PAGE 7 Student’s Name Student’s Name Professor’s Name Course Date Argumentative Essay on the Use of Mobile Phones in Schools The use of mobile or cell phones in learning institutions, specifically schools, has elicited debate and bitter arguments, not only in the United States of America, but in the world as a whole. While part of society has supported the use of cell phones in schools, the other part has opposed their use bitterly. Mobile phone manufacturers, such as Apple and Samsung, have targeted students as their main market and thus they have designed various models with lots of features(what features mention it?)in order to attract them. Despite the fact that the use of mobile phones by students in schools can be used positively and constructively in order to enhance their learning, the same technological devices can be utilized negatively, which distracts them and their teachers and in turn disrupts the learning process. For instance, whilst the students can use mobile phones positively by accessing or downloading important academic materials from the worldwide web, the same can also be used to get access towards destructive pornographic(Change the pornographic to something else like distraction: talking to friends all the time- playing games- youtube-twitter-facebook… ) contents from online sources thus destroying students’ morals. There are various reasons as to why mobile phones should not be used by students in schools and other learning institutions through giving tangible evidence. There are various arguments from critics calling for the use of mobile phones in schools by the students( make the thesis more simple if you want to change it its okay. ). Mobile phones should not be used in schools and other institutions of learning as the students can misuse. Despite the fact that the current mobile phones are well equipped with other additional features like email, Short Messaging Services (SMS), MP3 players, radio, blue tooth, Multimedia Messaging Service (MMS) and cameras, students have tended to misuse them through cyber bullying (Mention more about (harmful/depression / suicide/)) whereby they hurl insults and write vulgarity to harm other students through social platforms like Facebook and twitter. This misuse is bound to happen given the fact that research has indeed indicated that fifty four percent (54%) of young people poses cellphones on each given day (write reference [name,date]). Statistics show that thirty eight percent (38%) of young people have experienced cyber bullying and twenty five percent (25%) of teenagers have been bullied repeatedly through their cell phones (put reference 1 and 2 on the red color down). Sadly, statistics also show that at least half of teenage suicides are related to bullying (reference 3) . Students should not use cell phones in schools due to the fact that they cause considerable distractions during class time. For instance, some student in class may have a loud or funny rin.

1. PAGE
7
Student’s Name
Student’s Name
Professor’s Name
Course
Date
Argumentative Essay on the Use of Mobile Phones in Schools
The use of mobile or cell phones in learning institutions,
specifically schools, has elicited debate and bitter arguments,
not only in the United States of America, but in the world as a
whole. While part of society has supported the use of cell
phones in schools, the other part has opposed their use bitterly.
Mobile phone manufacturers, such as Apple and Samsung, have
targeted students as their main market and thus they have
designed various models with lots of features(what features
mention it?)in order to attract them. Despite the fact that the use
of mobile phones by students in schools can be used positively
and constructively in order to enhance their learning, the same
technological devices can be utilized negatively, which distracts
them and their teachers and in turn disrupts the learning
process. For instance, whilst the students can use mobile phones
positively by accessing or downloading important academic
materials from the worldwide web, the same can also be used to
get access towards destructive pornographic(Change the
pornographic to something else like distraction: talking to
friends all the time- playing games- youtube-twitter-facebook…
) contents from online sources thus destroying students’ morals.

