ninth edition
Jeff Madura
Florida Atlantic University
THOIVISOINI
*
A u s t r a l i a • B r a z i l C a n a d a • M e x i c o •S i n g a p o r e • S p a i n • U n i t e d K i n g d o m • U n i t e d S t a t e s
Contents
Blades, Inc. Case: Decision to Expand Internationally, 19
Small Business Dilemma: Developing a Multinational
Preface, xvii
Sporting Goods Corporation, 20
Part 1: The International
Financial Environment
Internet/Excel Exercises, 21
1
Chapter 1: Multinational Financial
Management: An Overview
2
Managing the MNC, 2
Facing Agency Problems, 3
Governance: How SOX Improved Corporate Governance
of MNCs, 3
Management Structure of an MNC, 4
Why Firms Pursue International Business, 5
Theory of Comparative Advantage, 6
Imperfect Markets Theory, 6
Product Cycle Theory, 6
/
How Firms Engageun International Business, 7
International Trade, 8
Licensing, 8
Franchising, 9
Joint Ventures, 9
Acquisitions of Existing Operations, 9
Establishing New Foreign Subsidiaries, 9
Summary of Methods, 10
Valuation Model for an MNC, 11
Domestic Model, 11
Valuing International Cash Flows, 12
Uncertainty Surrounding an MNCs Cash Flows, 14
Organization of the Text, 15
Summary, 16
Point Counter-Point: Should an MNC Reduce Its Ethical
Standards to Compete Internationally?, 16
Self Test, 16
Questions and Applications, 17
Advanced Questions, 17
Discussion in the Boardroom, 19
Running Your Own MNC, 19
Chapter 2: International
Flow of Funds
22
Balance of Payments, 22
Current Account, 22
Capital and Financial Accounts, 23
International Trade Flows, 25
Distribution of U.S. Exports and Imports, 26
U.S. Balance-of-Trade Trend, 26
International Trade Issues, 28
Events That Increased International Trade, 28
Trade Friction, 31
Governance: Should Managers Outsource to Satisfy
Shareholders?, 32
Factors Affecting International Trade Flows, 34
Impact of Inflation, 34
Impact of National Income, 34
Impact of Government Policies, 35
Impact of Exchange Rates, 35
Interaction of Factors, 36
Correcting a Balance-of-Trade Deficit, 36
Why a Weak Home Currency Is Not
a Perfect Solution, 37
International Capital Flows, 38
Distribution ofDFIby U.S. Firms, 38
Distribution of DEI in the United States, 39
Factors Affecting DFI, 40
Factors Affecting International Portfolio
Investment, 41
Impact of International Capital Flows, 41
Agencies That Facilitate International Flows, 42
International Monetary Fund, 42
World Bank, 43
World Trade Organization, 44
International Financial Corporation, 44
vii
viii
Contents
International Development Association, 45
Bank for International Settlements, 45
Organization for Economic Cooperation and
Development, 45
Regional Development Agencies, 45
How International Trade Affects an MNCs Value, 45
Summary, 46
Point Counter-Point: Should Trade Restrictions Be Used to
Influence Human Rights Issues?, 46
Self Test, 46
Questions and Applications, 47
Advanced Questions, 47
Discussion in the Boardroom, 47
Running Your Own MNC, 47
Blades, Inc. Case: Exposure to International
Flow of Funds, 48
Small Business Dilemma: Identifying Factors That Will Affect
the Foreign Demand at the Sports Exports Company, 48
Internet/Excel Exercises, 49
Chapter 3: International
Financial Markets
50
Foreign Exchange Market, 50
History of Foreign Exchange, 50
Foreign Exchange Transactions, 51
Foreign Exchange Quotations, 54
Interpreting Foreign Exchange Quotations, 56
Forward, Futures, and Options Markets, 58
International Money Market, 59
Origins and Development, 60
Money Market Interest Rates among Currencies, 61
Standardizing Global Bank Regulations, 61
International Credit Market, 63
Syndicated Loans, 63
International Bond Market, 64
Eurobond Market, 64
Development of Other Bond Markets, 65
