian tax liability (€722,500 × 0.24) 173,400
Net funds available to Meridiani €549,100

P19-2. Translation of financial statements

LG 3; Intermediate
Partial Income Statement
December 31, 2020 December 31,2021
Dinar Euro Euro
Sales 500,000,000 3,571,428.57 3,401,360.54
Cost of goods sold 350,000,000 2,500,000.00 2,380,952.38
Operating profits 150,000,000 1,071,428.57 1,020,408.16

Translation of Balance Sheet

December 30, 2020 December 31,2021
Dinar Euro Euro*
Cash 60,000,000 428,571.43 408,163.27
Inventory 300,000,000 2,142,857.14 2,040,816.33
Plant and equipment (net) 140,000,000 1,000,000.00 952,380.95

Total 500,000,000 3,571,428.57 3,401,360.54

Liabilities and stockholders’ equity

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Debt 240,000,000 1,714,285.71 1,632,653.06

Paid-in capital 200,000,000 1,428,571.43 1,360,544.22
Retained earnings 60,000,000 428,571.43 408,163.27
Total 500,000,000 3,571,428.57** 3,401,360.54**

*
At 5% appreciation, the new exchange rate becomes 147 DZD/€
**Differences in totals result from rounding.

P19-3. Personal finance problem: Exchange rates

LG 3; Easy
a. Cost of tour (EUR) € 595
Round trip airfare 850
Incidental travel expenses 400
Miscellaneous expenditures 1,500
Total cost of trip in dollars € 3,345

b. Amount of rand needed in South Africa

Incidental travel expenses (EUR) 400
Miscellaneous expenditures (EUR) 1,500
Amount of Rand needed in South Africa €1,900

Amount of Rand required is R28,291

P19-4. Personal finance: International investment diversification

LG 4; Intermediate
b. (1) Global funds are the most diverse of the four categories. But don’t be fooled by their
cosmopolitan-sounding name. They can be invested in any region of the world,
including the United States, but they do not actually offer as much diversification as a
good international fund. A prime example is Idex Global, which is 26% invested in the
United States, 11% in Britain, 8% in France, 6% in Japan, and 6% in Germany. Global
funds tend to be the safest foreign-stock investments, but that’s because they typically
lean on better-known U.S. stocks.
(2) International funds invest most of their assets outside the United States. Depending
on the countries selected for investment, international funds can range from
relatively safe to more risky. Vanguard’s International Growth Fund (VWIGX), for
instance, has 53% invested in Europe, 24% in emerging markets, and 21% in the
Pacific Rim, which leaves only 2% for North American companies. Fidelity
Diversified International, by comparison, has at least 1% of its assets spread over 23
different countries, many of which are in Europe. One can even invest in mutual
funds that provide extensive exposure to companies in communist countries, such as
T. Rowe Price’s Emerging Markets Stock Fund, which has a plurality of stock in
Chinese companies. Oakmark International Small Cap, on the other hand, has
significant exposure to some of the most volatile regions in the world: Thailand,
South Korea, Hong Kong, and Turkey. The best thing to do is to choose a fund with
the best balance, or make sure the manager is doing a good job of moving in and out
of regions profitably.

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(3) Emerging-market funds are the most volatile. They invest in undeveloped regions
that have enormous growth potential, but also pose significant risks—political
upheaval, corruption, and currency collapse, to name just a few. Do not go near
these funds with anything but money you are willing to lose.
(4) Country-specific funds are invested in one country or region of the world. That kind
of concentration makes them particularly volatile. If you pick the right country—
Britain in 1998, for example—the returns can be substantial. But pick the wrong
one, and watch out. For instance, the Japan Equity Fund rose only 9% in 2009. Only
the most sophisticated investors should venture into this territory.

P19-5. Euromarket investment and fund raising

LG 5; Challenge
The effective rates of interest can be obtained by adjusting the nominal rates by the forecast percent
revaluation in each case:

EUR INR IDR

Effective rates
Euromarket 1.00% 7.50% 9.25%
Domestic 0.75% 7.25% 9.65%
Following the assumption outlined in the problem, the best sources of investment and borrowing are the
following:
€50 million excess is to be invested in the IDR Euromarket.
€35 million to be raised in the EUR Euromarket.