2. There are various reasons as to why mobile phones should not
be used by students in schools and other learning institutions
through giving tangible evidence. There are various arguments
from critics calling for the use of mobile phones in schools by
the students( make the thesis more simple if you want to change
it its okay. ).
Mobile phones should not be used in schools and other
institutions of learning as the students can misuse. Despite the
fact that the current mobile phones are well equipped with other
additional features like email, Short Messaging Services (SMS),
MP3 players, radio, blue tooth, Multimedia Messaging Service
(MMS) and cameras, students have tended to misuse them
through cyber bullying (Mention more about
(harmful/depression / suicide/)) whereby they hurl insults and
write vulgarity to harm other students through social platforms
like Facebook and twitter. This misuse is bound to happen given
the fact that research has indeed indicated that fifty four percent
(54%) of young people poses cellphones on each given day
(write reference [name,date]). Statistics show that thirty eight
percent (38%) of young people have experienced cyber bullying
and twenty five percent (25%) of teenagers have been bullied
repeatedly through their cell phones (put reference 1 and 2 on
the red color down). Sadly, statistics also show that at least half
of teenage suicides are related to bullying (reference 3) .
Students should not use cell phones in schools due to the fact
that they cause considerable distractions during class time. For
instance, some student in class may have a loud or funny
ringtone that disrupt learning whenever one receives a call or an
SMS. This happens because some students forget to switch off
their phones and as a result, they make a lot of noise during
class time that eventually disrupts the normal learning process.
It is a known fact that for any successful or meaningful learning
to occur, then the learning environment should be freed from
barriers that can hinder effective communication between the
teachers and the students (Ahmed, et al 2010). Such barriers

3. include among them noise emanating from people, animals and
even mobile phones and it is due to this fact that the use of
mobile phones in the school environment by students should
never be accepted (Ahmed, et al 2010).
Another reason why mobile phones should never be accepted in
schools is the fact that their use has been known to hinder the
retention of learnt knowledge by the students (reference). It has
been established that some of the students have become
addicted to the use of mobile phones to the extent that their rate
of knowledge retention is too low because of minds that are
preoccupied with social media platforms such as Facebook,
Twitter and Instagram (reference). The use of mobile phones by
students in schools should be discouraged or banned altogether
since their use has been linked or associated with exam cheating
thus gaining an unfair advantage over their classmates who have
used just and fair means(reference). Students who use these
means of cheating eventually contribute to a community that is
ill-equipped to face the future since they passed their exams
through unjust means and thus the economic status of the places
they are employed in rarely grow due to unskilled personnel
(Doron, 2013).
Another reason why mobile phones should be banned is the fact
that some students pry into the privacy of their fellow
classmates through their mobiles (reference 5). The pictures and
videos obtained from such incidences are then posted on social
sites like Facebook and twitter without their owners’ knowledge
and consent causing great harm to them (reference4). The
invading of other people’s privacy is socially immoral and thus
in order to avoid such instances in the school environment, the
school should ban the use of cellular or mobile phones within
its premises.
On the other hand, some argue that the use of mobile phones in
schools and other learning institutions should be allowed
because they aid students in accessing some of the vital
academic contents from the Internet in the absence of
computers. The use of advanced mobile phones by students in

4. the school enables them to easily locate and gain access to the
educational resources from the virtual world thus enhancing
their knowledge and academic experience. The banning of
mobile phones by the school administration will hinder students
from getting relevant academic materials from the Internet since
they will be forced to rely on the materials provided in class by
their teacher, which are not always readily available. Also, it
will force the large number of student to queue for the few
available computers that are provided by the school. Therefore
the school administrations should allow students to bring and
use mobile phones in schools on the condition that such gadgets
are constructively used to enhance student learning,
performance and eventually success through fair and just means
(Daley,et al 2001).
The lack of computers in some schools has shown to causes a
negative impact on students, as they are not able to have around
the clock access to research materials to conduct any
meaningful research from web sources in order to improve their
classroom learning. Due to this fact, allowing students to
possess mobile phones in schools will enable them the means to
access boundless sources of information from the web. Another
good use for mobile phones would be the ability to make video
clips of their school activities through using their mobile
phones to store and play them whenever they need (Finney, et
al. 2010). Additionally, the students should be allowed to use
mobile phones in schools because, apart from helping them to
plan their learning activities, mobile phones also help them to
efficiently organize their class work by using electronic
academic calendars and planners (Finney, et al. 2010).
Given the fact that a school is normally defined as an institution
or place for progressive and systematic education and
instruction, then the use of mobile phones should never be
allowed at all (reference 6 ). Therefore, the school is a place in
which the learners should be capable to learn through the help,
supervision and guidance of their teachers without the
interference of unregulated and unreliable information. Students