International Stock Markets, 66
Issuance of Stock in Foreign Markets, 66
Issuance of Foreign Stock in the United States, 66
Listing of Stock by Non-U.S. Firms on U.S. Stock
Exchanges, 67
Governance: Effect of Sarbanes-Oxley Act on Foreign
Stock Offerings, 67
Investing in Foreign Stock Markets, 67
How Stock Market Characteristics Vary among
Countries, 70
How Financial Markets Facilitate MNC Functions, 70
Summary, 71
Point Counter-Point: Should Firms That Go Public Engage
in International Offerings?, 72
Self Test, 72
Questions and Applications, 72
Advanced Questions, 73
Discussion in the Boardroom, 74
Running Your Own MNC, 74
Blades, Inc. Case: Decisions to Use International Financial
Markets, 74
Small Business Dilemma: Use of the Foreign
Exchange Markets by the Sports Exports
Company, 75
Internet/Excel Exercises, 75
Appendix 3: Investing in International
Financial Markets, 76
Chapter 4: Exchange
Rate Determination
85
Measuring Exchange Rate Movements, 85
Exchange Rate Equilibrium, 86
Demand for a Currency, 87
Supply of a Currency for Sale, 87
Equilibrium, 88
Factors That Influence Exchange Rates, 89
Relative Inflation Rates, 89
Relative Interest Rates, 90
Relative Income Levels, 92
Government Controls, 92
Expectations, 93
Interaction of Factors, 93
Speculating on Anticipated Exchange Rates, 95
Summary, 97
Point Counter-Point: How Can Persistently Weak
Currencies Be Stabilized?, 97
Self Test, 98
Questions and Applications, 98
Advanced Questions, 99
Discussion in the Boardroom, 100
Running Your Own MNC, 100
Blades, Inc. Case: Assessment of Future Exchange Rate
Movements, 101
Small Business Dilemma: Assessment by the Sports
Exports Company of Factors That Affect the British
Pound's Value, 101
Internet/Excel Exercises, 102
Chapter 5: Currency
Derivatives
Forward Market, 103
How MNCs Use Forward Contracts, 104
Non-Deliverable Forward Contracts, 107
Currency Futures Market, 108
Contract Specifications, 108
Trading Futures, 108
103
Contents
Comparison of Currency Futures and Forward
Contracts, 110
Pricing Currency Futures, 110
Credit Risk of Currency Futures Contracts, 111
Speculation with Currency Futures, 111
How Firms Use Currency Futures, 112
Closing Out a Futures Position, 113
Trading Platforms for Currency Futures, 114
Currency Options Market, 114
Option Exchanges, 114
Over-the-Counter Market, 114
Currency Call Options, 115
Factors Affecting Currency Call Option
Premiums, 115
How Firms Use Currency Call Options, 116
Speculating with Currency Call Options, 117
Currency Put Options, 119
Factors Affecting Currency Put Option
Premiums, 119
\
Hedging with Currency Put Options, 120
Speculating with Currency Put Options, 120
Contingency Graphs for Currency Options, 122
Contingency Graph for a Purchaser of a Call
Option, 122
Contingency Graph for a Seller ofa Call Option, 123
Contingency Graph for a Buyer of a Put Option, 124
Contingency Graph for a Seller of a Put
Option, 124
Governance: Should an MNCs Managers Use Currency
Derivatives to Speculate?, 124 •
Conditional Currency Options,,124
European Currency Options, 126
Summary, 126 V
Point Counter-Point: Should Speculators Use Currency
Futures or Options?, 126
Self Test, 127
Questions and Applications, 127
Advanced Questions, 130
Discussion in the Boardroom, 132
Running Your Own MNC, 132
Blades, Inc. Case: Use of Currency Derivative
Instruments, 133
Small Business Dilemma: Use of Currency Futures
and Options by the Sports Exports Company, 134
Internet/Excel Exercises, 134
Appendix 5A: Currency Option
Pricing, 135
Part 2: Exchange
Rate Behavior
IX
153
Chapter 6: Government
Influence on Exchange Rates
154
Exchange Rate Systems, 154
Filled Exchange Rate System, 154
