SOLUTION MANUAL & TEST BANK
INTERNATIONAL FINANCIAL
MANAGEMENT
,Solution Manual & Test Bank For International Financial Management, 15th Edition By Jeff Madura
Chapter 1
Multinational Financial Management: An Overview
Lecture Outline
Managing The MNC
How Business Disciplines Are Used To Manage The MNC
Agency Problems
Management Structure Of An MNC
Why Firms Pursue International Business
Theory Of Comparative Advantage
Imperfect Markets Theory
Product Cycle Theory
Methods To Conduct International Business
International Trade
Licensing
Franchising
Joint Ventures
Acquisitions Of Existing Operations
Establishing New Foreign Subsidiaries
Summary Of Methods
Valuation Model For An
MNC Domestic Model
Multinational Model
Uncertainty Surrounding An MNC’s Cash Flows
Summary Of International Effects
How Uncertainty Affects The MNC’s Cost Of Capital
Organization Of The Text
, Multinational Financial Management: An Overview 2
Chapter Theme
This Chapter Introduces The Multinational Corporation As Having Similar Goals To The Purely Domestic
Corporation, But A Wider Variety Of Opportunities. With Additional Opportunities Come Potential
Increased Returns And Other Forms Of Risk To Consider. The Potential Benefits And Risks Are
Introduced.
Topics To Stimulate Class Discussion
1. What Is The Appropriate Definition Of An MNC?
2. Why Does An MNC Expand Internationally?
3. What Are The Risks Of An MNC Which Expands Internationally?
4. Why Must Purely Domestic Firms Be Concerned About The International Environment?
POINT/COUNTER-POINT:
Should An MNC Reduce Its Ethical Standards To Compete Internationally?
POINT: Yes. When A U.S.-Based MNC Competes In Some Countries, It May Encounter Some
Business Norms There That Are Not Allowed In The U.S. For Example, When Competing For A
Government Contract, Firms Might Provide Payoffs To The Government Officials Who Will Make The
Decision. Yet, In The United States, A Firm Will Sometimes Take A Client On An Expensive Golf
Outing Or Provide Skybox Tickets To Events. This Is No Different Than A Payoff. If The Payoffs Are
Bigger In Some Foreign Countries, The MNC Can Compete Only By Matching The Payoffs Provided
By Its Competitors.
COUNTER-POINT: No. A U.S.-Based MNC Should Maintain A Standard Code Of Ethics That Applies
To Any Country, Even If It Is At A Disadvantage In A Foreign Country That Allows Activities That
Might Be Viewed As Unethical. In This Way, The MNC Establishes More Credibility Worldwide.
WHO IS CORRECT? Use The Internet To Learn More About This Issue. Which Argument Do You
Support? Offer Your Own Opinion On This Issue.
ANSWER: The Issue Is Frequently Discussed. It Is Easy To Suggest That The MNC Should Maintain A
Standard Code Of Ethics, But In Reality, That Means That It Will Not Be Able To Compete In Some
Cases. For Example, Even If It Submits The Lowest Bid On A Specific Foreign Government Project, It
Will Not Receive The Bid Without A Payoff To The Foreign Government Officials. The Issue Is
Especially A Concern For Large Projects That May Generate Substantial Cash Flows For The Firm That
Is Chosen To Do The Project. Ideally, The MNC Can Clearly Demonstrate To Whoever Oversees The
Decision Process That It Deserves To Be Selected. If There Is Just One Decision-Maker With No
Oversight, An MNC Can Not Ensure That The Decision Will Be Ethical. But If The Decision-Maker
Must Be Accountable To A Department Who Oversees The Decision, The MNC May Be Able To
Prompt The Department To Ensure That The Process Is Ethical.
, Multinational Financial Management: An Overview 3
Answers To End Of Chapter Questions
1. Agency Problems Of Mncs.
a. Explain The Agency Problem Of Mncs.
ANSWER: The Agency Problem Reflects A Conflict Of Interests Between Decision-Making
Managers And The Owners Of The MNC. Agency Costs Occur In An Effort To Assure That
Managers Act In The Best Interest Of The Owners.
b. Why Might Agency Costs Be Larger For An MNC Than For A Purely Domestic Firm?
ANSWER: The Agency Costs Are Normally Larger For Mncs Than Purely Domestic Firms For The
Following Reasons. First, Mncs Incur Larger Agency Costs In Monitoring Managers Of Distant
Foreign Subsidiaries. Second, Foreign Subsidiary Managers Raised In Different Cultures May Not
Follow Uniform Goals, And Some Managers May Focus On Satisfying Respective Employees. Third,
The Sheer Size Of The Larger Mncs Would Also Create Large Agency Problems.
2. Comparative Advantage.
a. Explain How The Theory Of Comparative Advantage Relates To The Need For International
Business.
ANSWER: The Theory Of Comparative Advantage Implies That Countries Should Specialize In
Production, Thereby Relying On Other Countries For Some Products. Consequently, There Is A
Need For International Business.
b. Explain How The Product Cycle Theory Relates To The Growth Of An MNC.
ANSWER: The Product Cycle Theory Suggests That At Some Point In Time, The Firm Will Attempt To
Capitalize On Its Perceived Advantages In Markets Other Than Where It Was Initially Established.
3. Imperfect Markets.
a. Explain How The Existence Of Imperfect Markets Has Led To The Establishment Of
Subsidiaries In Foreign Markets.