P19-6. Ethics problem

LG 1; Intermediate
Although the firm may lose out in numerous contract bid opportunities in the foreign (and even domestic)
market, the management needs to conduct business in an ethical manner. The management team must
explain that it is “ethics first” when doing business, and that the objective is to maximize shareholder
wealth subject to ethical constraints. One can only hope that, over time, shareholders will get on board
with this idea.

◼ Case
Case studies are available on www.myfinancelab.com.

Assessing a Direct Investment in Chile by U.S. Computer Corporation

In this case, students evaluate the feasibility of a proposed foreign investment⎯construction of a factory in Chile.
They must consider many factors that make international transactions complex, including political and foreign
exchange rate risks and raising funds in international markets.

a. Cost of capital—US$:

Type of Capital Amount Weight Cost Weighted Cost

Long-term debt 6,000,000 60.00% 6.0% 3.60%
Equity 4,000,000 40.00 % 12.0% 4.80%

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Total $10,000,000 100.00% 8.40%

WACC = 8.40%, or 8% to the nearest whole percent

b. Present value (PV), 5 years:

Operating cash flow = sales  0.20

= $20,000,000  0.20
= $4,000,000
Present value N = 5, I = 8%, PMT = $4,000,000
Calculation
Solve for PV = $15,970,840

If the dollar appreciates (gets stronger) against the Chilean peso, it takes more pesos to buy each dollar. For
example, if the exchange rate changes to 800 pesos per dollar, sales of Ps 14 billion equals $17,500,000,
compared to $20,000,000 at the current exchange rate. Peso cash flows are therefore worth less, and the
present value would decrease.

c. USCC faces foreign exchange risks because the value of the Chilean peso can fluctuate against the dollar, and
it is not a currency that can be hedged. Any changes in exchange rates will result in a corresponding change
in USCC’s dollar-denominated revenues, costs, and profits.
To minimize foreign exchange risk, USCC can purchase more components with pesos, sell more products
priced in dollars, or both. It could purchase or produce more computer components in Chile rather than
importing them from the United States. USCC could also export finished computers to market outside of
Chile with sales denominated in dollars.

d. Local (peso) financing carries a much higher cost, 14% for long-term funds versus 6% in the Eurobond
market. Also, if the peso depreciates against the dollar, the value of USCC’s investment will decrease, as will
any repatriated amounts. The use of peso financing minimizes exchange rate risk.
An unstable political environment increases both political and exchange rate risks. The factory could be
seized by the Chilean government if it decides to nationalize foreign assets. The value of the peso relative to
the dollar would be likely to depreciate.
Joining into a bilateral trade pact would strengthen Chile’s economic ties with the United States. This should
make the project more attractive.

◼ Spreadsheet Exercise
The answer to Chapter 19’s MNC economic exposure spreadsheet problem is available on
www.pearson.com/mylab/finance.

◼ Group Exercise
Group exercises are available on www.myfinancelab.com.

This final chapter broadens the view of the firm internationally. This is also the direction of this final assignment.
Opportunities for expansion are now investigated beyond the fictitious firm’s domestic borders. This expansion
will take the form of either an attempt to increase market share or locate a new supplier. This, in fact, is the first
task of this assignment. The next decision is the nation chosen for the potential expansion.

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Exchange rate risk is the next part of the assignment. This begins by first retrieving recent exchange rate
information for the national currency of choice. This recent information is then compared to the past five years to
give students a sense of volatility in the exchange rate. Risk analysis is then enhanced by comparing the U.S.
inflation rate to that of the chosen nation. The progenitor of the inflation comparison is the theory of purchasing
power parity. Although not discussed in detail, students are asked to use recent inflation rates to form expectations
of future exchange rate moves. Specifically, the nation with the higher inflation rate is expected to see its currency
fall in value if this inflation differential persists. Inflation differences are then compared to the recent evolution of
the exchange rate. The final task is to explain what advantages are to be gained by “going international.” Although
the project asks groups to consider either a situation where the fictitious firm is looking abroad for a foreign
supplier or foreign sales, both could be done. As in other group exercises, providing examples of firms going
abroad brings realism to the classroom and makes unrealistic assumptions less likely.