Freely Floating Exchange Rate System, 156
Managed Float Exchange Rate System, 158
Pegged Exchange Rate System, 158
Currency Boards Used to Peg Currency Values, 161
Dollarization, 163
Classification of Exchange Rate Arrangements, 163
A Single European Currency, 164
Membership, 165
Impact on European Monetary Policy, 165
Impact on Business within Europe, 165
Impact on the Valuation of Businesses in Europe, 166
Impact on Financial Flows, 166
Impact on Exchange Rate Risk, 167
Status Report on the Euro, 167
Government Intervention, 167
Reasons for Government Intervention, 167
Direct Intervention, 168
Indirect Intervention, 171
Intervention as a Policy Tool, 172
Influence of a Weak Home Currency on the
Economy, 172
Influence of a Strong Home Currency on the
Economy, 172
Summary, 174
Point Counter-Point: Should China Be Forced to Alter the
Value of Its Currency?, 174
Self Test, 175
Questions and Applications, 175
Advanced Questions, 176
Discussion in the Boardroom, 176
Running Your Own MNC, 176
Blades, Inc. Case: Assessment of Government Influence on
Exchange Rates, 177
Small Business Dilemma: Assessment of Central Bank
Intervention by the Sports Exports Company, 178
Internet/Excel Exercises, 178
Appendix 6: Government Intervention
during the Asian Crisis, 179
Appendix 5B: Currency Option
Combinations, 139
Chapter 7: International
Arbitrage and Interest
Rate Parity
Part 1 Integrative Problem:
The International Financial
Environment, 152
International Arbitrage, 188
Locational Arbitrage, 188
188
Contents
Triangular Arbitrage, 191
Covered Interest Arbitrage, 194
Comparison ofArbitrage Effects, 197
Interest Rate Parity (IRP), 198
Derivation of Interest Rate Parity, 198
Determining the Forward Premium, 199
Graphic Analysis of Interest Rate Parity, 200
How to Test Whether Interest Rate
Parity Exists, 202
Interpretation of Interest Rate Parity, 202
Does Interest Rate Parity Hold?, 203
Considerations When Assessing Interest Rate
Parity, 204
Forward Premiums across Maturity Markets, 205
Changes in Forward Premiums, 206
Governance: How Arbitrage Reduces the Need to Monitor
Transaction Costs, 207
Summary, 207
Point Counter-Point: Does Arbitrage Destabilize Foreign
Exchange Markets?, 208
Self Test, 208
Questions and Applications, 209
Advanced Questions, 210
Discussion in the Boardroom, 211
Running Your Own MNC, 211
Blades, Inc. Case: Assessment of Potential Arbitrage
Opportunities, 211
Small Business Dilemma: Assessment of Prevailing
Spot and Forward Rates by the Sports Exports
Company, 213
Internet/Excel Exercises, 213
Chapter 8: Relationships
among Inflation, Interest Rates,
and Exchange Rates
214
Purchasing Power Parity (PPP), 214
Interpretations of Purchasing Power Parity, 214
Rationale behind Purchasing Power Parity
Theory, 215
Derivation of Purchasing Power Parity, 216
Using PPP to Estimate Exchange Rate Effects, 217
Graphic Analysis ofPurchasing Power Parity, 218
Testing the Purchasing Power Parity Theory, 219
Why Purchasing Power Parity Does Not Occur, 222
Purchasing Power Parity in the Long Run, 223
International Fisher Effect (IFE), 223
Relationship with Purchasing Power Parity, 223
Implications of the IFE for Foreign Investors, 224
Derivation of the International Fisher Effect, 225
Graphic Analysis of the International
Fisher Effect, 227
Tests of the International Fisher Effect, 229
Why the International Fisher Effect Does
Not Occur, 231
Comparison of the IRP, PPP, and IFE Theories, 231
Summary, 232
Point Counter-Point: Does PPP Eliminate Concerns about
Long-Term Exchange Rate Risk?, 233
Self Test, 233
Questions and Applications, 234
Advanced Questions, 235
Discussion in the Boardroom, 237
Running Your Own MNC, 237
