Description
Describes ways to manage finance in the foreign subsidiaries.
Chapter 1
Managing Finance in Foreign
Subsidiaries: An Overview
Group 1
Goals for International Financial
Management
• What goal should this effective global manager
be working toward?
– Maximization of shareholder wealth?
or
– Other Goals?
Maximize Shareholder Wealth
• Long accepted as a goal in the Anglo-Saxon
countries, but complications arise.
–Who are and where are the shareholders?
–In what currency should we maximize their
wealth?
Other Goals
• In other countries shareholders are viewed as merely one
among many “stakeholders” of the firm including:
– Employees
– Suppliers
– Customers
• In Japan, managers have typically sought to maximize the
value of the keiretsu—a family of firms to which the
individual firms belongs.
Other Goals
• No matter what the other goals, they cannot be
achieved in the long term if the maximization of
shareholder wealth is not given due
consideration.
Globalization of the World Economy: Recent
Trends
• Emergence of Globalized Financial Markets
• Trade Liberalization and Economic Integration
• Privatization
Emergence of Globalized
Financial Markets
• Deregulation of Financial Markets coupled with
• Advances in Technology have greatly reduced
information and transactions costs, which has led to:
• Financial Innovations, such as
– Currency futures and options
– Multi-currency bonds
– Cross-border stock listings
– International mutual funds
Goal of the MNC
• The commonly accepted goal of an MNC is to
maximize shareholder wealth.
• We will focus on MNCs that are based in the
United States and that wholly own their
foreign subsidiaries.
Conflicts Against the MNC Goal
• For corporations with shareholders who differ
from their managers, a conflict of goals can
exist - the agency problem.
• Agency costs are normally larger for MNCs
than for purely domestic firms.
– The sheer size of the MNC.
– The scattering of distant subsidiaries.
– The culture of foreign managers.
– Subsidiary value versus overall MNC value.
Example 1
? A subsidiary manager obtained financing from the parent
firm (headquarters) to develop and sell a new product.
? The manager estimated the costs and benefits of the
project from the subsidiary’s perspective and determined
that the project was feasible.
? However, the manager neglected to realize that any
earnings from this project remitted to the parent would be
heavily taxed by the host government.
? The estimated after-tax benefits received by the parent
were more than offset by the cost of financing the project.
While the subsidiary's individual value was enhanced, the
MNC’s overall value was reduced.
Impact of Management Control
• The magnitude of agency costs can vary with
the management style of the MNC.
• A centralized management style reduces
agency costs. However, a decentralized style
gives more control to those managers who are
closer to the subsidiary’s operations and
environment.
Centralized Multinational Financial Management
for an MNC with two subsidiaries, A and B
Financial
Managers
of Parent
Capital Expenditures
at A
Inventory and
Accounts
Receivable
Management at A
Cash
Management
at A
Financing at A
Capital Expenditures
at B
Inventory and
Accounts
Receivable
Management at B
Cash
Management
at B
Financing at B
Decentralized Multinational Financial Management
for an MNC with two subsidiaries, A and B
Financial
Managers
of A
Capital Expenditures
at A
Inventory and
Accounts
Receivable
Management at A
Cash
Management
at A
Financing at A
Capital Expenditures
at B
Inventory and
Accounts
Receivable
Management at B
Cash
Management
at B
Financing at B
Financial
Managers
of B
Impact of Management Control
• Some MNCs attempt to strike a balance - they
allow subsidiary managers to make the key
decisions for their respective operations, but
the decisions are monitored by the parent’s
management.
Impact of Management Control
• Electronic networks make it easier for the
parent to monitor the actions and
performance of foreign subsidiaries.
• For example, corporate intranet or internet
email facilitates communication. Financial
reports and other documents can be sent
electronically too.
Example 2
• The parent of Jersey, Inc., has subsidiaries in Australia and Italy. The
subsidiaries are in different time zones, so communicating
frequently by phone is inconvenient and expensive.
• In addition, financial reports and designs of new products or plant
sites cannot be easily communicated over the phone.