ANSWER: Because Of Imperfect Markets, Resources Cannot Be Easily And Freely Retrieved
By The MNC. Consequently, The MNC Must Sometimes Go To The Resources Rather Than
Retrieve Resources (Such As Land, Labor, Etc.).
b. Suppose Perfect Markets Existed.Would If Perfect Markets Existed, Would Wages, Prices,
And Interest Rates Among Countries Be More Similar Or Less Similar Than Under Conditions
Of Imperfect Markets? Why?
ANSWER: If Perfect Markets Existed, Resources Would Be More Mobile And Could Therefore Be
Transferred To Those Countries More Willing To Pay A High Price For Them. As This Occurred,
Shortages Of Resources In Any Particular Country Would Be Alleviated And The Costs Of Such
Resources Would Be Similar Across Countries.
, Multinational Financial Management: An Overview 4
4. International Opportunities.
a. Do You Think That Either The Acquisition Of A Foreign Firm Or Licensing Will Result In
Greater Growth For An MNC? Which Alternative Is Likely To Have More Risk?
ANSWER: An Acquisition Will Typically Result In Greater Growth, But It Is More Risky Because
It Normally Requires A Larger Investment And The Decision Can Not Be Easily Reversed Once The
Acquisition Is Made.
b. Describe A Scenario In Which The Size Of A Corporation Is Not Affected By Access To
International Opportunities.
ANSWER: Some Firms May Avoid Opportunities Because They Lack Knowledge About Foreign
Markets Or Expect That The Risks Are Excessive. Thus, The Size Of These Firms Is Not Affected
By The Opportunities.
c. Explain Why Mncs Such As Coca Cola And Pepsico, Inc., Still Have Numerous Opportunities
For International Expansion.
ANSWER: Coca Cola And Pepsico Still Have New International Opportunities Because Countries Are
At Various Stages Of Development. Some Countries Have Just Recently Opened Their Borders To
Mncs.
Many Of These Countries Do Not Offer Sufficient Food Or Drink Products To Their Consumers.
5. International Opportunities Due To The Internet.
a. What Factors Cause Some Firms To Become More Internationalized Than Others?
ANSWER: The Operating Characteristics Of The Firm (What It Produces Or Sells) And The Risk
Perception Of International Business Will Influence The Degree To Which A Firm Becomes
Internationalized.Several Other Factors Such As Access To Capital Could Also Be Relevant Here.
Firms That Are Labor-Intensive Could More Easily Capitalize On Low-Wage Countries While Firms
That Rely On Technological Advances Could Not.
b. Offer Your Opinion On Why The Internet May Result In More International Business.
ANSWER: The Internet Allows For Easy And Low-Cost Communication Between Countries, So That
Firms Could Now Develop Contacts With Potential Customers Overseas By Having A Website.
Many Firms Use Their Website To Identify The Products That They Sell, Along With The Prices For
Each Product. This Allows Them To Easily Advertise Their Products To Potential Importers
Anywhere In The World Without Mailing Brochures To Various Countries. In Addition, They Can
Add To Their Product Line And Change Prices By Simply Revising Their Website, So Importers Are
Kept Abreast Of The Exporter’s Product Information By Monitoring The Exporter’s Website
Periodically. Firms Can Also Use Their Websites To Accept Orders Online. Some Firms With An
International Reputation Use Their Brand Name To Advertise Products Over The Internet. They
May Use Manufacturers In Some Foreign Countries To Produce Some Of Their Products Subject To
Their Specification
6. Impact Of Exchange Rate Movements. Plak Co. Of Chicago Has Several European Subsidiaries
That Remit Earnings To It Each Year. Explain How Appreciation Of The Euro (The Currency
Used In Many European Countries) Would Affect Plak's Valuation.
ANSWER: Plak’s Valuation Should Increase Because The Appreciation Of The Euro Will Increase
The Dollar Value Of The Cash Flows Remitted By The European Subsidiaries.
, Multinational Financial Management: An Overview 5
7. Benefits And Risks Of International Business. As An Overall Review Of This Chapter, Identify
Possible Reasons For Growth In International Business. Then, List The Various Disadvantages That
May Discourage International Business.
ANSWER: Growth In International Business Can Be Stimulated By (1) Access To Foreign
Resources Which Can Reduce Costs, Or (2) Access To Foreign Markets Which Boost Revenues.
Yet, International Business Is Subject To Risks Of Exchange Rate Fluctuations, And Political
Risk (Such As A Possible Host Government Takeover, Tax Regulations, Etc.).
8. Valuation Of An MNC. Hudson Co., A U.S. Firm, Has A Subsidiary In Mexico, Where Political
Risk Has Recently Increased. Hudson's Best Guess Of Its Future Peso Cash Flows To Be Received
Has Not Changed. However, Its Valuation Has Declined As A Result Of The Increase In Political
Risk. Explain.
ANSWER: The Valuation Of The MNC Is The Present Value Of Expected Cash Flows. The
Increase In Risk Results In A Higher Expected Return, Which Reduces The Present Value Of The
Expected Future Cash Flows.
9. Centralization And Agency Costs. Would The Agency Problem Be More Pronounced For
Berkley Corp., Whose Parent Company Makes Most Major Decisions For Its Foreign
Subsidiaries, Or Oakland Corp., Which Uses A Decentralized Approach?