Blades, Inc. Case: Assessment of Purchasing
Power Parity, 238
Small Business Dilemma: Assessment of the IFE by the
Sports Exports Company, 239
Internet/Excel Exercises, 239
Part 2 Integrative Problem:
Exchange Rate Behavior, 24O
Midterm Self Exam, 241
Part 3: Exchange Rate
Risk Management
249
Chapter 9: Forecasting
Exchange Rates
250
Why Firms Forecast Exchange Rates, 250
Forecasting Techniques, 252
Technical Forecasting, 253
Fundamental Forecasting, 254
Market-Based Forecasting, 258
Mixed Forecasting, 261
Forecasting Services, 262
Reliance on Forecasting Services, 262
Forecast Error, 263
Potential Impact of Forecast Errors, 263
Measurement of Forecast Error, 263
Forecast Accuracy over Time, 264
Forecast Accuracy among Currencies, 264
Forecast Bias, 265
Graphic Evaluation of Forecast
Performance, 266
Comparison of Forecasting Methods, 269
Forecasting under Market Efficiency, 269
Governance: Governance of Managerial Forecasting, 270
Using Interval Forecasts, 270
Methods of Forecasting Exchange Rate
Volatility, 271
Summary, 272
Point Counter-Point: Which Exchange Rate Forecast
Technique Should MNCs Use?, 272
Contents
Self Test, 273
Questions and Applications, 273
Advanced Questions, 275
Discussion in the Boardroom, 277
Running Your Own MNC, 277
Blades, Inc. Case: Forecasting Exchange Rates, 277
Small Business Dilemma: Exchange Rate Forecasting by
the Sports Exports Company, 278
Internet/Excel Exercises, 278
Chapter 1O: Measuring
Exposure to Exchange Rate
Fluctuations
Is Exchange Rate Risk Relevant?, 280
Purchasing Power Parity Argument, 280
The Investor Hedge Argument, 280
Currency Diversification Argument, 281
Stakeholder Diversification Argument, 281
Response from MNCs, 281
Types of Exposure, 281
Transaction Exposure, 282
Estimating "Net" Cash Flows in Each
Currency, 282
Measuring the Potential Impact of the
Currency Exposure, 284
Assessing Transaction Exposure Based on
Value at Risk, 286
Economic Exposure, 289
Economic Exposure to Local Currency
Appreciation, 291
Economic Exposure to Local Currency
Depreciation, ir291
Economic Exposure of Domestic Firms, 292
Measuring Economic Exposure, 292
Translation Exposure, 295
Does Translation Exposure Matter?, 295
Determinants of Translation Exposure, 296
Examples of Translation Exposure, 297
Summary, 297
Point Counter-Point: Should Investors Care about an
MNCs Translation Exposure?, 298
Self Test, 298
Questions and Applications, 299
Advanced Questions, 300
Discussion in the Boardroom, 304
Running Your Own MNC, 304
Blades, Inc. Case: Assessment of Exchange Rate
Exposure, 304
Small Business Dilemma: Assessment of Exchange
Rate Exposure by the Sports Exports
Company, 305
Internet/Excel Exercises, 306
280
Chapter 11: Managing
Transaction Exposure
Transaction Exposure, 307
Identifying Net Transaction Exposure, 307
Adjusting the Invoice Policy to Manage
Exposure, 308
Governance: Aligning Manager Compensation with
Hedging'Goals, 308
Hedging Exposure to Payables, 308
Forward or Futures Hedge on Payables, 309
Money Market Hedge on Payables, 309
Call Option Hedge, 310
r
Summary of Techniques Used to Hedge
Payables, 313
Selecting the Optimal Technique for Hedging
Payables, 313
OptimalfHedge versus No Hedge, 316
Evaluating the Hedge Decision, 316
Hedging Exposure To Receivables, 317
Forward or Futures Hedge on
Receivables, 317
Money Market Hedge on Receivables, 317
Put Option Hedge, 318
Selecting the Optimal Technique for Hedging
Receivables, 320
Optimal Hedge versus No Hedge, 323
Evaluating the Hedge Decision, 323
Comparison of Hedging Techniques, 324
Hedging Policies of MNCs, 325
Limitations of Hedging, 326
Limitation of Hedging an Uncertain
Amount, 326
Limitation of Repeated Short-Term
Hedging, 326
Hedging Long-Term Transaction