• The internet allows the foreign subsidiaries to e-mail updated
information in a standardized format to avoid language problems
and to send images of financial reports and product designs.
• The parent can easily track inventory, sales, expenses, and earnings
of each subsidiary on a weekly or monthly basis. Thus, the use of
the Internet can reduce agency costs due to international business.
Impact of Corporate Control
• Various forms of corporate control can reduce
agency costs.
– Stock compensation for board members and
executives.
– The threat of a hostile takeover.
– Monitoring and intervention by large
shareholders.
Constraints
Interfering with the MNC’s Goal
• As MNC managers attempt to maximize their
firm’s value, they may be confronted with
various constraints.
– Environmental constraints.
– Regulatory constraints.
– Ethical constraints.
Example 3
? Eurenza, a manufacturing firm in Eastern Europe, is
struggling financially. The firm’s stock price has declined in
the last two years, as its sale have declined while its
expenses remain very high.
? One problem is that many of its employees are
unproductive. Eurenza while like to lay off some of these
employees, a move that would reduce its expenses and
increase earnings. Its existing shareholders would be better
off if the employees were laid off.
? Yet, the government will not allow Eurenza to lay off
employees, even if they are not productive. The
government is concerned that such a complete focus on
shareholder wealth will be detrimental to the labor force.
Why are firms motivated to expand
their business internationally?
Theories of International Business
?Theory of Comparative Advantage
– Specialization by countries can increase
production efficiency.
?Imperfect Markets Theory
– The markets for the various resources used in
production are “imperfect.”
Why are firms motivated to expand
their business internationally?
Theories of International Business
?Product Cycle Theory
– As a firm matures, it may recognize additional
opportunities outside its home country.
? Firm exports
product to
accommodate
foreign demand.
? Firm creates
product to
accommodate
local demand.
The International Product Life Cycle
? Firm
establishes
foreign
subsidiary
to establish
presence in
foreign
country
and
possibly to
reduce
costs.
?a. Firm
differentiates
product from
competitors
and/or expands
product line in
foreign country.
?b. Firm’s
foreign
business
declines as its
competitive
advantages are
eliminated.
or
International
Business Methods
• International trade is a relatively
conservative approach involving exporting
and/or importing.
– The internet facilitates international trade by
enabling firms to advertise and manage orders
through their websites.
There are several methods by which firms
can conduct international business.
International
Business Methods
• Licensing allows a firm to provide its
technology in exchange for fees or some other
benefits.
• Franchising obligates a firm to provide a
specialized sales or service strategy, support
assistance, and possibly an initial investment
in the franchise in exchange for periodic fees.
Example 4
? Springs, Inc., has set up a licensing agreement
with a manufacturer in the Czech Republic.
? When Springs receives orders for its products for
customers in Eastern Europe, it relies on this
manufacturer to produce and deliver the
products ordered.
? This expedites the delivery process and may even
allow Springs to have the products manufactured
at lower cost than if it produced them itself.
International
Business Methods
• Firms may also penetrate foreign markets by
engaging in a joint venture (joint ownership
and operation) with firms that reside in those
markets.
• Acquisitions of existing operations in foreign
countries allow firms to quickly gain control
over foreign operations as well as a share of
the foreign market.
Example 5
• In 2001, Home Depot acquired the second
largest home improvement business in
Mexico. This acquisition was Home Depot’s
first in Mexico, but allowed it to expand its
business after establishing name recognition
there. Home Depot is expanding in Mexico
just as it did in Canada throughout the 1990s.
International
Business Methods
• Firms can also penetrate foreign markets by
establishing new foreign subsidiaries.
• In general, any method of conducting business
that requires a direct investment in foreign
operations is referred to as a direct foreign
investment (DFI).
• The optimal international business method
may depend on the characteristics of the
MNC.
Example 6
• The evolution of Nike began in 1962, when Phil Knight, a business student at
Stanford’s business school, wrote a paper on how U.S. firm could use Japanese
technology to break the German dominance of the athletic shoe industry in the
United States.