ANSWER: The Agency Problem Would Be More Pronounced For Oakland Because Of A Higher
Probability That Subsidiary Decisions Would Conflict With The Parent. Assuming That The Parent
Attempts To Maximize Shareholder Wealth, Decisions By The Parent Should Be Compatible With
Shareholder Objectives. If The Subsidiaries Made Their Own Decisions, The Agency Costs Would
Be Higher Since The Parent Would Need To Monitor The Subsidiaries To Assure That Their
Decisions Were Intended To Maximize Shareholder Wealth.
10. Global Competition. Explain Why More Standardized Product Specifications Across Countries
Can Increase Global Competition.
ANSWER: Standardized Product Specifications Allow Firms To More Easily Expand Their Business
Across Other Countries, Which Increases Global Competition.
11. Exposure To Exhange Rates. Mccanna Corp., A U.S. Firm, Has A French Subsidiary That
Produces Wine And Exports To Various European Countries. All Of The Countries Where It Sells
Its Wine Use The Euro As Their Currency, Which Is The Same As The Currency Used In France. Is
Mccanna Corp. Exposed To Exchange Rate Risk?
ANSWER: The Subsidiary And Its Customers Based In Countries That Now Use The Euro As Their
Currency Would No Longer Be Exposed To Exchange Rate Risk. However, Mccanna Corp Is
Exposed To Exchange Rate Risk, Because The Subsidiary Will Ultimately Remit Its Earnings To The
Parent, And The Euro Earnings Will Be Converted To Dollars When They Are Remitted.
12. Macro Versus Micro Topics. Review The Table Of Contents And Indicate Whether Each Of The
Chapters From Chapter 2 Through Chapter 21 Has A Macro Or Micro Perspective.
ANSWER: Chapters 2 Through 8 Are Macro, While Chapters 9 Through 21 Are Micro.
13. Methods Used To Conduct International Business. Duve, Inc., Desires To Penetrate A Foreign
Market With Either A Licensing Agreement With A Foreign Firm Or By Acquiring A Foreign Firm.
Explain The
, Multinational Financial Management: An Overview 6
Differences In Potential Risk And Return Between Licensing With A Foreign Firm, And Acquiring A
Foreign Firm.
ANSWER: A Licensing Agreement Has Limited Potential For Return, Because The Foreign Firm
Will Receive Much Of The Benefits As A Result Of The Licensing Agreement. Yet, The MNC Has
Limited Risk, Because It Did Not Need To Invest Substantial Funds In The Foreign Country.
An Acquisition By The MNC Requires A Substantial Investment. If This Investment Is Not A Success,
The MNC May Have Trouble Selling The Firm It Acquired For A Reasonable Price. Thus, There Is
More Risk. However, If This Investment Is Successful, All Of The Benefits Accrue To The MNC.
14. International Business Methods. Snyder Golf Co., A U.S. Firm That Sells High-Quality Golf
Clubs In The U.S., Wants To Expand Internationally By Selling The Same Golf Clubs In Brazil.
a. Describe The Tradeoffs That Are Involved For Each Method (Such As Exporting, Direct
Foreign Investment, Etc.) That Snyder Could Use To Achieve Its Goal.
ANSWER: Snyder Can Export The Clubs, But The Transportation Expenses May Be High. If Could
Establish A Subsidiary In Brazil To Produce And Sell The Clubs, But This May Require A Large
Investment Of Funds. It Could Use Licensing, In Which It Specifies To A Brazilian Firm How To
Produce The Clubs. In This Way, It Does Not Have To Establish Its Own Subsidiary There.
b. Which Method Of International Method Would You Recommend For This Firm? Justify
Your Recommendation.
ANSWER: If The Amount Of Golf Clubs To Be Sold In Brazil Is Small, It May Decide To Export.
However, If The Expected Sales Level Is High, It May Benefit From Licensing. If It Is Confident
That The Expected Sales Level Will Remain High, It May Be Willing To Establish A Subsidiary. The
Wages Are Lower In Brazil, And The Large Investment Needed To Establish A Subsidiary May Be
Worthwhile.
15. Impact Of Political Risk. Explain Why Political Risk May Discourage International Business.
ANSWER: Political Risk Increases The Rate Of Return Required To Invest In Foreign Projects. Some
Foreign Projects Would Have Been Feasible If There Was No Political Risk, But Will Not Be
Feasible Because Of Political Risk.
16. Impact Of 9/11. Following The Terrorist Attack On The U.S., The Valuations Of Many Mncs
Declined By More Than 10 Percent. Explain Why The Expected Cash Flows Of Mncs Were Reduced,
Even If They Were Not Directly Hit By The Attacks.
ANSWER: An MNC’s Cash Flows Could Be Reduced In The Following Ways. First, A Decline In
Travel Would Affect Any Mncs That Have Business In Travel-Related Industries. The Airline,
Hotel, And Tourist- Related Industries Were Expected To Experience A Decline In Business. Layoffs
Were Announced Immediately By Many Of These Mncs. Second, These Effects On Travel-Related
Industries Can Carry Over To Other Industries, And Weaken Economies. Third, The Cost Of
International Trade Increased As A Result Of Tighter Restrictions On Some Products. Fourth, Some
Mncs Incurred Expenses As A Result Of Increasing Security To Protect Their Employees.
Advanced Questions
, Multinational Financial Management: An Overview 7
17. International Joint Venture. Anheuser-Busch, (Which Is Now Part Of AB Inbev Due To A
Merger), The Producer Of Budweiser And Other Beers, Has Engaged 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.