Exposure, 328
Long-Term Forward Contract, 328
Parallel Loan, 328
Alternative Hedging Techniques, 329
Leading and Lagging, 329
Cross-Hedging, 329
Currency Diversification, 329
Summary, 330
Point Counter-Point: Should an MNC Risk
Overhedging?, 330
Self Test, 331
Questions and Applications, 331
Advanced Questions, 334
Discussion in the Boardroom, 338
Running Your Own MNC, 338
Blades, Inc. Case: Management of Transaction
Exposure, 338
xi
307
xii
Contents
Small Business Dilemma: Hedging Decisions by the Sports
Exports Company, 340
Internet/Excel Exercises, 340
Appendix 11: Nontraditional
Hedging Techniques, 341
Chapter 12: Managing
Economic Exposure and
Translation Exposure
369
Chapter 13: Direct
Foreign Investment
346
Economic Exposure, 346
Use of Projected Cash Flows to Assess Economic
Exposure, 347
How Restructuring Can Reduce Economic
Exposure, 348
Issues Involved in the Restructuring
Decision, 351
A Case Study in Hedging Economic Exposure, 352
Savor Co.'s Dilemma, 352
Assessment of Economic Exposure, 352
Assessment of Each Unit's Exposure, 353
Identifying the Source of the Unit's
Exposure, 353
Possible Strategies to Hedge Economic
Exposure, 354
Savor's Hedging Solution, 356
Limitations of Savor's Optimal Hedging
Strategy, 356
Hedging Exposure to Fixed Assets, 356
Managing Translation Exposure, 357
Use of Forward Contracts to Hedge Translation
Exposure, 357
Limitations of Hedging Translation
Exposure, 358
Governance: Governing the Hedge of Translation
Exposure, 359
Summary, 359
/'
Point Counter-Point: Can an MNC Reduce the Impact
of Translation Exposure by Communicating, 360
Self Test, 360
Questions and Applications, 361
Advanced Questions, 361
Discussion in the Boardroom, 362
Running Your Own MNC, 362
Blades, Inc. Case: Assessment of Economic
Exposure, 363
Small Business Dilemma: Hedging the Sports Exports
Company's Economic Exposure to Exchange
Rate Risk, 364
Internet/Excel Exercises, 364
Part 3 Integrative Problem:
Exchange Rate Risk
Management, 366
Part 4: Long-Term
Asset and Liability
Management
370
Motives for Direct Foreign Investment, 370
Revenue-Related Motives, 370
Cost-Related Motives, 371
Governance: Selfish Managerial Motives for DFI, 373
Comparing Benefits of DFI among Countries, 373
Comparing Benefits of DFI over Time, 374
Benefits of International Diversification, 375
Diversification Analysis of International
Projects, 377
Diversification^ among Countries, 379
Decisions Subsequent to DFI, 380
Host Government Views of DFI, 380
Incentives to Encourage DFI, 380
Barriers to DFI, 381
Government-Imposed Conditions to Engage
in DFI, 382
Summary, 382
Point Counter-Point: Should MNCs Avoid DFI in Countries
with Liberal Child Labor Laws?, 382
Self Test, 383
Questions and Applications, 383
Advanced Questions, 384
Discussion in the Boardroom, 384
Running Your Own MNC, 384
Blades, Inc. Case: Consideration of Direct Foreign
Investment, 385
Small Business Dilemma: Direct Foreign Investment
Decision by the Sports Exports Company, 386
Internet/Excel Exercises, 386
Chapter 14: Multinational
Capital Budgeting
Subsidiary versus Parent Perspective, 387
Tax Differentials, 387
Restricted Remittances, 388
Excessive Remittances, 388
Exchange Rate Movements, 388
Summary of Factors, 388
Input for Multinational Capital Budgeting, 389
Multinational Capital Budgeting Example, 391
Background, 391
Analysis, 392
Factors to Consider in Multinational Capital
Budgeting, 395
Exchange Rate Fluctuations, 395
387
Contents
Inflation, 396
Financing Arrangement, 397
Blocked Funds, 400
Uncertain Salvage Value, 401
Impact of Project on Prevailing Cash Flows, 402
Host Government Incentives, 403
Real Options, 403
Adjusting Project Assessment for Risk, 404
