Multinational Finance by Kirt C.

Butler
Learning objectives
Foreign exchange & Eurocurrency markets
Financial risk management
Derivative instruments (futures, options, & swaps)

Corporate management of FX risks

International corporate finance

Country risk, capital budgeting, cost of capital, taxation, real options, corporate governance, & cross-border M&A

International portfolio investment

Capital markets, portfolio investment, and asset pricing
Butler / Multinational Finance 4e (2008) An Introduction to Ltd. Chapter 1 John Wiley & SonsMultinational Finance 1-1

Everything should be made as simple as possible, but not simpler.

Albert Einstein

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Chapter 1 An Introduction to Multinational Finance

Learning objectives
Corporate governance and the goals of the multinational corporation

The challenges of multinational operations

Cultural differences and country risks

The opportunities of multinational operations

Investment opportunities Financial opportunities

Financial management of the MNC

Butler / Multinational Finance Chapter 1 An Introduction to Multinational Finance

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 Goals of the MNC Challenges of the MNC Opportunities of the MNC Financial management of the MNC

A definition of the MNC Governance of the MNC Claims on corporate revenues

A starting point
Multinational

financial management is financial management conducted in more than one cultural, social, economic, or political environment develop a framework for evaluating the opportunities, costs and risks of operating in the worlds markets for goods, services, and financial assets and liabilities

Well

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 Goals of the MNC Challenges of the MNC Opportunities of the MNC Financial management of the MNC

A definition of the MNC Governance of the MNC Claims on corporate revenues

Governance of the MNC

Super visor y boar d

Management Shar eholder s Debt Assets Equity

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 Goals of the MNC Challenges of the MNC Opportunities of the MNC Financial management of the MNC

A definition of the MNC Governance of the MNC Claims on corporate revenues

Claims on corporate revenues

REVENUES
EXPENSES GOVT

OTHER
DEBT EQUITY

VREVENUES
= VEXPENSES + VGOVT + VOTHER + VDEBT + VEQUITY
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Goals of the MNC Challenges of the MNC Opportunities of the MNC Financial management of the MNC

Cultural challenges Additional risks

The gentle reader will never, never know what a consummate ass he can become, until he goes abroad.
Mark Twain
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Goals of the MNC Challenges of the MNC Opportunities of the MNC Financial management of the MNC

Cultural challenges Additional risks Risk versus exposure to risk

The MNCs additional risks

Country risk - the risk that the business environment in a host country will unexpectedly change
- Political risk - the risk that the business environment in a host country will change unexpectedly due to political events - Financial risk - the risk of unexpected change in the financial or economic environment of a host country
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Butler / Multinational Finance

Chapter 1 An Introduction to Multinational Finance

Goals of the MNC Challenges of the MNC Opportunities of the MNC Financial management of the MNC

Cultural challenges Additional risks Risk versus exposure to risk

Risk versus risk exposure

Risk exists whenever actual outcomes can differ from expectations

A company has an exposure to risk when its value can change with unexpected changes in business conditions

1-9 Butler / Multinational Finance Chapter 1 An Introduction to Multinational Finance

Goals of the MNC Challenges of the MNC Opportunities of the MNC Financial management of the MNC

The MNCs opportunities Imperfect financial markets Market inefficiencies

The MNCs opportunities Value = St [E[CFt] / (1+it)t]

Multinational investment policy

- Higher returns from existing investments - New investment opportunities

Multinational financial policy

- Reduced capital costs through access to international capital markets
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Butler / Multinational Finance

Chapter 1 An Introduction to Multinational Finance

Goals of the MNC Challenges of the MNC Opportunities of the MNC Financial management of the MNC

The MNCs opportunities Imperfect financial markets Market inefficiencies

Retur n
25%

The optimal capital budget

Domestic fir ms cost of capital

20%

15%

10%

5%

Domestic fir ms investment oppor tunity set

0% 0 100 200 300 400 500

Domestic fir m Capital budget ($ millions)

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Goals of the MNC Challenges of the MNC Opportunities of the MNC Financial management of the MNC

The MNCs opportunities Imperfect financial markets Market inefficiencies

Retur n
25%

The value of multinationality

MNCs investment oppor tunity set Domestic fir ms cost of capital

20%

15%

10%

5%

MNCs cost of capital

Domestic fir ms investment oppor tunity set

0% 0 100 200 300 400 500

Domestic fir m
Butler / Multinational Finance

Multinational cor por ation (MNC)

1-12

Capital budget ($ millions)

Chapter 1 An Introduction to Multinational Finance

Goals of the MNC Challenges of the MNC Opportunities of the MNC Financial management of the MNC

The MNCs opportunities Imperfect financial markets Market inefficiencies

Perfect financial market assumptions

Frictionless markets
- No government intervention or taxes - No transactions, agency, or bankruptcy costs

Rational investors Equal access to costless information Equal access to market prices

Financial opportunities often involve a violation of one of these assumptions

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Goals of the MNC Challenges of the MNC Opportunities of the MNC Financial management of the MNC

The MNCs opportunities Imperfect financial markets Market inefficiencies

Forms of market efficiency

Operational efficiency
- Frictionless markets are operationally efficient

Informational efficiency
- Rational investors with equal access to markets and information ensure informational efficiency, in which prices reflect all relevant information

Allocational efficiency
- Together, operational and informational efficiency promote allocational efficiency
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Butler / Multinational Finance

Chapter 1 An Introduction to Multinational Finance

Goals of the MNC Challenges of the MNC Opportunities of the MNC Financial management of the MNC

International business Multinational finance Where the art resides

Viv la difference
Cross-border differences can affect all areas of business, particularly through differences in
- Language & culture - Human resource management

- Accounting
- Distribution - Financial markets

- Marketing
- Logistics - Corporate governance

- Other business conventions (legal, accounting, taxation, regulation, etc.)

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Goals of the MNC Challenges of the MNC Opportunities of the MNC Financial management of the MNC

International business Multinational finance Where the art resides

Multinational financial management

Multinational finance is interdisciplinary within the field of finance Multinational financial managers must know
Foreign exchange and Eurocurrency markets Derivatives (futures, options, & swaps) International financial markets (debt & equity) International markets for real assets (e.g., land or labor) - International portfolio investment
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Butler / Multinational Finance

Chapter 1 An Introduction to Multinational Finance

Goals of the MNC Challenges of the MNC Opportunities of the MNC Financial management of the MNC

International business Multinational finance where the art resides

The notes I handle no better than many pianists, but the pauses between the notes ah, that is where the art resides.
Arthur Schnabel
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