• After graduation, Knight visited the Unitsuka Tiger shoe company in Japan. He a
made a licensing agreement with that company to produce a shoe that he sold in
U.S. under the name Blue Ribbon Sports (BRS). In 1972, Knight exported his shoes
to Canada.
• In 1974, he expanded his operations into Australia. In 1977, the firm licensed
factories in Taiwan and Korea to produce athletic shoes and then sold the shoe in
Asian countries. In 1978, BRS became Nike, Inc., and began to export shoes to
Europe and South America. As a result of its exporting and its direct foreign
investments, Nike’s international sales $1 billion by 1992 and were about $5 billion
by 2005.
Degree of International Business by MNCs
26%
62%
58%
33%
47%
50%
66%
12%
46%
40%
0%
10%
20%
30%
40%
50%
60%
70%
Campbell's
Soup
Dow
Chemical
IBM Motorola Nike
Foreign Sales as a % of Total Sales
Foreign Assets as a % of Total Assets
International Opportunities
• Investment opportunities - The marginal
return on projects for an MNC is above that of
a purely domestic firm because of the
expanded opportunity set of possible projects
from which to select.
• Financing opportunities - An MNC is also able
to obtain capital funding at a lower cost due
to its larger opportunity set of funding sources
around the world.
Marginal
Return on
Projects
Purely
Domestic
Firm
MNC
Asset Level
of Firm
Investment
Opportunities
International Opportunities
Cost-benefit Evaluation for
Purely Domestic Firms versus MNCs
Appropriate
Size for Purely
Domestic Firm
Appropriate
Size for MNC
X Y
Marginal
Cost of
Capital
Purely
Domestic
Firm
MNC
Financing
Opportunities
International Opportunities
• Opportunities in Europe
– The Single European Act of 1987.
– The removal of the Berlin Wall in 1989.
– The inception of the euro in 1999.
• Opportunities in Latin America
– The North American Free Trade Agreement
(NAFTA) of 1993.
– The General Agreement on Tariffs and Trade
(GATT) accord.
International Opportunities
• Opportunities in Asia
– The reduction of investment restrictions by many
Asian countries during the 1990s.
– China’s potential for growth.
– The Asian economic crisis in 1997-1998.
Exposure to International Risk
?exchange rate movements
– Exchange rate fluctuations affect cash flows and
foreign demand.
?foreign economies
– Economic conditions affect demand.
?political risk
– Political actions affect cash flows.
International business usually increases an
MNC’s exposure to:
Exposure to International Risk
$130,000
$135,000
$140,000
$145,000
$150,000
$155,000
$160,000
$165,000
Jan Mar May Jul Sep Nov Jan Mar May
2000 2001
U.S. Firm’s Cost of Obtaining £100,000
Overview of an MNC’s Cash Flows
Profile A: MNCs focused on International Trade
U.S. Businesses
Foreign Importers
U.S. Customers
Foreign Exporters
U.S.-
based
MNC
Payments for products
Payments for supplies
Payments for exports
Payments for imports
Overview of an MNC’s Cash Flows
Profile B: MNCs focused on International Trade and
International Arrangements
U.S. Businesses
Foreign Importers
U.S. Customers
Foreign Exporters
Foreign Firms
U.S.-
based
MNC
Fees for services
Costs of services
Payments for products
Payments for supplies
Payments for exports
Payments for imports
Overview of an MNC’s Cash Flows
Profile C: MNCs focused on International Trade, International
Arrangements, and Direct Foreign Investment
U.S. Businesses
Foreign Importers
U.S. Customers
Foreign Exporters
Foreign Firms
Foreign Subsidiaries
U.S.-
based
MNC
Funds remitted
Funds invested
Fees for services
Costs of services
Payments for products
Payments for supplies
Payments for exports
Payments for imports
Managing for Value
• Like domestic projects, foreign projects
involve an investment decision and a financing
decision.
• When managers make multinational finance
decisions that maximize the overall present
value of future cash flows, they maximize the
firm’s value, and hence shareholder wealth.
