International Financial Management
Abridged 10th Edition
by Jeff Madura
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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
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Multinational Corporation:
Firms that engage in some form of international business
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Management Structure of MNC
1. Centralized
Agency Problem?
2. Decentralized
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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.
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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
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Exhibit 1.3 Cash Flow Diagrams for MNCs
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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.
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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.
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Uncertainty Surrounding MNC Cash Flows
1. Exposure to international economic conditions
2. Exposure to international political risk
3. Exposure to exchange rate risk
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CHAPTER 2: INTERNATIONAL FLOWS OF FUND
Balance of Payment
◼ Summary of transactions between domestic and foreign residents
for a specific country over a specified period of time.
◼ Current Account: summary of flow of funds due to purchases of
goods or services or the provision of income on financial assets.
◼ Capital Account: summary of flow of funds resulting from the sale of
assets between one specified country and all other countries over a
specified period of time.
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CHAPTER 2: INTERNATIONAL FLOWS OF FUND
Factor that affect Flows
◼ International Trade of Flows?
◼ FDI?
◼ Investment?
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CHAPTER 3: INTERNATIONAL FINANCIAL
MARKETS
A. Foreign exchange market
B. International money market
C. International credit market
D. International bond market
E. International stock markets
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CHAPTER 3: INTERNATIONAL FINANCIAL
MARKETS
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CHAPTER 4 & 5: EXCHANGE RATE &
DERIVATIVES
Factors That Influence Exchange Rates
e = f (INF , INT , INC , GC , EXP )
where
e = percentage change in the spot rate
INF = change in the differenti al between U. S. inflation
and the foreign country' s inflation
INT = change in the differenti al between the U.S. interest rate
and the foreign country' s interest rate
INC = change in the differenti al between the U.S. income level
and the foreign country' s income level
GC = change in government controls
EXP = change in expectatio ns of future exchange rates
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CHAPTER 4 & 5: EXCHANGE RATE &
DERIVATIVES
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CHAPTER 4 & 5: EXCHANGE RATE &
DERIVATIVES
◼ A currency derivative is a contract whose price is derived from the
value of an underlying currency.
◼ Examples include forwards/futures contracts and options
contracts.
◼ Derivatives are used by MNCs to:
◼ Speculate on future exchange rate movements
◼ Hedge exposure to exchange rate risk
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