5. also negatively make use of their mobile phones through taking
photo shots of their friends while in the bathroom and
“sextexting” their classmates (reference 7). This misuse is a
clear example of sexual harassment and bullying that should
never be allowed or encouraged in any learning institution
anywhere in the world. Theft cases in learning institutions have
also become rampant due to the fact that most smart mobile
phones are expensive and pose as a valuable prize for any thief
(reference 8). In order to avoid such cases, it is prudent that the
possession and subsequent use of mobile phones by students in
schools should be banned altogether. According to some critics,
it has been argued that the issue of bullying and exam cheating
has escalated and mobile phones cannot be blamed entirely
(reference 9). However, it should be noted that research has
shown that teenage students are susceptible to addiction and
therefore the constant and regular use of cell phones by students
to the point of addiction is a grave threat to their academic
performance and their lives (Thomas, 1998).
In conclusion(change it to to something else do not write in
conclution), Given the compelling evidence and the undeniable
negative results regarding the use of mobile phones by students
within school grounds, government legislators should support
the ban on mobile phones. This is because while the gadgets
were meant to aid communication between different people in
different circumstances, the students have continued to use them
negatively thus bringing lots of harm on each other. The use of
mobile phones by students in the schools should therefore never
be allowed unless clear rules and policies are put in place to
ensure that the gadgets can only be used by students for
educational and other constructive purposes while in the school
environment. This will greatly reduce the losses arising from
the use of mobile phones by the students while in school. In
addition, all stakeholders should gather and openly discuss the
best uses of mobile phones that can be incorporated into the
general school curriculum to ensure that they yield great
benefits to the student population and the overall learning

6. experience. Punitive measures should also be put in place to
discourage any student found using cell phones in the school
environment to cause negative impacts. The use of technology
should therefore be used constructively to enhance the learning
of the students in the school environment instead of bringing
harm and damage through the use of technology.
Works Cited
Daley, Patrick, et al. 50 Debate Prompts for Kids...New York:
Scholastic Inc, 2001.
Ahmed, Ahmed, et al. Mobile Information Communication
Technologies Adoption in Developing Countries. New York:
Idea Group Inc, 2010).
Doron, Assa. The Great Indian Phone Book: How the Cheap
Cell Phone Changes Business, Politics, and Daily Life. New
York: Harvard University Press, 2013.
Finney, John, et al. Music Education with Digital Technology.
Continuum International Publishing Group, 2010.
Thomas, Gary. The Making of the Inclusive School. New York:
Routledge, 1998.
1. http://www.bullyingstatistics.org/content/cyber-bullying-
statistics.html
2.
http://www.nspcc.org.uk/Inform/resourcesforprofessionals/bully
ing/bullying_statistics_wda85732.html
3. http://www.bullyingstatistics.org/content/bullying-and-
suicide.html
4.
http://www.stopcyberbullying.org/how_it_works/direct_attacks.
html
5. http://endofbullying.com/cyberbullying/
6. Makdisi, G. (1980). ‘On the origin and development of the
college in Islam and the West’, in Islam and the Medieval West,
ed. Khalil I. Semaan, State University of New York Press
7. http://www.unh.edu/ccrc/bullying/factsheet.html

7. 8. http://www.dailymail.co.uk/news/article-2257536/The-teen-
smartphone-mugging-epidemic-Two-thirds-mobile-theft-
victims-London-children-young-adults.html
9. Bolton, José, and Stan Graeve. "No Room for Bullies: from
the Classroom to Cyberspace." Boys Town, Neb.: Boys Town,
2005
NOTES:
Make the thesis clear and simple. Show side1 and side2 and
shortly (bshakil 3am) describe how u will show that THIS side
is better than THAT side.
I put the website for the references please help me to take an
“A”. Also, make my side the second side Mention the opposite
side after that Mention my side. I need it at least 5 pages. Thank
you
I change something on blue and the red is what I need to
change.
#p*a eefl*€-?g Hxp#sLss *
The essence of risk management lies in maximizing the areas
where we have some control over the outcome while
minimizing the areas where we have absolutely no control over
the outcome and the linkage between effect and csuse is hidden
from us. - Peier Bernstein, Against lhe Gods, 1 996.
Ll;A gt li : I"i {- $ 1}"} g CTf VE 5
I Examine how operating exposule arises through unexpected
changes in both operating