( )
( )
¿
+
n
t
t
t
k
1 =
$,
1
CF E
= Value
E (CF
$,t
) = expected cash flows to be received at
the end of period t
n = the number of periods into the future
in which cash flows are received
k = the required rate of return by
investors
Valuation Model for an MNC
• Domestic Model
( ) ( ) | |
( )
¿
¿
¦
¦
)
¦
¦
`
¹
¦
¦
¹
¦
¦
´
¦
+
×
=
n
t
t
m
j
t j t j
k
1 =
1
, ,
1
ER E CF E
= Value
E (CF
j,t
) = expected cash flows denominated in currency j
to be received by the U.S. parent at the end of
period t
E (ER
j,t
) = expected exchange rate at which currency j can
be converted to dollars at the end of period t
k = the weighted average cost of capital of the U.S.
parent company
Valuation Model for an MNC
• Valuing International Cash Flows
Valuation Model for an MNC
• An MNC’s financial decisions include how
much business to conduct in each country and
how much financing to obtain in each
currency.
• Its financial decisions determine its exposure
to the international environment.
Valuation Model for an MNC
Impact of New International Opportunities
on an MNC’s Value
Exchange Rate Risk
( ) ( ) | |
( )
¿
¿
¦
¦
)
¦
¦
`
¹
¦
¦
¹
¦
¦
´
¦
+
×
=
n
t
t
m
j
t j t j
k
1 =
1
, ,
1
ER E CF E
= Value
Political Risk
Exposure to
Foreign Economies
Example 7
? To illustrate how the dollar cash flows of an MNC can be
measured, consider a U.S. firm that had expected cash
flows of $100,000 from local business and 1,000,000
Mexican pesos from business in Mexico at the end of
period t. Assuming that the peso’s value is expected to be
$0.09, the expected dollar cash flows are:
E(CF
$,t
) = [E(CF
j,t
) X E(Er
j,t
)]
= [$100,000] + [1,000,000 pesos x ($0.09)]
= [$100,000] + $[90,000]
= $190,000.
? The cash flows of $100,000 from U.S. business are already
denominated in U.S. dollars and therefore did no have to be
converted.
Thank you
doc_736039439.ppt
Describes ways to manage finance in the foreign subsidiaries.
Chapter 1
Managing Finance in Foreign
Subsidiaries: An Overview
Group 1
Goals for International Financial
Management
• What goal should this effective global manager
be working toward?
– Maximization of shareholder wealth?
or
– Other Goals?
Maximize Shareholder Wealth
• Long accepted as a goal in the Anglo-Saxon
countries, but complications arise.
–Who are and where are the shareholders?
–In what currency should we maximize their
wealth?
Other Goals
• In other countries shareholders are viewed as merely one
among many “stakeholders” of the firm including:
– Employees
– Suppliers
– Customers
• In Japan, managers have typically sought to maximize the
value of the keiretsu—a family of firms to which the
individual firms belongs.
Other Goals
• No matter what the other goals, they cannot be
achieved in the long term if the maximization of
shareholder wealth is not given due
consideration.
Globalization of the World Economy: Recent
Trends
• Emergence of Globalized Financial Markets
• Trade Liberalization and Economic Integration
• Privatization
Emergence of Globalized
Financial Markets
• Deregulation of Financial Markets coupled with
• Advances in Technology have greatly reduced
information and transactions costs, which has led to:
• Financial Innovations, such as
– Currency futures and options
– Multi-currency bonds
– Cross-border stock listings
– International mutual funds
Goal of the MNC
• The commonly accepted goal of an MNC is to
maximize shareholder wealth.
• We will focus on MNCs that are based in the
United States and that wholly own their
foreign subsidiaries.
Conflicts Against the MNC Goal
• For corporations with shareholders who differ
from their managers, a conflict of goals can
exist - the agency problem.
• Agency costs are normally larger for MNCs
than for purely domestic firms.
– The sheer size of the MNC.
– The scattering of distant subsidiaries.
– The culture of foreign managers.
– Subsidiary value versus overall MNC value.
Example 1
? A subsidiary manager obtained financing from the parent
firm (headquarters) to develop and sell a new product.
? The manager estimated the costs and benefits of the
project from the subsidiary’s perspective and determined
that the project was feasible.
