Multinational Financial Management, Study Guide, 6th Edition Solution Manual
Multinational Financial Management, Study Guide, 6th Edition Solution Manual offers step-by-step solutions to help you understand tough concepts with ease.
Scarlett Anderson
Contributor
4.7
146
7 months ago
Preview (31 of 278)
Sign in to access the full document!
CHAPTER 1: INTRODUCTION 1
CHAPTER 1
INTRODUCTION
Chapter 1 emphasizes the internationalization of business and economic activity that has occurred since
the end of World War II. Although international business activities have existed for centuries, primarily in
the form of exporting and importing, only in the postwar period have multinational firms become
preeminent. The distinguishing characteristic of the MNC is its emphasis on global, rather than affiliate,
performance. Specifically, MNCs ask, “Where in the world should we build our plants, sell our products,
raise capital, and hire personnel?” Thus the true MNC is characterized more by attitude than the physical
reality of an integrated, global system of marketing and production activities. It involves looking beyond
the boundaries of the home country and treating the world as “our oyster.”
After stimulating student interest with this vision of the MNC, I then introduce the financial decisions
that MNCs must make. I begin by discussing the key concepts and lessons from domestic finance that
apply directly to international corporate finance. The lessons include the emphasis on cash flow rather
than accounting earnings, the time value of money, the importance of taxes, and the unwillingness of
investors to reward companies for activities (like corporate diversification) that investors could replicate
for themselves at no greater cost.
The key concepts, which I point out will arise time and again in the course, are arbitrage, market
efficiency, and the separation of risk into systematic risk, which must be rewarded, and unsystematic risk,
which is not rewarded. The latter concept, of course, is the intuition underlying both the capital asset
pricing model (CAPM) and the arbitrage pricing theory (APT). Although imperfect, the theoretical
framework of domestic corporate finance provides a useful frame of reference, and understanding it is
essential before proceeding with the more complex aspects of international financial management. I
devote some time to explaining that total risk matters, even if the CAPM or APT holds. Otherwise, the
astute student will see a conflict between the irrelevance of unsystematic risk and hedging activities.
I then outline the key decision areas in international financial management: foreign exchange risk
management, managing working capital and the internal financial system, financing foreign units, capital
budgeting, and evaluation and control. I emphasize the additional parameters that MNC financial
executives must cope with, including multiple currencies, rates of inflation, tax systems, and capital
markets, as well as foreign exchange and political risks.
CHAPTER 1
INTRODUCTION
Chapter 1 emphasizes the internationalization of business and economic activity that has occurred since
the end of World War II. Although international business activities have existed for centuries, primarily in
the form of exporting and importing, only in the postwar period have multinational firms become
preeminent. The distinguishing characteristic of the MNC is its emphasis on global, rather than affiliate,
performance. Specifically, MNCs ask, “Where in the world should we build our plants, sell our products,
raise capital, and hire personnel?” Thus the true MNC is characterized more by attitude than the physical
reality of an integrated, global system of marketing and production activities. It involves looking beyond
the boundaries of the home country and treating the world as “our oyster.”
After stimulating student interest with this vision of the MNC, I then introduce the financial decisions
that MNCs must make. I begin by discussing the key concepts and lessons from domestic finance that
apply directly to international corporate finance. The lessons include the emphasis on cash flow rather
than accounting earnings, the time value of money, the importance of taxes, and the unwillingness of
investors to reward companies for activities (like corporate diversification) that investors could replicate
for themselves at no greater cost.
The key concepts, which I point out will arise time and again in the course, are arbitrage, market
efficiency, and the separation of risk into systematic risk, which must be rewarded, and unsystematic risk,
which is not rewarded. The latter concept, of course, is the intuition underlying both the capital asset
pricing model (CAPM) and the arbitrage pricing theory (APT). Although imperfect, the theoretical
framework of domestic corporate finance provides a useful frame of reference, and understanding it is
essential before proceeding with the more complex aspects of international financial management. I
devote some time to explaining that total risk matters, even if the CAPM or APT holds. Otherwise, the
astute student will see a conflict between the irrelevance of unsystematic risk and hedging activities.
I then outline the key decision areas in international financial management: foreign exchange risk
management, managing working capital and the internal financial system, financing foreign units, capital
budgeting, and evaluation and control. I emphasize the additional parameters that MNC financial
executives must cope with, including multiple currencies, rates of inflation, tax systems, and capital
markets, as well as foreign exchange and political risks.
Loading page 6...
Loading page 7...
Loading page 8...
Loading page 9...
Loading page 10...
Loading page 11...
Loading page 12...
Loading page 13...
Loading page 14...
Loading page 15...
Loading page 16...
Loading page 17...
Loading page 18...
Loading page 19...
Loading page 20...
Loading page 21...
Loading page 22...
Loading page 23...
Loading page 24...
Loading page 25...
Loading page 26...
Loading page 27...
Loading page 28...
Loading page 29...
Loading page 30...
Loading page 31...
28 more pages available. Scroll down to load them.
Preview Mode
Sign in to access the full document!
100%