Instructor Manual For

Instructor Manual For Financial Management Core Concepts 5 th Edition By Raymond Brooks, Jimmy Yang

(All Chapters 1-18, 100% Original Verified, A+ Grade)

All Chapters Arranged Reverse:

18-1

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Chapter 18 International Financial Management

LEARNING OBJECTIVES

• Understand cultural, business, and political differences in business practices.
• Calculate exchange rates, cross rates, and forward rates.
• Understand transaction exposure, operating exposure, and translation exposure.
• Apply net present value to foreign projects.

IN A NUTSHELL…

With globalization here to stay and the Internet spreading its web across most cultures and continents, financial managers and businessmen have to be well equipped with knowledge about business practices, policies, and issues related to investing and managing funds across the globe. This chapter starts out with a discussion of the cultural and political differences permeating business practices in different countries. Next, the calculation of cross and forward exchange rates is covered followed by the effects of fluctuating currencies on a firm’s transaction, operating, and translation exposures. The chapter ends with a detailed explanation of how capital budgeting is to be done in the context of foreign projects.

LECTURE OUTLINE

18.1 Managing Multinational Operations The complexity of managing multinational corporations increases significantly because of differences in cultures, business practices, and political systems that they are faced with once they operate in foreign countries.Cultural Risk: Cultural risk arises from differences in customs, social norms, attitudes, assumptions, and expectations of the local society in the host country.Differences in ownership structure: Such norms include the requirement to set up joint ventures in certain countries and the requirement to increase local participation and ownership.Differences in human resource norms: Such norms include hiring and firing norms and different cultural attitudes toward women and minorities in the workplace. Also, local promotions and reward systems may not be consistent with those of the home office and would have to be altered to maintain positive relations with local employees, customers, and government officials. 2 / 4

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Religious heritage of the host country: These can often can affect the way employees dress and their holiday observances and have to be honored.Nepotism and corrupt practices in the host country: The requirement to hire relatives of government officials as a condition of doing business (Indonesia) and bribery of officials to get permits and licenses—considered to be illegal in the United States—are normal practices in many foreign countries.Intellectual property rights: Rights protected by copyrights and patents may not be honored in some foreign countries (e.g., China) and become an issue when considering doing business abroad.Although attempts are being made to alter the landscape of differences in attitudes toward intellectual property rights, e.g., 2001 treaty, much still needs to be done.Business risk arises from economic factors such as inflation rates, recessions, and interest rate and exchange rate fluctuations and can be more pronounced when operating in multiple countries. Efficient diversification of such risk factors is key to success.Political Risk stems from changing attitudes of the political leadership toward MNCs resulting in loss of subsidies or risk of nationalization. MNCs can defend against such risks by doing the

following:

• Keeping critical operations private: Maintain key or critical elements of operations safely

within the firm rendering the assets useless in case of nationalization.

• Financing operations and assets with local money: Local creditors can put pressure on the

host government not to nationalize the business.

• Receiving primary inputs outside the local economy: Otherwise, the assets and operations

would not be valuable.

18.2 Foreign Exchange With each sovereign nation having its own currency (except of course, the euro which is the accepted currency in sixteen out of twenty-seven countries of the European Union (EU)), MNCs have to keep track of the fluctuations in exchange rates of various currencies caused by fluctuating economic factors such as interest rates, inflation rates, and productivity.Purchasing Power Parity Purchasing power parity means that the price of similar goods is the same regardless of which currency one uses to buy the goods.Table 18.1 is an example of how the price of a Big Mac in various countries can be used to keep track of relative purchasing power and exchange rates in countries where McDonald’s operates.

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In the real world, exchange rates are based on the prices of a basket of goods, rather than on a single item, in different countries.In general, the rate at which we can exchange money between currencies should allow us to purchase the same basket of goods in any country with the same dollars (except for local tariffs etc.Currency Exchange Rates, as shown in Table 18.2, can be expressed in direct (Amount of $ required to buy 1 unit of foreign money) or indirect (amount of foreign money required to buy 1 US$) form.

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