? However, the manager neglected to realize that any
earnings from this project remitted to the parent would be
heavily taxed by the host government.
? The estimated after-tax benefits received by the parent
were more than offset by the cost of financing the project.
While the subsidiary's individual value was enhanced, the
MNC’s overall value was reduced.
Impact of Management Control
• The magnitude of agency costs can vary with
the management style of the MNC.
• A centralized management style reduces
agency costs. However, a decentralized style
gives more control to those managers who are
closer to the subsidiary’s operations and
environment.
Centralized Multinational Financial Management
for an MNC with two subsidiaries, A and B
Financial
Managers
of Parent
Capital Expenditures
at A
Inventory and
Accounts
Receivable
Management at A
Cash
Management
at A
Financing at A
Capital Expenditures
at B
Inventory and
Accounts
Receivable
Management at B
Cash
Management
at B
Financing at B
Decentralized Multinational Financial Management
for an MNC with two subsidiaries, A and B
Financial
Managers
of A
Capital Expenditures
at A
Inventory and
Accounts
Receivable
Management at A
Cash
Management
at A
Financing at A
Capital Expenditures
at B
Inventory and
Accounts
Receivable
Management at B
Cash
Management
at B
Financing at B
Financial
Managers
of B
Impact of Management Control
• Some MNCs attempt to strike a balance - they
allow subsidiary managers to make the key
decisions for their respective operations, but
the decisions are monitored by the parent’s
management.
Impact of Management Control
• Electronic networks make it easier for the
parent to monitor the actions and
performance of foreign subsidiaries.
• For example, corporate intranet or internet
email facilitates communication. Financial
reports and other documents can be sent
electronically too.
Example 2
• The parent of Jersey, Inc., has subsidiaries in Australia and Italy. The
subsidiaries are in different time zones, so communicating
frequently by phone is inconvenient and expensive.
• In addition, financial reports and designs of new products or plant
sites cannot be easily communicated over the phone.
• The internet allows the foreign subsidiaries to e-mail updated
information in a standardized format to avoid language problems
and to send images of financial reports and product designs.
• The parent can easily track inventory, sales, expenses, and earnings
of each subsidiary on a weekly or monthly basis. Thus, the use of
the Internet can reduce agency costs due to international business.
Impact of Corporate Control
• Various forms of corporate control can reduce
agency costs.
– Stock compensation for board members and
executives.
– The threat of a hostile takeover.
– Monitoring and intervention by large
shareholders.
Constraints
Interfering with the MNC’s Goal
• As MNC managers attempt to maximize their
firm’s value, they may be confronted with
various constraints.
– Environmental constraints.
– Regulatory constraints.
– Ethical constraints.
Example 3
? Eurenza, a manufacturing firm in Eastern Europe, is
struggling financially. The firm’s stock price has declined in
the last two years, as its sale have declined while its
expenses remain very high.
? One problem is that many of its employees are
unproductive. Eurenza while like to lay off some of these
employees, a move that would reduce its expenses and
increase earnings. Its existing shareholders would be better
off if the employees were laid off.
? Yet, the government will not allow Eurenza to lay off
employees, even if they are not productive. The
government is concerned that such a complete focus on
shareholder wealth will be detrimental to the labor force.
Why are firms motivated to expand
their business internationally?
Theories of International Business
?Theory of Comparative Advantage
– Specialization by countries can increase
production efficiency.
?Imperfect Markets Theory
– The markets for the various resources used in
production are “imperfect.”
Why are firms motivated to expand
their business internationally?
Theories of International Business
?Product Cycle Theory
– As a firm matures, it may recognize additional
opportunities outside its home country.
? Firm exports
product to
accommodate
foreign demand.
? Firm creates
product to
accommodate
local demand.
The International Product Life Cycle
? Firm
establishes
foreign
subsidiary
to establish
presence in
foreign
country
and
possibly to
reduce
costs.
?a. Firm
differentiates
product from
competitors
and/or expands
product line in
foreign country.