ANSWER: The Joint Venture Creates A Way For Anheuser-Busch To Distribute Budweiser
Throughout Japan. It Enables Anheuser-Busch To Penetrate The Japanese Market Without Requiring
A Substantial Investment In Japan.
b. Explain How The Joint Venture Limited The Risk Of The International Business.
ANSWER: The Joint Venture Has Limited Risk Because Anheuser-Busch Does Not Need To
Establish Its Own Distribution Network In Japan. Thus, Anheuser-Busch May Be Able To Use A
Smaller Investment For The International Business, And There Is A Higher Probability That The
International Business Will Be Successful.
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?
ANSWER: Anheuser-Busch Is Able To Benefit From Kirin’s Distribution System In Japan, Which
Would Not Normally Be So Accessible. Kirin Is Able To Learn More About How Anheuser-Busch
Expanded Its Product Across Numerous Countries, And Therefore Breaks Through An
―Information‖ Barrier.
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.
ANSWER: Anheuser-Busch Could Lose Some Of Its Market Share To Kirin As A Result Of
Explaining Its Worldwide Expansion Strategies To Kirin. However, It Appears That Anheuser-
Busch Expects The Potential Benefits Of The Joint Venture To Outweigh Any Potential Adverse
Effects.
18. Impact Of Eastern European Growth. The Managers Of Loyola Corp. Recently Had A Meeting
To Discuss New Opportunities In Europe As A Result Of The Recent Integration Among Eastern
European Countries. They Decided Not To Penetrate New Markets Because Of Their Present Focus
On Expanding Market Share In The United States. Loyola’s Financial Managers Have Developed
Forecasts For Earnings Based On The 12 Percent Market Share (Defined Here As Its Percentage Of
Total European Sales) That Loyola Currently Has In Eastern Europe. Is 12 Percent An Appropriate
Estimate For Next Year’s Eastern European Market Share? If Not, Does It Likely Overestimate Or
Underestimate Next Year’s Actual Eastern European Market Share Next Year?
ANSWER: It Would Likely Overestimate Its Market Share Because The Competition Should Increase
As Competitors Penetrate The European Countries.
19. Valuation Of An MNC. Birm Co., Based In Alabama, Is Considering Several International
Opportunities In Europe That Could Affect The Value Of Its Firm. The Valuation Of Its Firm Is
Dependent On Four Factors: (1) Expected Cash Flows In Dollars, (2) Expected Cash Flows In Euros
, Multinational Financial Management: An Overview 8
That Are Ultimately
, Multinational Financial Management: An Overview 9
Converted Into Dollars, (3) The Rate At Which It Can Convert Euros To Dollars, And (4) Birm’s
Weighted Average Cost Of Capital. For Each Opportunity, Identify The Factors That Would Be
Affected.
a. Birm Plans A Licensing Deal In Which It Will Sell Technology To A Firm In Germany For
$3,000,000; The Payment Is Invoiced In Dollars, And This Project Has The Same Risk Level
As Its Existing Businesses.
b. Birm Plans To Acquire A Large Firm In Portugal That Is Riskier Than Its Existing Businesses.
c. Birm Plans To Discontinue Its Relationship With A U.S. Supplier So That Can Import A Small
Amount Of Supplies (Denominated In Euros) At A Lower Cost From A Belgian Supplier.
d. Birm Plans To Export A Small Amount Of Materials To Ireland That Are Denominated In Euros.
ANSWER:
Exchange Rate Birm’s Weighted
At Which Birm Average Cost Of
Opportunity Dollar CF Euro CF
Co. Capital
Converts Euros
To Dollars
A. Joint Venture X
B. Acquisition X X
C. Imported Supplies X
D. Exports To Ireland X
20. Assessing Motives For International Business. Fort Worth Inc. Specializes In Manufacturing
Some Basic Parts For Sports Utility Vehicles That Are Produced And Sold In The U.S. Its Main
Advantage In The
U.S. Is That Its Production Is Efficient, And Less Costly Than That Of Some Other Unionized
Manufacturers. It Has A Substantial Market Share In The U.S. Its Manufacturing Process Is Labor-
Intensive. The Company Pays Relatively Low Wages Compared To U.S. Competitors, But It Has
Guaranteed The Local Workers That Their Positions Will Not Be Eliminated For The Next 30
Years. It Hired A Consultant To Determine Whether It Should Set Up A Subsidiary In Mexico,
Where The Parts Would Be Produced. The Consultant Suggested That Forth Worth Expand For The
Following Reasons. Offer Your Opinion On Whether The Consultant’s Reasons Are Logical:
a. Theory Of Competitive Advantage: There Are Not Many Suvs Sold In Mexico; Hence, Fort
Worth Inc. Would Not Face Much Competition There.
b. Imperfect Markets Theory: Fort Worth Inc. Can Not Easily Transfer Workers To Mexico, But It
Can Establish A Subsidiary There In Order To Penetrate A New Market.
c. Product Cycle Theory: Fort Worth Inc. Has Been Successful In The U.S. It Has Limited
Growth Opportunities Because It Already Controls Much Of The U.S. Market For The Parts It
Produces. Thus, The Natural Next Step Is To Conduct The Same Business In A Foreign
Country.