Risk-Adjusted Discount Rate, 404
Sensitivity Analysis, 404
Simulation, 405
Governance: Controls over International Project
Proposals, 406
Summary, 406
Point Counter-Point: Should MNCs Use Forward Rates to
Estimate Dollar Cash Flows of Foreign Projects?, 406
Self Test, 407
Questions and Applications, 407
Advanced Questions, 410
Discussion in the Boardroom, 412
Running Your Own MNC, 412
Blades, Inc. Case: Decision by Blades, Inc., to Invest in
Thailand, 412
Exchange Rate Effects on the Funds Remitted, 434
Required Return of Acquirer, 434
Other Types of Multinational Restructuring, 434
International Partial Acquisitions, 434
International Acquisitions of Privatized
Businesses, 435
International Alliances, 435
International Divestitures, 436
Restructuring Decisions as Real Options, 437
Call Option on Real Assets, 437
Put Option on Real Assets, 438
,Summary, 438
Point Counter-Point: Can a Foreign Target Be Assessed
Like Any Other Asset?, 439
Self Test, 439
Questions and Applications, 439
Advanced Questions, 440
Discussion in the Boardroom, 443
Running Your Own MNC, 443
Blades, Inc. Case: Assessment of an Acquisition in
Thailand, 443
Small Business Dilemma: Multinational Restructuring by the
Sports Exports Company, 445
Small Business Dilemma: Multinational Capital Budgeting
by the Sports Exports Company, 414
Internet/Excel Exercises, 414
Appendix 14: Incorporating
International Tax Laws in
Multinational Capital Budgeting, 415
Chapter 15: International
Acquisitions ;»
xiii
422
Background on International Acquisitions, 422
Trends in International Acquisitions, 423
Model for Valuing a Foreign Target, 423
Market Assessment of International
Acquisitions, 424
Assessing Potential Acquisitions after the Asian
Crisis, 424
Assessing Potential Acquisitions in Europe, 425
Governance: Impact of the Sarbanes-Oxley Act on the
Pursuit of Targets, 425
Factors That Affect the Expected Cash Flows of the
Foreign Target, 425
Target-Specific Factors, 425
Country-Specific Factors, 426
Example of the Valuation Process, 427
International Screening Process, 427
Estimating the Target's Value, 428
Changes in Valuation over Time, 431
Why Valuations of a Target May Vary among MNCs, 433
Estimated Cash Flows of the Foreign Target, 433
Internet/Excel Exercises, 445
Chapter 16: Country
Risk Analysis
446
Why Country Risk Analysis Is Important, 446
Political Risk Factors, 447
Attitude of Consumers in the Host Country, 447
Actions of Host Government, 447
Blockage of Fund Transfers, 448
Currency Inconvertibility, 448
War, 449
Bureaucracy, 449
Corruption, 449
Financial Risk Factors, 450
Indicators of Economic Growth, 450
Types of Country Risk Assessment, 451
Macroassessment of Country Risk, 451
Microassessment of Country Risk, 452
Techniques to Assess Country Risk, 453
Checklist Approach, 453
Delphi Technique, 453
Quantitative Analysis, 454
Inspection Visits, 454
Combination of Techniques, 454
Measuring Country Risk, 454
Variation in Methods of Measuring Country
Risk, 457
Using the Country Risk Rating for Decision
Making, 457
xiv
Contents
Comparing Risk Ratings among Countries, 457
Actual Country Risk Ratings across Countries, 457
Incorporating Country Risk in Capital Budgeting, 459
Adjustment of the Discount Rate, 459
Adjustment of the Estimated Cash Flows, 459
How Country Risk Affects Financial
Decisions, 462
Governance: Governance over the Assessment
of Country Risk, 462
Reducing Exposure to Host Government Takeovers, 463
Use a Short-Term Horizon, 463
Rely on Unique Supplies or Technology, 463
Hire Local Labor, 463
Borrow Local Funds, 463
Purchase Insurance, 464
Use Project Finance, 464
Summary, 465
Point Counter-Point: Does Country Risk Matter for U.S.
