Solutions Manual For

Solutions Manual For Financial Management Core Concepts 3 rd Global Edition Raymond Brooks (All Chapters 1-18, 100% Original Verified, A+ Grade) All Chapters Arranged

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Chapter 18 International Financial Management LEARNING OBJECTIVES(Slide 18-2) 1.Understand cultural, business, and political differences in business practices.

2.Calculate exchange rates, cross rates, and forward rates.

3.Understand transaction exposure, operating exposure, and translation exposure.

4.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(Slides 18-3 to 18-7) 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.

18.1 (A) 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 as the requirement to set upjoint

ventures in certain countries and the requirement to increaselocal participation and ownership.600 ©2016 Pearson Education Ltd 2 / 4

601Brooks Financial Management: Core Concepts, 3e

Differences in human resource norms: such as hiring and firingnorms and

different cultural attitudes towards women and minoritiesin the workplace. Also, local promotions and reward systems may notbe consistent with those of the home office and would have to bealtered to maintain positive relations with local employees, customers,and government officials.

Religious heritage of the host country: often can affect the wayemployees

dress and their holiday observances and have to behonored.

Nepotism and corrupt practices in the host country: such as the

requirement to hire relatives of government officials as a condition ofdoing business (Indonesia) and bribery of officials to get permits and licenses—considered to be illegal in the USA—are normal practices in many foreign countries.Intellectual property rights: such as those 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 towards intellectual property rights e.g. 2001 treaty, much still needs to be done.

18.1 (B) Business Risk:arises from economic factors such as inflation

rates,recessions, and interest rate and exchange rate fluctuations and can be morepronounced when operating in multiple countries.Efficient diversification ofsuch risk factors is key to success.

18.1 (C) Political Risk:stems from changing attitudes of the political leadership towards MNCs resulting in loss of subsidies or risk of nationalization.MNCs can defend

against such risks by:

1.Keeping critical operations private:i.e. maintain key orcritical elements

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

2.Financing operations and assets with local money: so that local

creditors can put pressure on the host government not to nationalize the business.

3.Receiving primary inputs outside the local economy: without

which the assets and operations would not be valuable.

18.2 Foreign Exchange(Slides 18-8 to 18-23) With each sovereign nation having its own currency (except of course, the Euro which is the accepted currency in 16 out of 27 countries of the European Union (EU)), MNCs ©2016 Pearson Education Ltd 3 / 4

Chapter 18  International Financial Management 602 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.

18.2 (A) Purchasing Power Parity Purchasing power parity means that the price of similar goods is the sameregardless 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 canbe used to keep track of relative purchasing power and exchange rates incountries where McDonalds operates.Price in US $ = Price of a Big Mac in Foreign Currency/ HK$/1US$ For Hong Kong, Price in US$ HK$15.1HK$7.79 =$1.94 Purchasing Power(Hong Kong) = Price in HK$/Price in US$=HK$15.1/$4.073.71 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.©2016 Pearson Education Ltd

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