Solutions Manual For

Solutions Manual For Fundamentals of Financial Management, Concise Edition, 11 th Edition By Eugene Brigham, Joel Houston (All Chapters 1-18, 100% Original Verified, A+ Grade) All Chapters Arranged

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Chapter 18 Multinational Financial Management Learning Objectives

After reading this chapter, students should be able to do the following:

Identify the primary reasons companies choose to go “global.” Explain how exchange rates work and interpret different exchange rate quotations.Discuss the intuition behind interest rate parity and purchasing power parity.Explain the different opportunities and risks that investors face when they invest overseas.Identify some specific challenges that a multinational corporation faces and discuss how they influence its capital budgeting, capital structure, and working capital policies.

Chapter 18: Multinational Financial ManagementLearning Objectives253

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Lecture Suggestions This chapter presents an overview of multinational financial management, including exchange rates, interest rate and purchasing power parity, international capital markets, multinational capital budgeting, and international capital structures.What we cover, and the way we cover it, can be seen by scanning the slides and Integrated Case solution for Chapter 18, which appears at the end of this chapter’s solutions. For other suggestions about the lecture, please see the “Lecture Suggestions” in Chapter 2, where we describe how we conduct our classes.

254Lecture SuggestionsChapter 18: Multinational Financial Management

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Answers to End-of-Chapter Questions 18-1Considering differential labor costs abroad, transportation, tax advantages, and so forth, U.S.corporations can maximize long-run profits. There are also nonprofit behavioral and strategic considerations, such as maximizing market share and enhancing the prestige of corporate officers.18-2A dollar will buy more euros.18-3There will be an excess supply of dollars in the foreign exchange markets, and thus, this will tend to drive down the value of the dollar. Foreign investments in the United States will increase.18-4The foreign project’s cash flows must be converted to U.S. dollars, since the shareholders of the U.S. corporation (assuming they are mainly U.S. residents) are interested in dollar returns. This subjects them to exchange rate risk, and therefore requires an additional risk premium. There is also a risk premium for political risk (mainly the risk of expropriation) that should be included.18-5No, interest rate parity implies that an investment in the U.S. with the same risk as a similar investment in a foreign country should have the same return. Interest rate parity is expressed as

follows:

.r1 r1 rate exchangeSpot rate exchange Forward f h    Interest rate parity shows why a particular currency might be at a forward premium or discount.A currency is at a forward premium whenever domestic interest rates are higher than foreign interest rates. Discounts prevail if domestic interest rates are lower than foreign interest rates.If these conditions do not hold, then arbitrage will soon force interest rates back to parity.18-6Purchasing power parity assumes there are neither transactions costs nor regulations that limit the ability to buy and sell goods across different countries. In many cases, these assumptions are incorrect, which explains why PPP is often violated. An additional complication, when empirically testing to see whether PPP holds, is that products in different countries are rarely identical. Frequently, there are real or perceived differences in quality, which can lead to price differences in different countries.18-7A Eurodollar is a dollar deposit in a foreign bank, normally a European bank. The foreign bank need not be owned by foreigners—it only has to be located in a foreign country. For example, a Citibank subsidiary in Paris accepts Eurodollar deposits. The Frenchman’s deposit at Chase Manhattan Bank in New York is not a Eurodollar deposit. However, if he transfers his deposit to a bank in London or Paris, it would be.The existence of the Eurodollar market makes the Federal Reserve’s job of controlling U.S.interest rates more difficult. Eurodollars are outside the direct control of the U.S. monetary authorities. Because of this, interest rates in the U.S. cannot be insulated from those in other parts of the world. Thus, any domestic policies the Federal Reserve might take toward interest rates would be affected by the Eurodollar market.

Chapter 18: Multinational Financial ManagementAnswers and Solutions255

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