d. Exchange Rate Risk. The Exchange Rate Of The Peso Has Weakened Recently, So This Would
Allow Fort Worth Inc. To Build A Plant At A Very Low Cost (By Exchanging Dollars For The
INTERNATIONAL FINANCIAL
MANAGEMENT
,Solution Manual & Test Bank For International Financial Management, 15th Edition By Jeff Madura
Chapter 1
Multinational Financial Management: An Overview
Lecture Outline
Managing The MNC
How Business Disciplines Are Used To Manage The MNC
Agency Problems
Management Structure Of An MNC
Why Firms Pursue International Business
Theory Of Comparative Advantage
Imperfect Markets Theory
Product Cycle Theory
Methods To Conduct International Business
International Trade
Licensing
Franchising
Joint Ventures
Acquisitions Of Existing Operations
Establishing New Foreign Subsidiaries
Summary Of Methods
Valuation Model For An
MNC Domestic Model
Multinational Model
Uncertainty Surrounding An MNC’s Cash Flows
Summary Of International Effects
How Uncertainty Affects The MNC’s Cost Of Capital
Organization Of The Text
, Multinational Financial Management: An Overview 2
Chapter Theme
This Chapter Introduces The Multinational Corporation As Having Similar Goals To The Purely Domestic
Corporation, But A Wider Variety Of Opportunities. With Additional Opportunities Come Potential
Increased Returns And Other Forms Of Risk To Consider. The Potential Benefits And Risks Are
Introduced.
Topics To Stimulate Class Discussion
1. What Is The Appropriate Definition Of An MNC?
2. Why Does An MNC Expand Internationally?
3. What Are The Risks Of An MNC Which Expands Internationally?
4. Why Must Purely Domestic Firms Be Concerned About The International Environment?
POINT/COUNTER-POINT:
Should An MNC Reduce Its Ethical Standards To Compete Internationally?
POINT: Yes. When A U.S.-Based MNC Competes In Some Countries, It May Encounter Some
Business Norms There That Are Not Allowed In The U.S. For Example, When Competing For A
Government Contract, Firms Might Provide Payoffs To The Government Officials Who Will Make The
Decision. Yet, In The United States, A Firm Will Sometimes Take A Client On An Expensive Golf
Outing Or Provide Skybox Tickets To Events. This Is No Different Than A Payoff. If The Payoffs Are
Bigger In Some Foreign Countries, The MNC Can Compete Only By Matching The Payoffs Provided
By Its Competitors.
COUNTER-POINT: No. A U.S.-Based MNC Should Maintain A Standard Code Of Ethics That Applies
To Any Country, Even If It Is At A Disadvantage In A Foreign Country That Allows Activities That
Might Be Viewed As Unethical. In This Way, The MNC Establishes More Credibility Worldwide.
WHO IS CORRECT? Use The Internet To Learn More About This Issue. Which Argument Do You
Support? Offer Your Own Opinion On This Issue.
ANSWER: The Issue Is Frequently Discussed. It Is Easy To Suggest That The MNC Should Maintain A
Standard Code Of Ethics, But In Reality, That Means That It Will Not Be Able To Compete In Some
Cases. For Example, Even If It Submits The Lowest Bid On A Specific Foreign Government Project, It
Will Not Receive The Bid Without A Payoff To The Foreign Government Officials. The Issue Is
Especially A Concern For Large Projects That May Generate Substantial Cash Flows For The Firm That
Is Chosen To Do The Project. Ideally, The MNC Can Clearly Demonstrate To Whoever Oversees The
Decision Process That It Deserves To Be Selected. If There Is Just One Decision-Maker With No
Oversight, An MNC Can Not Ensure That The Decision Will Be Ethical. But If The Decision-Maker
Must Be Accountable To A Department Who Oversees The Decision, The MNC May Be Able To
Prompt The Department To Ensure That The Process Is Ethical.
, Multinational Financial Management: An Overview 3
Answers To End Of Chapter Questions
1. Agency Problems Of Mncs.
a. Explain The Agency Problem Of Mncs.
ANSWER: The Agency Problem Reflects A Conflict Of Interests Between Decision-Making
Managers And The Owners Of The MNC. Agency Costs Occur In An Effort To Assure That
Managers Act In The Best Interest Of The Owners.
b. Why Might Agency Costs Be Larger For An MNC Than For A Purely Domestic Firm?
ANSWER: The Agency Costs Are Normally Larger For Mncs Than Purely Domestic Firms For The
Following Reasons. First, Mncs Incur Larger Agency Costs In Monitoring Managers Of Distant
Foreign Subsidiaries. Second, Foreign Subsidiary Managers Raised In Different Cultures May Not
Follow Uniform Goals, And Some Managers May Focus On Satisfying Respective Employees. Third,
The Sheer Size Of The Larger Mncs Would Also Create Large Agency Problems.
2. Comparative Advantage.
a. Explain How The Theory Of Comparative Advantage Relates To The Need For International
Business.
ANSWER: The Theory Of Comparative Advantage Implies That Countries Should Specialize In
Production, Thereby Relying On Other Countries For Some Products. Consequently, There Is A
Need For International Business.
b. Explain How The Product Cycle Theory Relates To The Growth Of An MNC.
ANSWER: The Product Cycle Theory Suggests That At Some Point In Time, The Firm Will Attempt To
Capitalize On Its Perceived Advantages In Markets Other Than Where It Was Initially Established.
3. Imperfect Markets.
a. Explain How The Existence Of Imperfect Markets Has Led To The Establishment Of
Subsidiaries In Foreign Markets.