?b. Firm’s
foreign
business
declines as its
competitive
advantages are
eliminated.
or
International
Business Methods
• International trade is a relatively
conservative approach involving exporting
and/or importing.
– The internet facilitates international trade by
enabling firms to advertise and manage orders
through their websites.
There are several methods by which firms
can conduct international business.
International
Business Methods
• Licensing allows a firm to provide its
technology in exchange for fees or some other
benefits.
• Franchising obligates a firm to provide a
specialized sales or service strategy, support
assistance, and possibly an initial investment
in the franchise in exchange for periodic fees.
Example 4
? Springs, Inc., has set up a licensing agreement
with a manufacturer in the Czech Republic.
? When Springs receives orders for its products for
customers in Eastern Europe, it relies on this
manufacturer to produce and deliver the
products ordered.
? This expedites the delivery process and may even
allow Springs to have the products manufactured
at lower cost than if it produced them itself.
International
Business Methods
• Firms may also penetrate foreign markets by
engaging in a joint venture (joint ownership
and operation) with firms that reside in those
markets.
• Acquisitions of existing operations in foreign
countries allow firms to quickly gain control
over foreign operations as well as a share of
the foreign market.
Example 5
• In 2001, Home Depot acquired the second
largest home improvement business in
Mexico. This acquisition was Home Depot’s
first in Mexico, but allowed it to expand its
business after establishing name recognition
there. Home Depot is expanding in Mexico
just as it did in Canada throughout the 1990s.
International
Business Methods
• Firms can also penetrate foreign markets by
establishing new foreign subsidiaries.
• In general, any method of conducting business
that requires a direct investment in foreign
operations is referred to as a direct foreign
investment (DFI).
• The optimal international business method
may depend on the characteristics of the
MNC.
Example 6
• The evolution of Nike began in 1962, when Phil Knight, a business student at
Stanford’s business school, wrote a paper on how U.S. firm could use Japanese
technology to break the German dominance of the athletic shoe industry in the
United States.
• After graduation, Knight visited the Unitsuka Tiger shoe company in Japan. He a
made a licensing agreement with that company to produce a shoe that he sold in
U.S. under the name Blue Ribbon Sports (BRS). In 1972, Knight exported his shoes
to Canada.
• In 1974, he expanded his operations into Australia. In 1977, the firm licensed
factories in Taiwan and Korea to produce athletic shoes and then sold the shoe in
Asian countries. In 1978, BRS became Nike, Inc., and began to export shoes to
Europe and South America. As a result of its exporting and its direct foreign
investments, Nike’s international sales $1 billion by 1992 and were about $5 billion
by 2005.
Degree of International Business by MNCs
26%
62%
58%
33%
47%
50%
66%
12%
46%
40%
0%
10%
20%
30%
40%
50%
60%
70%
Campbell's
Soup
Dow
Chemical
IBM Motorola Nike
Foreign Sales as a % of Total Sales
Foreign Assets as a % of Total Assets
International Opportunities
• Investment opportunities - The marginal
return on projects for an MNC is above that of
a purely domestic firm because of the
expanded opportunity set of possible projects
from which to select.
• Financing opportunities - An MNC is also able
to obtain capital funding at a lower cost due
to its larger opportunity set of funding sources
around the world.
Marginal
Return on
Projects
Purely
Domestic
Firm
MNC
Asset Level
of Firm
Investment
Opportunities
International Opportunities
Cost-benefit Evaluation for
Purely Domestic Firms versus MNCs
Appropriate
Size for Purely
Domestic Firm
Appropriate
Size for MNC
X Y
Marginal
Cost of
Capital
Purely
Domestic
Firm
MNC
Financing
Opportunities
International Opportunities
• Opportunities in Europe
– The Single European Act of 1987.
– The removal of the Berlin Wall in 1989.
– The inception of the euro in 1999.
• Opportunities in Latin America
– The North American Free Trade Agreement
(NAFTA) of 1993.
– The General Agreement on Tariffs and Trade
(GATT) accord.
International Opportunities
• Opportunities in Asia
– The reduction of investment restrictions by many
Asian countries during the 1990s.
