COURSE NO. ACT.

5103: INTERNATIONAL FINANCIAL MANAGEMENT

CHAPTER-01 INTRODUCTION

MNC
Definition of MNC Goal of MNC Agency Problem Conflicts with the MNC Goal: 1) Monitoring is more difficult; 2) Different cultures; 3) Size of MNC; 4) Tend to downplay

How we can reduce agency problem?

1) Impact of management control: i)Centralized Multinational Financial Management ii)Decentralized Multinational Financial Management 2)Impact of Corporate Control; i) Stock Options ii) Hostile Takeover Threat iii) Investor Monitoring;

Constraints Interfering with the MNCs Goal

The following are the constraints that hinder the MNC in achieving goal: i) Environmental constraints: Building codes, disposal of production wastage materials and pollution control. ii) Regulatory constraints: Taxes, currency convertibility, earnings remittance, employee rights and other iii) Ethical constraints: Bribes to govt. for special tax breaks, or other favors.

Goal of the MNC

1. Profit Maximization, 2) Wealth Maximization Profit maximization: Profit maximization means maximization of dollar earnings. How we can maximize profit in the competitive market? * We can maximize profit by reducing cost. How we can reduce cost? By introducing Just In Time (JIT) Total Quality Management (TQM) Process Reengineering By economics of scale (By taking advantage of large scale of production)

Wealth Maximization
Wealth maximization means maximization of the price of the shares How we can maximize the share price? We can increase the price of shares by By making good investment decision By making good fund raising decision My making good dividend decision

Agency Problem
Conflict between owners and management is termed as agency problem How agency problem creates? Impact of management control in reducing agency Centralized multinational financial management Decentralized multinational financial management

Impact of Corporate Control

Stock option Hostile takeover threat Investor monitoring Fire management

Theories of International Business

The commonly held theories as to why firms become motivated to expand their business internationally are: 1) The theory of comparative advantage; 2) The imperfect market theory; and 3) The product cycle theory.

International Business Methods

Firms use several methods to conduct international business. The most common methods are these: 1) International trade 2) Licensing; 3) Franchising; 4) Joint ventures; 5) Acquisitions of existing operations; 6) Establishing new foreign subsidiaries.

 Domestic Model: The value of the firm should be present value of expected cash flows. i.e. Valuing international cash flows: E(CFst) = [E(CFj.t.) X E(Erj.t. )] Where: E(CFst)= The amount of cash flow denominated in domestic currency; E(CFj.t.) = The amount of cash flow denominated in foreign currency; E(Erj.t. )= The expected currency conversion rate

Valuation Model for an MNC