CHAPTER 1 TEST

1. Explain what MNCs should do to reduce and prevent agency problems?

 Establishing Good Corporate Governance: Instituting strong corporate governance entails
establishing clear expectations, roles, and responsibilities for executives, fostering transparency, and
setting up checks and balances to monitor and regulate their actions.
 Proper Incentive Design: Creating suitable incentives to motivate managers aligns their actions with
shareholders' interests. One commonly used incentive is to provide managers with the MNC’s stock as
part of their compensation; thus, the subsidiary managers benefit directly from a higher stock price
when they make decisions that enhance the MNC’s value.
 External Monitoring and Auditing: Regular financial audits by independent external firms can
provide an accurate, unbiased view of the company's financial situation. This helps keep the
management accountable and ensures discrepancies are identified and addressed promptly.
 Direct intervention by institutional investors: Institutional investors with large holdings of an MNC’s
stock have some influence over management and may complain to the board of directors if managers are
making poor decisions. Institutional investors may seek to enact changes, including removal of high-
level managers or even board members, in a poorly performing MNC. Such investors may also band
together to demand changes in an MNC, as they know that the firm would not want to lose all of its
major shareholders.
 The threat of takeover: If managers make poor decisions that reduce the MNC’s value, then another
firm might acquire it at this lower price; the new owner would then probably remove the weak
managers. The threat of a hostile takeover disciplines managerial behavior and induces managers to
attempt to maximize shareholder value.
2. Explain why MNCs need to pursue international business?

Three commonly held theories to explain why MNCs are motivated to expand their business internationally are

 Comparative advantages: A country that specializes in some products may not be a produce other
product, so trade between countries is essential. This is the argument made by the classical theory of
comparative advantage. Comparative advantage allows firms to penetrate foreign markets.
 Imperfect Markets Theory: The real world suffers from imperfect market conditions where factors of
production are somewhat immobile. There are costs and often restrictions related to the transfer of labor
and other resources often used for production, so because markets are imperfect, MNCs often capitalize
on a foreign country's resources. Imperfect markets provide an incentive for firms to seek out foreign
opportunities.
 Product Cycle Theory: One of the more popular explanations as to why firms evolve into MNCs is the
product cycle theory. According to this theory, a firm first becomes established in its home market,
where information about markets and competition is more readily available. To the extent that the firm’s
product is perceived by foreign consumers to be superior to that available within their own countries,
 the firm may accommodate foreign consumers by exporting. As time passes, if the firm’s product
becomes very popular in foreign countries, it may produce the product in foreign markets, thereby
reducing its transportation costs. The firm may also develop strategies to prolong the foreign demand for
its product. One frequently used approach is to differentiate the product so that competitors cannot
duplicate it exactly.
3. Case study 17: International Joint Venture. Anheuser-Busch, the producer of Budweiser and other
beers, expanded into Japan by engaging in a joint venture with Kirin Brewery, the largest
brewery in Japan. The joint venture enables Anheuser-Busch to have its beer distributed through
Kirin’s distribution channels in Japan. In addition, it could utilize Kirin’s facilities to produce
beer that would be sold locally. In return, Anheuser-Busch provided information about the
American beer market to Kirin.

a. Explain how the joint venture enabled Anheuser-Busch to achieve its objective of maximizing
shareholder wealth.

Many companies decide to expand their operations internationally in order to be able to grow their profit
margins and maximize shareholder wealth. By engaging in a joint venture with Japan’s largest brewery,
Anheuser Busch was able to take advantage of Kirin Brewery distribution channels and facilities to expand its
market in Japan.

b. Explain how the joint venture limited the risk of the international business.

There are several risks associated with doing business internationally that can be mitigated by joint ventures.
Some of them include: inexperience, laws and regulations, infrastructure, cultural and language barriers, and
providing after sales services. By joining Kirin Brewery, Anheuser-Busch minimized these risks. The Japanese
brewery can provide expertise in the target market, knowledge of laws and regulations, the necessary
infrastructure without having to invest huge amounts of capital; knowledge of the culture and language, as well
as customer service.

c. Many international joint ventures are intended to circumvent barriers that normally prevent foreign
competition. What barrier in Japan did Anheuser-Busch circumvent as a result of the joint venture?
What barrier in the United States did Kirin circumvent as a result of the joint venture?

Anheuser-Busch circumvented tariffs and quotas barriers as well as direct investment barriers; because it is able
to benefit from Kirin’s distribution system in Japan. Kirin is able to learn more about how Anheuser-Busch
expanded its product across various countries, circumventing information and cultural barriers.

d. Explain how Anheuser-Busch could have lost some of its market share in countries outside Japan as a
result of this particular joint venture.

In joint ventures it is critical that both parties define their products and markets very well because they are
potential competitors of each other. It would have been beneficial for Anheuser Busch to demand a non-
compete commitment from Kirin in other markets if they wanted to expand to other markets that Kirin could
potentially reach.
 FINAL TEST

1. Present depreciation methods and prepare depreciation plans.

a. Straight line method

With the straight-line depreciation method, the value of an asset is reduced uniformly over each period until it
reaches its salvage value.

b. Decreasing balance method

A method of accounting for asset depreciation that records greater depreciation in the earlier periods of an
asset’s useful life and less depreciation in its later years.
Depreciation expense=Residual value of ¿ asset × Depreciation rate
 c. Product quantity method
This method is particularly utilized for assets that experience a high degree of wear and tear based on actual use
per-unit such as certain pieces of machinery or production equipment.

2. Presenting debt repayment methods and making a debt repayment plan