– China’s potential for growth.
– The Asian economic crisis in 1997-1998.
Exposure to International Risk
?exchange rate movements
– Exchange rate fluctuations affect cash flows and
foreign demand.
?foreign economies
– Economic conditions affect demand.
?political risk
– Political actions affect cash flows.
International business usually increases an
MNC’s exposure to:
Exposure to International Risk
$130,000
$135,000
$140,000
$145,000
$150,000
$155,000
$160,000
$165,000
Jan Mar May Jul Sep Nov Jan Mar May
2000 2001
U.S. Firm’s Cost of Obtaining £100,000
Overview of an MNC’s Cash Flows
Profile A: MNCs focused on International Trade
U.S. Businesses
Foreign Importers
U.S. Customers
Foreign Exporters
U.S.-
based
MNC
Payments for products
Payments for supplies
Payments for exports
Payments for imports
Overview of an MNC’s Cash Flows
Profile B: MNCs focused on International Trade and
International Arrangements
U.S. Businesses
Foreign Importers
U.S. Customers
Foreign Exporters
Foreign Firms
U.S.-
based
MNC
Fees for services
Costs of services
Payments for products
Payments for supplies
Payments for exports
Payments for imports
Overview of an MNC’s Cash Flows
Profile C: MNCs focused on International Trade, International
Arrangements, and Direct Foreign Investment
U.S. Businesses
Foreign Importers
U.S. Customers
Foreign Exporters
Foreign Firms
Foreign Subsidiaries
U.S.-
based
MNC
Funds remitted
Funds invested
Fees for services
Costs of services
Payments for products
Payments for supplies
Payments for exports
Payments for imports
Managing for Value
• Like domestic projects, foreign projects
involve an investment decision and a financing
decision.
• When managers make multinational finance
decisions that maximize the overall present
value of future cash flows, they maximize the
firm’s value, and hence shareholder wealth.
( )
( )
¿
+
n
t
t
t
k
1 =
$,
1
CF E
= Value
E (CF
$,t
) = expected cash flows to be received at
the end of period t
n = the number of periods into the future
in which cash flows are received
k = the required rate of return by
investors
Valuation Model for an MNC
• Domestic Model
( ) ( ) | |
( )
¿
¿
¦
¦
)
¦
¦
`
¹
¦
¦
¹
¦
¦
´
¦
+
×
=
n
t
t
m
j
t j t j
k
1 =
1
, ,
1
ER E CF E
= Value
E (CF
j,t
) = expected cash flows denominated in currency j
to be received by the U.S. parent at the end of
period t
E (ER
j,t
) = expected exchange rate at which currency j can
be converted to dollars at the end of period t
k = the weighted average cost of capital of the U.S.
parent company
Valuation Model for an MNC
• Valuing International Cash Flows
Valuation Model for an MNC
• An MNC’s financial decisions include how
much business to conduct in each country and
how much financing to obtain in each
currency.
• Its financial decisions determine its exposure
to the international environment.
Valuation Model for an MNC
Impact of New International Opportunities
on an MNC’s Value
Exchange Rate Risk
( ) ( ) | |
( )
¿
¿
¦
¦
)
¦
¦
`
¹
¦
¦
¹
¦
¦
´
¦
+
×
=
n
t
t
m
j
t j t j
k
1 =
1
, ,
1
ER E CF E
= Value
Political Risk
Exposure to
Foreign Economies
Example 7
? To illustrate how the dollar cash flows of an MNC can be
measured, consider a U.S. firm that had expected cash
flows of $100,000 from local business and 1,000,000
Mexican pesos from business in Mexico at the end of
period t. Assuming that the peso’s value is expected to be
$0.09, the expected dollar cash flows are:
E(CF
$,t
) = [E(CF
j,t
) X E(Er
j,t
)]
= [$100,000] + [1,000,000 pesos x ($0.09)]
= [$100,000] + $[90,000]
= $190,000.
? The cash flows of $100,000 from U.S. business are already
denominated in U.S. dollars and therefore did no have to be
converted.
Thank you
doc_736039439.ppt