8. and financing cash flows.
i Analyze the sequence of how unexpected exchange rate
changes alter the economic
performance of a business unit through the sequence of volume,
price, cost, and other
key variable changes. 1
I Evaluate the strategic alternatives to managing operating
exposure'
* Detail the proactive policies available to firms for managing
operating exposure'
This chapter examines the economic exposure of a firm over
time, what we term operating
exposure. Operating exposure,also referred lo as economic
exposure, competitive exposure, ot
strategic exposure,measures any change in the present value of
a firm resulting from changes
in future operating cash flows caused by any unexpected change
in exchange rates. Operating
exposure analysis assesses the impact of changing exchange
rates on a firm's own operations
over coming months and years and on its competitive position
vis-d-vis other firms. The goal
is to identify strategic moves or operating techniques the firm
might wish to adopt to enhance
its value in the face of unexpected exchange rate changes.
Operating exposure and transaction exposure are related in that
they both deai with
future cash flows. They differ in terms of which cash flows
management considers and why

9. those cash flows change when exchange rates change. We begin
by revisiting the structure
of our firm, Tiident Corporation, and how its structure dictates
its iikely operating
exposure. The chapter continues with a series of strategies and
structures used in the man-
agement of operating exposure, and concludes with a Mini-
Case, Toyota's European Oper-
ating Exposure.
Ts ? s* * e-s6 {."* a.g:*a c"a€-i q} ffi : A fuE *s Etix* mti cl st
a I
-
s
* g:*: n"ra { i xeg &:xpq;sLs s"r
The structure and operations of a multinational company
determine the nature of its oper-
ating exposure. Tiident Corporation's basic structure and
currencies of operation are
described in Exhibit 11.1. As a U.S.-based publicly traded
company, ultimately all financial
metrics and values have to be consolidated and expressed in
U.S. dollars. That accounting
exposure of the firm was described in Chapter 10.
Operationally, however, the functional
i
I
li
l.
k
*+'
b'

10. g,i
F.:ut.6:
300 PART 3 Foreign Exchange ExPosure
Trident Corporation:
Sells domestrcally in Rmb
Structure and OPerations
Seils in the EU in €
Trident Chinese components to Germany in € -Trident
China r--------- ----> GermanY
lnenminoi, nmul (euros' €)
f .a4a::li.r:::1i : i::ti:r:
China and Germany are subsidiaries of Trident U S'
c r-r t"""
""*
p"n-"-nirlo u
-s
Trident
-> u.s.
in $ (U.S. donars, g)
S"q I S S'qfi trJp&l

11. ty sno -e4l-e tL", i I $
Material and labor costs are in renminbi
(Rmb) .^
3ft"J ffio% i"**ti" (nmn) ana 50% export ($ and €)'
Material and laoor costs are in euros
(€)'
sll.
"i.
sov. coq-esirc (€) and bO% export
(€)
Materiat anO 'abor costs a/e in dollars
($)
'Suflr
utu 50% dorr'esiic ($) ar-d 50% exporl
(ib)
Rmb functional
€ functional
$ functional
Trident China
Trident GermanY
Trident U.S.

12. currencies of the individual subsidiaries
in combination determine the overall
operatin
exposure of the firm in total' flects where and to whot
The net operatrng cash flows of any
individual business unlt re
it ,"fft^uguin.if.orn tttotn and from where
it buys:
Net operating : Receivables over time - Payables
over time
cash flow from sales for inputs
and labor
Forexample,TiidentGermanysellslocallyandexpolts,butailsalesar
einvoiced-
euros. A11 operating ."rir- inno*, are therefore
in its home currency, the euro' on the co
side,laborcostsarelocalandineuros,asrveliaSmanyofitsmateriutin
p.'tpurchasesbeit
iocal and in euros. lt also purchases **fon"n,,
from Tiident china' but those too a
invoiced in euros. Tii;;; Germany i, .r"uri,i ""to-functional,
with all cash inflows and ou
t "T;[ : ;l'Jorporation U S is s i m' a' i^ :l':'l"i: : Tlf1.3
::T::1,*";#;t::"'J'"