◼ Integrative Case 8: Organic Solutions

Integrative Case 8, Organic Solutions, asks students to evaluate a proposed acquisition by means of either a cash
transaction or a stock swap. The effects on the short- and long-term earnings per share (EPS) should be calculated
and other proposals to achieve the merger discussed. The students must also consider the qualitative implications
of acquiring a non-U.S.-based company.

a. Price for cash acquisition of GTI:

Incremental Present Value
Year Cash Flow Discount Rate of GTI
1 $18,750,000 16% $139,243,245
2 18,750,000
3 20,500,000
4 21,750,000
5 24,000,000
6–30 25,000,000 [Note: F6 = 25]

The maximum price Organic Solutions (OS) should offer GTI for a cash acquisition is $139,243,245. Net of
the $8,400,000 liabilities, GTI’s owners would receive $130,843,245.

b. 1. Straight bonds—Financing such a large portion of the acquisition with straight bonds will dramatically
increase the financial risk of the firm. The management of OS must be very comfortable that the
combined firm is able to generate adequate cash to service this debt. The coupon rate on these bonds
could also be quite high. The potential benefit to the OS owners is the magnified return on equity that
could result from the leverage.
2. Convertible bonds—Initially, convertibles will provide much of the same concern as straight bonds
because financial leverage will increase. There are two benefits to convertible bonds not available with
straight bonds. First is that the coupon rate will be lower. Investors will value the conversion feature and
will be willing to pay more, thus reducing the cost, for the convertible bond. The second advantage is that
the leverage will decrease as conversion occurs, assuming the benefits of the acquisition ultimately
proves favorable and the value of the firm increases by the merger. The drawback is the potential
dissolution of ownership that will occur if and when the bonds are converted.

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3. Bonds with stock purchase warrants attached—The benefits and disadvantages of this security mix are
similar to those of a convertible bond. However, there is one major difference. The attached warrants may
eventually be used to supply the firm with additional equity capital. This inflow of capital will lower the
financial risk of the firm and generate additional funds. There will still be the dissolution of ownership
potential.

c. 1. Ratio of exchange: $30  $50 = 0.60

OS must exchange 0.60 shares of its stock for each share of GTI’s stock to acquire the firm in a stock
swap.
2. The exchange of stock should increase OS’s EPS to $3.93, an increase from $3.50.

Calculations:
New OS shares required: 4,620,000  0.60 = 2,772,000
Total OS shares: 10,000,000 + 2,772,000 = 12,772,000
$35,000,000 + $15,246,000
EPS for OS: = $3.93
12,772,000
EPS for GTI: $3.93  0.60 = $2.36, a decrease from $3.30

The decrease in EPS for GTI can be explained by looking at the price/earnings (P/E) ratio for OS and the
P/E ratio based on the price paid for GTI:

OS GTI
Price per share $50 $30
(market) (price paid)
EPS—premerger $3.50 $3.30
P/E ratio 14.29 9.09
EPS—postmerger $3.93 $2.36

When the P/E ratio paid is less than the P/E ratio of the acquiring company, there is an increase in the
acquiring company’s EPS and a decrease in the target’s EPS.
3. Over the long run, the EPS of the merged firm would probably not increase. Usually the earnings
attributable to the acquired company’s assets grow at a faster rate than those resulting from the acquiring
company’s premerger assets.

d. OS could make a tender offer to GTI’s stockholders or the firm could propose a combination cash payment-
stock swap acquisition.
e. The fact that GTI is actually a foreign-based company would impact many areas of the foregoing analysis.
Regulations that apply to international operations tend to complicate the preparation of financial statements
for foreign-based subsidiaries. Certain factors influence the risk and return characteristics of a MNC,
particularly economic and political risks. There are two forms of political risk: macro, which involves all
foreign firms in a country, and micro, which involves only a specific industry, individual firm, or corporations
from a particular country. International cash flows can be subject to a variety of factors, including local taxes
in host countries, host-country regulations that may block the return of MNCs’ cash flow, the usual business
and financial risks, currency and political actions of host governments, and local capital market conditions.
Foreign exchange risks can also complicate international cash management.

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