Projects?, 465
Self Test, 465
Questions and Applications, 466
Advanced Questions, 467
Discussion in the Boardroom, 469
Running Your Own MNC, 469
Blades, Inc. Case: Country Risk Assessment, 469
Small Business Dilemma: Country Risk Analysis at the
Sports Exports Company, 471
Internet/Excel Exercises, 471
Revising the Capital Structure in Response to
Changing Conditions, 488
Interaction between Subsidiary and Parent Financing
Decisions, 489
Impact of Increased Debt Financing by the
Subsidiary, 490
Impact of Reduced Debt Financing by the
Subsidiary,^491
Summary of Interaction between Subsidiary and
Parent Financing Decisions, 491
Local versus Global Target Capital Structure, 492
Offsetting a Subsidiary's High Degree of Financial
:Leverage, 492
Offsetting a Subsidiary's Low Degree of Financial
Leverage, 492
Limitations in Offsetting a Subsidiary's Abnormal
Degree of Financial Leverage, 492
Summary, 493
?
Point Counter-Point: Should the Reduced Tax Rate on
Dividends Affect an MNCs Capital Structure?, 493
Self Test, 494
Questions and Applications, 494
Advanced Questions, 495
Discussion in the Boardroom, 497
Running Your Own MNC, 497
Blades, Inc. Case: Assessment of Cost of Capital, 497
Small Business Dilemma: Multinational Capital Structure
Decision at the Sports Exports Company, 499
Internet/Excel Exercises, 499
Chapter 17: Multinational Cost
of Capital and Capital Structure 472
Chapter 18: Long-Term
Financing
Background on Cost of Capital, 472
Comparing the Costs of'/Equity and Debt, 472
Cost of Capital for MNCs, 473
Cost-of-Equity Comparison Using the CAPM, 475
Implications ofth'e CAPM for an MNCs Risk, 476
Costs of Capital across Countries, 477
Country Differences in the Cost of Debt, 477
Country Differences in the Cost of Equity, 478
Combining the Costs of Debt and Equity, 480
Estimating the Cost of Debt and Equity, 480
Using the Cost of Capital for Assessing Foreign
Projects, 481
Derive Net Present Values Based on the Weighted
Average Cost of Capital, 481
Adjust the Weighted Average Cost of Capital for the
Risk Differential, 482
Derive the Net Present Value of the Equity
Investment, 482
The MNCs Capital Structure Decision, 486
Influence of Corporate Characteristics, 486
Influence of Country Characteristics, 487
Long-Term Financing Decision, 500
Sources of Equity, 500
500
Sources of Debt, 501
Governance: Stockholder versus Creditor
Conflict, 501
Cost of Debt Financing, 501
Measuring the Cost of Financing, 502
Actual Effects of Exchange Rate Movements on
Financing Costs, 504
Assessing the Exchange Rate Risk of Debt
Financing, 506
Use of Exchange Rate Probabilities, 506
Use of Simulation, 506
Reducing Exchange Rate Risk, 507
Offsetting Cash Inflows, 507
Forward Contracts, 508
Currency Swaps, 508
Parallel Loans, 510
Diversifying among Currencies, 514
Interest Rate Risk from Debt Financing, 515
The Debt Maturity Decision, 515
Contents
The Fixed versus Floating Rate Decision, 517
Hedging with Interest Rate Swaps, 517
Plain Vanilla Swap, 517
Summary, 521
Point Counter-Point: Will Currency Swaps Result in Low
Financing Costs?, 521
Self Test, 521
Questions and Applications, 522
Advanced Questions, 523
Discussion in the Boardroom, 524
Running Your Own MNC, 524
Blades, Inc. Case: Use of Long-Term Financing, 524
Small Business Dilemma: Long-Term Financing Decision by
the Sports Exports Company, 525
Internet/Excel Exercises, 526
Part 4 Integrative Problem:
Long-Term Asset and Liability
Management, 527
Part 5: Short-Term Asset and
Liability Management
529
Chapter 19: Financing
International Trade
530
Payment Methods for International Trade, 530
Prepayment, 531
Letters of Credit (L/Cs), 531
Drafts, 532
Consignment, 532
Open Account, 532
Trade Finance Method's, 533