ANSWER: Because Of Imperfect Markets, Resources Cannot Be Easily And Freely Retrieved
By The MNC. Consequently, The MNC Must Sometimes Go To The Resources Rather Than
Retrieve Resources (Such As Land, Labor, Etc.).
b. Suppose Perfect Markets Existed.Would If Perfect Markets Existed, Would Wages, Prices,
And Interest Rates Among Countries Be More Similar Or Less Similar Than Under Conditions
Of Imperfect Markets? Why?
ANSWER: If Perfect Markets Existed, Resources Would Be More Mobile And Could Therefore Be
Transferred To Those Countries More Willing To Pay A High Price For Them. As This Occurred,
Shortages Of Resources In Any Particular Country Would Be Alleviated And The Costs Of Such
Resources Would Be Similar Across Countries.
, Multinational Financial Management: An Overview 4
4. International Opportunities.
a. Do You Think That Either The Acquisition Of A Foreign Firm Or Licensing Will Result In
Greater Growth For An MNC? Which Alternative Is Likely To Have More Risk?
ANSWER: An Acquisition Will Typically Result In Greater Growth, But It Is More Risky Because
It Normally Requires A Larger Investment And The Decision Can Not Be Easily Reversed Once The
Acquisition Is Made.
b. Describe A Scenario In Which The Size Of A Corporation Is Not Affected By Access To
International Opportunities.
ANSWER: Some Firms May Avoid Opportunities Because They Lack Knowledge About Foreign
Markets Or Expect That The Risks Are Excessive. Thus, The Size Of These Firms Is Not Affected
By The Opportunities.
c. Explain Why Mncs Such As Coca Cola And Pepsico, Inc., Still Have Numerous Opportunities
For International Expansion.
ANSWER: Coca Cola And Pepsico Still Have New International Opportunities Because Countries Are
At Various Stages Of Development. Some Countries Have Just Recently Opened Their Borders To
Mncs.
Many Of These Countries Do Not Offer Sufficient Food Or Drink Products To Their Consumers.
5. International Opportunities Due To The Internet.
a. What Factors Cause Some Firms To Become More Internationalized Than Others?
ANSWER: The Operating Characteristics Of The Firm (What It Produces Or Sells) And The Risk
Perception Of International Business Will Influence The Degree To Which A Firm Becomes
Internationalized.Several Other Factors Such As Access To Capital Could Also Be Relevant Here.
Firms That Are Labor-Intensive Could More Easily Capitalize On Low-Wage Countries While Firms
That Rely On Technological Advances Could Not.
b. Offer Your Opinion On Why The Internet May Result In More International Business.
ANSWER: The Internet Allows For Easy And Low-Cost Communication Between Countries, So That
Firms Could Now Develop Contacts With Potential Customers Overseas By Having A Website.
Many Firms Use Their Website To Identify The Products That They Sell, Along With The Prices For
Each Product. This Allows Them To Easily Advertise Their Products To Potential Importers
Anywhere In The World Without Mailing Brochures To Various Countries. In Addition, They Can
Add To Their Product Line And Change Prices By Simply Revising Their Website, So Importers Are
Kept Abreast Of The Exporter’s Product Information By Monitoring The Exporter’s Website
Periodically. Firms Can Also Use Their Websites To Accept Orders Online. Some Firms With An
International Reputation Use Their Brand Name To Advertise Products Over The Internet. They
May Use Manufacturers In Some Foreign Countries To Produce Some Of Their Products Subject To
Their Specification
6. Impact Of Exchange Rate Movements. Plak Co. Of Chicago Has Several European Subsidiaries
That Remit Earnings To It Each Year. Explain How Appreciation Of The Euro (The Currency
Used In Many European Countries) Would Affect Plak's Valuation.
ANSWER: Plak’s Valuation Should Increase Because The Appreciation Of The Euro Will Increase
The Dollar Value Of The Cash Flows Remitted By The European Subsidiaries.
, Multinational Financial Management: An Overview 5
7. Benefits And Risks Of International Business. As An Overall Review Of This Chapter, Identify
Possible Reasons For Growth In International Business. Then, List The Various Disadvantages That
May Discourage International Business.
ANSWER: Growth In International Business Can Be Stimulated By (1) Access To Foreign
Resources Which Can Reduce Costs, Or (2) Access To Foreign Markets Which Boost Revenues.
Yet, International Business Is Subject To Risks Of Exchange Rate Fluctuations, And Political
Risk (Such As A Possible Host Government Takeover, Tax Regulations, Etc.).
8. Valuation Of An MNC. Hudson Co., A U.S. Firm, Has A Subsidiary In Mexico, Where Political
Risk Has Recently Increased. Hudson's Best Guess Of Its Future Peso Cash Flows To Be Received
Has Not Changed. However, Its Valuation Has Declined As A Result Of The Increase In Political
Risk. Explain.
ANSWER: The Valuation Of The MNC Is The Present Value Of Expected Cash Flows. The
Increase In Risk Results In A Higher Expected Return, Which Reduces The Present Value Of The
Expected Future Cash Flows.
9. Centralization And Agency Costs. Would The Agency Problem Be More Pronounced For
Berkley Corp., Whose Parent Company Makes Most Major Decisions For Its Foreign
Subsidiaries, Or Oakland Corp., Which Uses A Decentralized Approach?
