Chapter 1 Multinational Financial Management: An Overview

According to the text, the valuation of an MNC with foreign subsidiaries is directly affected by: a. exchange rate fluctuations b. foreign political conditions c. foreign economic conditions d. It is affected by all of the above.

D

Which of the following is not one of the more common methods used by MNCs to improve their internal control process? a. Ensuring that all data are reported consistently among subsidiaries b. Establishing a centralized database of information c. Making executives more accountable for financial statements by personally verifying their accuracy d. Speeding the process by which all departments and all subsidiaries have access to the data that they need e. All of these choices are common methods used by MNCs to improve their internal control process.

E

Multinational corporations (MNCs)

firms that engage in some form of international business

imperfect market

the condition where, due to the costs to transfer labor and other resources used for production, firms may attempt to use foreign factors of production when they are less costly than local factors.

The agency costs of an MNC are likely to be higher if it a. scatters its subsidiaries across many foreign countries. b. decreases its volume of international business. c. uses a centralized management style. d. B and C.

A

The least risky method by which firms conduct international business is: a. International Trade. b. The establishment of new subsidiaries. c. The acquisitions of existing operations. d. Licensing e. Franchising.

A

Which of the following is not a way in which agency problems can be reduced through corporate control? a. Acquisition of a foreign subsidiary b. Executive compensation c. Monitoring by large shareholders d. Threat of hostile takeover e. None of these choices are correct.

A

Which of the following is not an example of how an MNC can be affected by exchange rate movements? a. Remitted earnings from the foreign subsidiary of a U.S.-based MNC may increase due to a stronger home currency. b. When the home currency weakens, products denominated in that currency become cheaper to foreign customers, which may increase foreign demand for the MNC's products. c. When the home currency strengthens, products denominated in that currency become more expensive to foreign customers, which may reduce foreign demand for the MNC's products. d. Remitted earnings from the foreign subsidiary of a U.S.-based MNC may increase due to a weaker home currency. e. Due to exchange rate fluctuations, the number of units of a firm's home currency needed to purchase foreign supplies can change even if suppliers have not adjusted their prices.

A

Which of the following is not one of the more common methods used by MNCs to improve their internal control process? a. requiring executives to forecast future exchange rates b. establishing a centralized database of information c. speeding the process by which all departments and all subsidiaries have access to the data that they need d. ensuring that all data are reported consistently among subsidiaries

A

Acquisitions of Existing Operations

Acquisitions represent direct foreign investment because MNCs directly invest in a foreign country by purchasing the operations of target companies

Assume that an American firm wants to engage in international business in which it establishes a large subsidiary in the foreign country. This strategy definitely represents ______________. a. a joint venture b. direct foreign investment c. franchising d. licensing

B

The goal of a multinational corporation (MNC) is a. The establishment of subsidiaries in any country where operations would provide a return over and above the cost of capital, even if better projects are available domestically. b. The maximization of shareholder wealth. c. The minimization of taxes remitted from foreign subsidiaries. d. The maximization of social benefits resulting from actions such as the employment of foreign managers.

B

Which of the following is not mentioned in the text as a reason for the increased globalization of business? a. Increased privatization in recent years b. An increase in GNP of virtually all countries in recent years c. Growth in direct foreign investment in recent years d. An increased standardization of products and services across countries in recent years e. An increase in international trade

B

Which of the following is not mentioned in the text as an additional risk resulting from international business? a. Exchange rate fluctuations b. Financial risk c. Political risk d. Exposure to foreign economies e. Country risk

B

Compared to international trade, direct foreign investment generally results in ____ exposure to international political risk and ____ exposure to international economic conditions. a. lower; higher b. higher; lower c. higher; higher d. lower; lower

C

The Sarbanes-Oxley Act caused corporate governance of MNCs to _________; it makes executives ____ accountable for verifying financial statements. a. deteriorate; less b. deteriorate; more c. improve; more d. improve; less

C

Which of the following events would confirm the Product Cycle Theory? a. A U.S. firm manufacturing computers imports the needed components from Taiwan. b. A U.S. firm manufacturing widgets builds a plant in Mexico to reduce labor costs. c. A U.S. firm manufacturing computers establishes a plant in Germany in order to reduce transportation costs and to retain its advantage over its German competitors. d. All of these choices are correct. e. None of these choices are correct.

C

Which of the following events would confirm the Theory of Comparative Advantage? a. A U.S. firm manufacturing widgets builds a plant in Mexico to reduce labor costs. b. A U.S. firm manufacturing computers establishes a plant in Germany in order to reduce transportation costs and to retain its advantage over its German competitors. c. A U.S. firm manufacturing computers imports the needed components from Taiwan. d. All of these choices are correct. e. None of these choices are correct.

C

Which of the following is not a form of corporate control that can be used to reduce agency problems in MNCs? a. Stock options b. Investor monitoring c. A decentralized management style d. Hostile takeover threat e. All of these choices are forms of corporate control that can be used to reduce agency problems in MNCs.

C

Which of the following is the most direct example of political risk in Spain for a U.S.-based MNC with a subsidiary in Spain? a. Consumers in the U.S. may purchase products from companies in Spain. b. Spain's economy may decrease. c. Spain's government may impose special taxes on the subsidiary. d. Spain's government may change tax rates on income earned by local citizens.

