International Financial Management

10th Edition
by Jeff Madura

1 © 2010 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

2 2 © 2010 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

3 3 © 2010 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

4 © 2010 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

5 © 2010 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.

6 © 2010 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

7 7 © 2010 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. International trade
2. Licensing
3. Franchising
4. Joint Ventures
5. Acquisitions of existing operations
6. Establishing new foreign subsidiaries

8 © 2010 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.
 Valuation Model for an MNC:
Domestic Model

  E  CF$,t   
n
V   t 
t 1  1  k  

 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.

9 9 © 2010 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.
 Valuation Model for an MNC:
International Cash Flows

E  CF$,t    E  CF j ,t   E  S j ,t   
m

j 1
 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.

101 © 2010 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

111 © 2010 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

1 © 2010 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.