ANSWER: The Agency Problem Would Be More Pronounced For Oakland Because Of A Higher
Probability That Subsidiary Decisions Would Conflict With The Parent. Assuming That The Parent
Attempts To Maximize Shareholder Wealth, Decisions By The Parent Should Be Compatible With
Shareholder Objectives. If The Subsidiaries Made Their Own Decisions, The Agency Costs Would
Be Higher Since The Parent Would Need To Monitor The Subsidiaries To Assure That Their
Decisions Were Intended To Maximize Shareholder Wealth.
10. Global Competition. Explain Why More Standardized Product Specifications Across Countries
Can Increase Global Competition.
ANSWER: Standardized Product Specifications Allow Firms To More Easily Expand Their Business
Across Other Countries, Which Increases Global Competition.
11. Exposure To Exhange Rates. Mccanna Corp., A U.S. Firm, Has A French Subsidiary That
Produces Wine And Exports To Various European Countries. All Of The Countries Where It Sells
Its Wine Use The Euro As Their Currency, Which Is The Same As The Currency Used In France. Is
Mccanna Corp. Exposed To Exchange Rate Risk?
ANSWER: The Subsidiary And Its Customers Based In Countries That Now Use The Euro As Their
Currency Would No Longer Be Exposed To Exchange Rate Risk. However, Mccanna Corp Is
Exposed To Exchange Rate Risk, Because The Subsidiary Will Ultimately Remit Its Earnings To The
Parent, And The Euro Earnings Will Be Converted To Dollars When They Are Remitted.
12. Macro Versus Micro Topics. Review The Table Of Contents And Indicate Whether Each Of The
Chapters From Chapter 2 Through Chapter 21 Has A Macro Or Micro Perspective.
ANSWER: Chapters 2 Through 8 Are Macro, While Chapters 9 Through 21 Are Micro.
13. Methods Used To Conduct International Business. Duve, Inc., Desires To Penetrate A Foreign
Market With Either A Licensing Agreement With A Foreign Firm Or By Acquiring A Foreign Firm.
Explain The
, Multinational Financial Management: An Overview 6
Differences In Potential Risk And Return Between Licensing With A Foreign Firm, And Acquiring A
Foreign Firm.
ANSWER: A Licensing Agreement Has Limited Potential For Return, Because The Foreign Firm
Will Receive Much Of The Benefits As A Result Of The Licensing Agreement. Yet, The MNC Has
Limited Risk, Because It Did Not Need To Invest Substantial Funds In The Foreign Country.
An Acquisition By The MNC Requires A Substantial Investment. If This Investment Is Not A Success,
The MNC May Have Trouble Selling The Firm It Acquired For A Reasonable Price. Thus, There Is
More Risk. However, If This Investment Is Successful, All Of The Benefits Accrue To The MNC.
14. International Business Methods. Snyder Golf Co., A U.S. Firm That Sells High-Quality Golf
Clubs In The U.S., Wants To Expand Internationally By Selling The Same Golf Clubs In Brazil.
a. Describe The Tradeoffs That Are Involved For Each Method (Such As Exporting, Direct
Foreign Investment, Etc.) That Snyder Could Use To Achieve Its Goal.
ANSWER: Snyder Can Export The Clubs, But The Transportation Expenses May Be High. If Could
Establish A Subsidiary In Brazil To Produce And Sell The Clubs, But This May Require A Large
Investment Of Funds. It Could Use Licensing, In Which It Specifies To A Brazilian Firm How To
Produce The Clubs. In This Way, It Does Not Have To Establish Its Own Subsidiary There.
b. Which Method Of International Method Would You Recommend For This Firm? Justify
Your Recommendation.
ANSWER: If The Amount Of Golf Clubs To Be Sold In Brazil Is Small, It May Decide To Export.
However, If The Expected Sales Level Is High, It May Benefit From Licensing. If It Is Confident
That The Expected Sales Level Will Remain High, It May Be Willing To Establish A Subsidiary. The
Wages Are Lower In Brazil, And The Large Investment Needed To Establish A Subsidiary May Be
Worthwhile.
15. Impact Of Political Risk. Explain Why Political Risk May Discourage International Business.
ANSWER: Political Risk Increases The Rate Of Return Required To Invest In Foreign Projects. Some
Foreign Projects Would Have Been Feasible If There Was No Political Risk, But Will Not Be
Feasible Because Of Political Risk.
16. Impact Of 9/11. Following The Terrorist Attack On The U.S., The Valuations Of Many Mncs
Declined By More Than 10 Percent. Explain Why The Expected Cash Flows Of Mncs Were Reduced,
Even If They Were Not Directly Hit By The Attacks.
ANSWER: An MNC’s Cash Flows Could Be Reduced In The Following Ways. First, A Decline In
Travel Would Affect Any Mncs That Have Business In Travel-Related Industries. The Airline,
Hotel, And Tourist- Related Industries Were Expected To Experience A Decline In Business. Layoffs
Were Announced Immediately By Many Of These Mncs. Second, These Effects On Travel-Related
Industries Can Carry Over To Other Industries, And Weaken Economies. Third, The Cost Of
International Trade Increased As A Result Of Tighter Restrictions On Some Products. Fourth, Some
Mncs Incurred Expenses As A Result Of Increasing Security To Protect Their Employees.
Advanced Questions
, Multinational Financial Management: An Overview 7
17. International Joint Venture. Anheuser-Busch, (Which Is Now Part Of AB Inbev Due To A
Merger), The Producer Of Budweiser And Other Beers, Has Engaged 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.