C

Zest Co. has a subsidiary in Mexico. The expected cash flows in pesos to be received in the future from this subsidiary have not changed since last month, but the valuation of Zest Co. has increased since last month. What could have caused this increase in value? a. a stronger Mexican economy b. higher Mexican interest rates c. appreciation of the Mexican peso d. depreciation of the Mexican peso

C

Agency costs faced by multinational corporations (MNCs) may be larger than those faced by purely domestic firms because a. Monitoring of managers located in foreign countries is more difficult. b. MNCs are relatively large. c. Foreign subsidiary managers raised in different cultures may not follow uniform goals. d. All of these choices are correct.

D

Licensing obligates a firm to provide ________, while franchising obligates a firm to provide ________. a. A specialized sales or service strategy; its technology b. A specialized sales or service strategy; a specialized sales or service strategy c. Its technology; its technology d. Its technology; a specialized sales or service strategy e. Its technology; an initial investment

D

The most risky method(s) by which firms conduct international business is (are): a. The establishment of new subsidiaries. b. The acquisitions of existing operations. c. Franchising. d. [The acquisitions of existing operations.] and [The establishment of new subsidiaries.] only e. All of these choices are correct.

D

The valuation of an MNC should decline when an event causes the expected cash flows from foreign subsidiaries to ____ and when the foreign currencies denominating these cash flows are expected to ____. a. increase; depreciate b. decrease; appreciate c. decrease; depreciate d. increase; appreciate

D

Which of the following is mentioned in the text as a theory of international business? a. theory of comparative advantage b. imperfect markets theory c. product cycle theory d. All of the above are mentioned in the text as theories of international business.

D

________ obligates a firm to provide a specialized sales or service strategy, support assistance, and possible an initial investment in exchange for periodic fees. a. Licensing b. A joint venture c. International trade d. Franchising e. None of these choices are correct.

D

A centralized management style, where major decisions about a foreign subsidiary are made by the parent company, results in an automatic increase in agency costs.

False

Although MNCs may need to convert currencies occasionally, they do not face any exchange rate risk, as exchange rates are stable over time.

False

If managers of foreign subsidiaries make decisions that maximize the values of their respective subsidiaries, they automatically maximize the value of the entire corporation.

False

In a joint venture, one firm is obligated to provide another firm with a specialized sales or service strategy in exchange for periodic fees.

False

International trade is the most common form of direct foreign investment (DFI).

False

The Theory of Comparative Advantage begins by assuming that a given firm first becomes established in its home country and may subsequently penetrate foreign markets via geographic or product differentiation.

False

Establishment of New Foreign Subsidiaries

Firms can also penetrate foreign markets by establishing new operations in foreign countries to produce and sell their products. requires DFI

A decentralized management style, where subsidiary managers make the relevant decisions regarding their subsidiary, may result in better decision making, as subsidiary managers are generally better informed about their subsidiary's operations.

True

The Sarbanes-Oxley Act ensures a more transparent process for managers to report on the productivity and financial condition of their firm.

True

Under the Product Cycle Theory, foreign demand can be initially satisfied by exporting.

True

joint venture

a venture that is jointly owned and operated by two or more firms.

Licensing

an arrangement whereby one firm provides its technology (copyrights, patents, trademarks, or trade names) in exchange for fees or other considerations.

direct foreign investment (DFI)

any method of increasing international business that requires a direct investment in foreign operations.

Agency Problem

conflict of goals between a firm's shareholders and its managers.

Sarbanes-Oxley Act (SOX)

ensures a more transparent process for managers to report on the productivity and financial condition of their firm. It requires firms to implement an internal reporting process that can be easily monitored by executives and the board of directors.

Uncertainty Surrounding an MNC's Cash Flows

international economic condition international political risk Exchange rate risk

Multinational Model

measure its expected dollar cash flows in any period by multiplying the expected cash flow in each currency by the expected exchange rate at which that currency could be converted to dollars and then summing those two products. E(CF $,t) sum[E(CF) x E(S)] V=0 sum {(sum[E(CF) x E(S)]) / (1+K)^t}

franchising

one firm provides a specialized sales or service strategy, support assistance, and possibly an initial investment in the franchise in exchange for periodic fees, allowing local residents to own and manage the units

Domestic Model

pure domestic firm value V= E(CF)/(1+K)^t

centralized management style

reduce agency costs because it allows managers of the parent to control foreign subsidiaries and thus reduces the power of subsidiary managers. However, the parent's managers may make poor decisions for the subsidiary if they are less informed than the subsidiary's managers about its setting and financial characteristics

decentralized management style

result in higher agency costs because subsidiary managers may make decisions that fail to maximize the value of the entire MNC. Yet this management style gives more control to those managers who are closer to the subsidiary's operations and environment.

product cycle theory

theory suggesting that a firm initially establishes itself locally and expands into foreign markets in response to foreign demand for its product; over time, the MNC will grow in foreign markets; after some point, its foreign business may decline unless it can differentiate its product from competitors. **as a firm matures, it may recognize additional opportunities outside its home country

Comparative advantages

theory suggesting that specialization by countries can increase worldwide production.

International trade

used by firms to penetrate markets (by exporting) or to obtain supplies at a low cost (by importing)

MNC finance decisions

whether to discontinue operations in a particular country, whether to pursue new business in a particular country, whether to expand business in a particular country, and how to finance expansion in a particular country.