Accounts Receivable Financing, 533
Factoring, 533
Letters of Credit (L/Cs), 534
Banker's Acceptance, 538
Working Capital Financing, 540
Medium-Term Capital Goods Financing
(Forfaiting), 541
Countertrade, 541
Agencies That Motivate International Trade, 542
Export-Import Bank of the United States, 542
Private Export Funding Corporation
(PEFCO), 544
Overseas Private Investment Corporation
(OPIC), 544 '
xv
Discussion in the Boardroom, 546
Running Your Own MNC, 546
Blades, Inc. Case: Assessment of International Trade
Financing in Thailand, 546
Small Business Dilemma: Ensuring Payment for Products
Exported by the Sports Exports Company, 548
Internet/Excel Exercise, 548
Chapter 2O: Short-Term
Financing
549
Sources of Short-Term Financing, 549
Short-Term Notes, 549
Commercial Paper, 549
Bank Loans, 549
Internal Financing by MNCs, 550
Governance: Governance over Subsidiary Short-Term
Financing,550
Why MNCs Consider Foreign Financing, 550
Foreign Financing to Offset Foreign Currency
Inflows, 550
Foreign Financing to Reduce Costs, 551
Determining the Effective Financing Rate, 552
Criteria Considered for Foreign Financing, 553
Interest Rate Parity, 553
The Forward Rate as a Forecast, 554
Exchange Rate Forecasts, 555
Actual Results from Foreign Financing, 558
Financing with a Portfolio of Currencies, 558
Portfolio Diversification Effects, 561
Repeated Financing with a Currency
Portfolio, 562
Summary, 564
Point Counter-Point: Do MNCs Increase Their Risk When
Borrowing Foreign Currencies?, 564
Self Test, 564
Questions and Applications, 565
Advanced Questions, 566
Discussion in the Boardroom, 567
Running Your Own MNC, 567
Blades, Inc. Case: Use of Foreign Short-Term
Financing, 567
Small Business Dilemma: Short-Term Financing by the
Sports Exports Company, 568
Internet/Excel Exercises, 568
Summary, 545
Chapter 21: International
Cash Management
Point Counter-PointrDo Agencies That Facilitate
International Trade Prevent Free Trade?, 545
Self Test, 545
Questions and Applications, 545
Advanced Questions, 546
Multinational Management of Working Capital, 569
Subsidiary Expenses, 569
Subsidiary Revenue, 570
Subsidiary Dividend Payments, 570
Subsidiary Liquidity Management, 570
569
xvi
Contents
Centralized Cash Management, 571
Self Test, 587
Governance: Monitoring of MNC Cash Positions, 571
Questions and Applications, 587
Advanced Questions, 588
Discussion in the Boardroom, 589
Running Your Own MNC, 589
Blades, Inc. Case: International Cash Management, 589
Small Business Dilemma: Cash Management at the Sports
Exports Comp'any, 590
Internet/Excel Exercises, 590
Techniques to Optimize Cash Flows, 572
Accelerating Cash Inflows, 572
Minimizing Currency Conversion Costs, 573
Managing Blocked Funds, 575
Managing Intersubsidiary Cash Transfers, 575
Complications in Optimizing Cash Flow, 576
Company-Related Characteristics, 576
Government Restrictions, 576
Characteristics of Banking Systems, 576
Investing Excess Cash, 576
How to Invest Excess Cash, 577
Centralized Cash Management, 577
Determining the Effective Yield, 579
Implications of Interest Rate Parity, 581
Use of the Forward Rate as a Forecast, 581
Use of Exchange Rate Forecasts, 582
Diversifying Cash across Currencies, 585
Dynamic Hedging, 586
Summary, 586
Point Counter-Point: Should Interest Rate Parity Prevent
MNCs from Investing in Foreign Currencies?, 587
Appendix 21: Investing in a Portfolio of
Currencies, 592
Part,5 Integrative Problem:
Short-Term Asset and Liability
Management, 596
Final Self Exam, 598
Appendix A: Answers to Self Test Questions, 606
Appendix B: Supplemental Cases, 618
Appendix C: Using Excel to Conduct Analysis, 640
Appendix D: International Investing Project, 647
Appendix E: Discussion in the Boardroom, 650
Glossary, 658
Index, 665