ANSWER: The Joint Venture Creates A Way For Anheuser-Busch To Distribute Budweiser
Throughout Japan. It Enables Anheuser-Busch To Penetrate The Japanese Market Without Requiring
A Substantial Investment In Japan.
b. Explain How The Joint Venture Limited The Risk Of The International Business.
ANSWER: The Joint Venture Has Limited Risk Because Anheuser-Busch Does Not Need To
Establish Its Own Distribution Network In Japan. Thus, Anheuser-Busch May Be Able To Use A
Smaller Investment For The International Business, And There Is A Higher Probability That The
International Business Will Be Successful.
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?
ANSWER: Anheuser-Busch Is Able To Benefit From Kirin’s Distribution System In Japan, Which
Would Not Normally Be So Accessible. Kirin Is Able To Learn More About How Anheuser-Busch
Expanded Its Product Across Numerous Countries, And Therefore Breaks Through An
―Information‖ Barrier.
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.
ANSWER: Anheuser-Busch Could Lose Some Of Its Market Share To Kirin As A Result Of
Explaining Its Worldwide Expansion Strategies To Kirin. However, It Appears That Anheuser-
Busch Expects The Potential Benefits Of The Joint Venture To Outweigh Any Potential Adverse
Effects.
18. Impact Of Eastern European Growth. The Managers Of Loyola Corp. Recently Had A Meeting
To Discuss New Opportunities In Europe As A Result Of The Recent Integration Among Eastern
European Countries. They Decided Not To Penetrate New Markets Because Of Their Present Focus
On Expanding Market Share In The United States. Loyola’s Financial Managers Have Developed
Forecasts For Earnings Based On The 12 Percent Market Share (Defined Here As Its Percentage Of
Total European Sales) That Loyola Currently Has In Eastern Europe. Is 12 Percent An Appropriate
Estimate For Next Year’s Eastern European Market Share? If Not, Does It Likely Overestimate Or
Underestimate Next Year’s Actual Eastern European Market Share Next Year?
ANSWER: It Would Likely Overestimate Its Market Share Because The Competition Should Increase
As Competitors Penetrate The European Countries.
19. Valuation Of An MNC. Birm Co., Based In Alabama, Is Considering Several International
Opportunities In Europe That Could Affect The Value Of Its Firm. The Valuation Of Its Firm Is
Dependent On Four Factors: (1) Expected Cash Flows In Dollars, (2) Expected Cash Flows In Euros
, Multinational Financial Management: An Overview 8
That Are Ultimately
, Multinational Financial Management: An Overview 9
Converted Into Dollars, (3) The Rate At Which It Can Convert Euros To Dollars, And (4) Birm’s
Weighted Average Cost Of Capital. For Each Opportunity, Identify The Factors That Would Be
Affected.
a. Birm Plans A Licensing Deal In Which It Will Sell Technology To A Firm In Germany For
$3,000,000; The Payment Is Invoiced In Dollars, And This Project Has The Same Risk Level
As Its Existing Businesses.
b. Birm Plans To Acquire A Large Firm In Portugal That Is Riskier Than Its Existing Businesses.
c. Birm Plans To Discontinue Its Relationship With A U.S. Supplier So That Can Import A Small
Amount Of Supplies (Denominated In Euros) At A Lower Cost From A Belgian Supplier.
d. Birm Plans To Export A Small Amount Of Materials To Ireland That Are Denominated In Euros.
ANSWER:
Exchange Rate Birm’s Weighted
At Which Birm Average Cost Of
Opportunity Dollar CF Euro CF
Co. Capital
Converts Euros
To Dollars
A. Joint Venture X
B. Acquisition X X
C. Imported Supplies X
D. Exports To Ireland X
20. Assessing Motives For International Business. Fort Worth Inc. Specializes In Manufacturing
Some Basic Parts For Sports Utility Vehicles That Are Produced And Sold In The U.S. Its Main
Advantage In The
U.S. Is That Its Production Is Efficient, And Less Costly Than That Of Some Other Unionized
Manufacturers. It Has A Substantial Market Share In The U.S. Its Manufacturing Process Is Labor-
Intensive. The Company Pays Relatively Low Wages Compared To U.S. Competitors, But It Has
Guaranteed The Local Workers That Their Positions Will Not Be Eliminated For The Next 30
Years. It Hired A Consultant To Determine Whether It Should Set Up A Subsidiary In Mexico,
Where The Parts Would Be Produced. The Consultant Suggested That Forth Worth Expand For The
Following Reasons. Offer Your Opinion On Whether The Consultant’s Reasons Are Logical:
a. Theory Of Competitive Advantage: There Are Not Many Suvs Sold In Mexico; Hence, Fort
Worth Inc. Would Not Face Much Competition There.
b. Imperfect Markets Theory: Fort Worth Inc. Can Not Easily Transfer Workers To Mexico, But It
Can Establish A Subsidiary There In Order To Penetrate A New Market.
c. Product Cycle Theory: Fort Worth Inc. Has Been Successful In The U.S. It Has Limited
Growth Opportunities Because It Already Controls Much Of The U.S. Market For The Parts It
Produces. Thus, The Natural Next Step Is To Conduct The Same Business In A Foreign
Country.
d. Exchange Rate Risk. The Exchange Rate Of The Peso Has Weakened Recently, So This Would
Allow Fort Worth Inc. To Build A Plant At A Very Low Cost (By Exchanging Dollars For The
