summary international financial management 10th edition cheol eun 1264413092

summary international financial management 10th edition cheol eun 1264413092 1 / 4

summary international financial management 10th edition cheol eun 1264413092 2 / 4

summary international financial management 10th edition cheol eun 1264413092 Chapter 1 – Multinational Financial Management Overview The main goal of an MNC is to maximize shareholder wealth. When managers are tempted to serve their own interests instead of those shareholders, an agency problem exists. Managers also face environmental, regulatory and ethical constraints that can conflict with the goal of maximizing shareholders wealth.

International business is justified by three key theories:

•The theory of comparative advantage suggests that each country should use its comparative advantage to specialize in its production and rely on other countries to meet other needs.•The imperfect markets theory suggests that because of imperfect markets, factors of production are immobile, which encourages countries to specialize based on the resources they have •The product cycle theory suggests that after firms are established in their home countries, they commonly expand their product specialization in foreign countries

The most common methods by which firms conduct international business are:

•international trade •licensing •franchising •joint ventures •acquisitions of foreign firms and •the formation of foreign subsidiaries including Special Purpose Vehicles. Methods such as licensing and franchising involve little capital investment but distribute some of the profits to other parties. The acquisition of foreign firms and formation of foreign subsidiaries require substantial capital investments but offer the potential for large returns.MNCs have the special attribute of having to conduct relationships with a host of differing governments and a worldwide network of trade agreements between countries. They can also, via their governments, make claims to the WTO to settle trade disputes.MNCs are valued as other companies in the stock market, the accounts, and in academic

models:

•In the stock market there is no discernible difference in risk valuation that can be clearly attributed to the company being multinational. 3 / 4

summary international financial management 10th edition cheol eun 1264413092 •The accounts face the special problems of translating the value of foreign assets into the reporting currency. Such profits are reported separately.•Academic models in line with other companies are based on discounted cash flows and the more recent additions of real options valuation and game theory.Chapter 2 – International Flow of Goods, Services & Investments The key components of the balance of payments are the current account and the financial account. The financial account is a broad measure of the country’s international trade balance.The financial account is a measure of the country’s long-term and short-term capital investments, including direct foreign investment and investment in securities (portfolio investment).A country’s international trade flows are affected by •Inflation •national income •government restrictions and •exchange rates.High inflation, a high national income, low or no restrictions on import and a strong local currency tend to result in a strong demand for imports and a current account deficit.Although some countries attempt to correct current account deficits by reducing the value of their currencies, this strategy critically depends on import and export elasticities.A country’s international capital flows are affected by any factors that influence direct foreign investment or portfolio investment.•Direct foreign investment tends to occur in those countries that have no restrictions and much potential for economic growth.•Portfolio investment tends to occur in those countries where taxes are not excessive, where interest rates are high, and where the local currencies are not expected to weaken.Economic theories of international trade offer a justification for international trade but also offer a critique based on the assumptions on which the theories rest. The main theories are •Mercantilism •The theory of absolute and comparative advantage and •The Heckscher-Ohlin theorem

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