INTERNATIONAL FINANCE (EXAM 1) REVIEW
QUESTIONS WITH 100% CORRECT ANSWERS
Multinational Corporations (MNC's)
firms that engage in some form of international business
- Goal: Maximize shareholder wealth
Agency Problems
conflict of goals between a firm's managers and its shareholders
Agency Costs
costs of ensuring that managers maximize shareholder wealth (larger for multinational
corporations due to difficulty of monitoring over long distances)
International Business Theories
1. Theory of Comparative Advantage
2. Imperfect Markets Theory
3. Product Cycle Theory
Theory of Comparative Advantage
countries specialize in certain products and rely on trade for others that they can't produce as
efficiently (due to climate or other restrictions)
Imperfect Markets Theory
factors of production are somewhat immobile (costs and restrictions related to transfer of labor
and other resources used for production)
- provides incentive to seek out foreign opportunity
Product Cycle Theory
- firms first become established in their home market as a result of some perceived advantage
- foreign demand accommodated by exporting and potentially moving production to foreign
countries to reduce transportation costs
International Trade
- exporting to penetrate foreign markets
- importing to obtain material from low cost suppliers
Licensing
obligates a firm to provide its technology in exchange for fees or other benefits (Ex. Starbucks
technology in trains)
Franchising
, obligates a firm to provide a sales/service strategy, support assistance, and an initial investment
in return for periodic fees
Acquisitions
acquiring other firms as a means of penetrating foreign markets (quickly obtain a large portion of
foreign market share; subject to risk of substantial losses)
Establish Subsidiaries
establishing new operations in foreign countries to produce and sell their products (preferred to
acquisitions because it is more tailored to firm's needs)
Direct Foreign Investment (DFI)
any method of increasing international business operations that requires a direct investment in
foreign markets (DOES NOT include international trade and licensing)
Factors of International Risk/Uncertainty
1. International economic conditions
2. International political risk
3. Exchange rate risk
Effect of International Economic Conditions
weakened economic conditions causes income earned by consumers of foreign country to drop,
which decreases sales and causes a reduction of firms cash flows in that country
Effect of International Political Risk
foreign government may increase taxes or impose trade barriers on imported goods, which would
have a negative impact on a firm's cash flows
Effect of Exchange Rate Risk
if foreign currency of subsidiary weakens against the dollar, the MNC will receive a lower dollar
amount cash flow for exports (opposite risk for imports: if foreign currency appreciates against
the dollar, the MNC pays a larger cash outflow)
Balance of Payments
summary of transactions between domestic and foreign residents for a specific country over a
specific period of time
Current Account
flow of funds between a country and all other countries due to PURCHASES of goods or
services (IMPORTS; cash outflows)
Capital Account
QUESTIONS WITH 100% CORRECT ANSWERS
Multinational Corporations (MNC's)
firms that engage in some form of international business
- Goal: Maximize shareholder wealth
Agency Problems
conflict of goals between a firm's managers and its shareholders
Agency Costs
costs of ensuring that managers maximize shareholder wealth (larger for multinational
corporations due to difficulty of monitoring over long distances)
International Business Theories
1. Theory of Comparative Advantage
2. Imperfect Markets Theory
3. Product Cycle Theory
Theory of Comparative Advantage
countries specialize in certain products and rely on trade for others that they can't produce as
efficiently (due to climate or other restrictions)
Imperfect Markets Theory
factors of production are somewhat immobile (costs and restrictions related to transfer of labor
and other resources used for production)
- provides incentive to seek out foreign opportunity
Product Cycle Theory
- firms first become established in their home market as a result of some perceived advantage
- foreign demand accommodated by exporting and potentially moving production to foreign
countries to reduce transportation costs
International Trade
- exporting to penetrate foreign markets
- importing to obtain material from low cost suppliers
Licensing
obligates a firm to provide its technology in exchange for fees or other benefits (Ex. Starbucks
technology in trains)
Franchising
, obligates a firm to provide a sales/service strategy, support assistance, and an initial investment
in return for periodic fees
Acquisitions
acquiring other firms as a means of penetrating foreign markets (quickly obtain a large portion of
foreign market share; subject to risk of substantial losses)
Establish Subsidiaries
establishing new operations in foreign countries to produce and sell their products (preferred to
acquisitions because it is more tailored to firm's needs)
Direct Foreign Investment (DFI)
any method of increasing international business operations that requires a direct investment in
foreign markets (DOES NOT include international trade and licensing)
Factors of International Risk/Uncertainty
1. International economic conditions
2. International political risk
3. Exchange rate risk
Effect of International Economic Conditions
weakened economic conditions causes income earned by consumers of foreign country to drop,
which decreases sales and causes a reduction of firms cash flows in that country
Effect of International Political Risk
foreign government may increase taxes or impose trade barriers on imported goods, which would
have a negative impact on a firm's cash flows
Effect of Exchange Rate Risk
if foreign currency of subsidiary weakens against the dollar, the MNC will receive a lower dollar
amount cash flow for exports (opposite risk for imports: if foreign currency appreciates against
the dollar, the MNC pays a larger cash outflow)
Balance of Payments
summary of transactions between domestic and foreign residents for a specific country over a
specific period of time
Current Account
flow of funds between a country and all other countries due to PURCHASES of goods or
services (IMPORTS; cash outflows)
Capital Account