13. sales, domestic and i;;;;;;;ir""l, are in u.s-aoirutr.
All costs,labor and matetials' sourct
domestically "rd
i"t";;;;i;;r[y,'are invoiclJi" us. dollars.
This includes purchases frc
Tiident China.TiidetiUS' it therefore
obviously dollar functional'
TiidentChinaismorecomplex.Cash*'no*',laborandmaterials,areall
domestica:
paid in Chinese r"n*Jbi-Cushinflows, fro*"u".,
are generated across three different
curre
cies as the company il; ;;;iiy in renminbi, as wellis
exporting to both Germany rn ettr
and the united States in dollais. on net,
uttttougt having some cash inflows
in both dolli
and euros, th" aomina"ftu""tt"y cash
flow is the renminbi'
st*ti* iJ*rsus *ynar::ie *peratinE €x9:*su1e. . ,:- ^ c^-^^^c+i-c
qnrl anal
MeasuringtheoperatingexposureofafirmlikeTiidentrequiresforeca
stingandanalyzl
all the firm,s future indi;du;l transaction

14. *-p.."t"t t"gethei wjth the future exposures
of
the firm,s comperirors and potential
**;ii,;; wo.i-a*ia.' Exchange rate changes in
I
!i.-i]:il
til-i A.PTFR ll OperatingExposure
short term affect current and immediate contracts, generally
termed transactions. But over
the longer term, as prices change and competitors react, the
more fundamental economic and
competitive drivers of the business may alter all cash flows of
all units. A simple exampie wiil
clarify the point.
Assume Tiident's three business units are roughly equal in size.
In 2012,the dollar starts
depreciating in the market against the euro at the same time the
Chinese government contin-
ues the gradual revaluation of the renminbi. The operating
exposure of each individual busi-
ness unit then needs to be examined statically (transaction
exposures) and dynamically
(future business transactions not yet contracted for).
* Trident China. Sales in U.S. dollars will result in fewer
renminbi proceeds in the immedi-
ate period. Sales in euros may stay roughly the same in

15. renminbi proceeds depending on
the relative movement of the Rmb against the euro. General
profitability will fall in the
short run. In the longer term, depending on the markets for its
products and the nature of
competition, it may need to raise the price it sells its export
products for, even to its U.S.
parent company.
& Tiident Germany. Since this business unit's cash inflows and
outflows are ail in eutos,
there is no immediate transaction exposure or change. It may
suffer some rising input costs
in the future if Tiident China does indeed eventually push
through price increases of com-
ponent saies. Profitability is unaffected in the short term.
* Trident U.S. Like Tiident Germany, Tiident U.S. has all local
currency cash inflows and
outflows. A fall in the value of the doltar will have no
immediate (transaction exposure)
impact, but may change over the medium to long term as input
costs from China may rise
over time as the Chinese subsidiary tries to regain prior profit
margins. But, iike Germany,
short-term profitability is unaffected,
The net result for Tiident is possibly a fali in the total
profitability of the firm in the
short Jerm, primarily from the fall in profits of the Chinese
subsidiary; that is, the short-term
transaction/operating exposure impact, The fall in the dollar in
the short term, however, is
likely to have a positive impact on translation exposure, as
profits and earnings in renminbi

16. and euros translate into more and more dollars. Wali Street
would likely like the results in
the immediate quarter or two.
Operating and Finan*ing eash FFews
The cash flows of the MNE can be divided into operating cash
fTows and financing cash
flows. Operating cash flows arise from intercompany (between
unrelated companies) and
intracompany (between units of the same company) receivables
and payables, rent and
Iease payments for the use of facilities and equipment, royalty
and license fees for the use
of technoiogy and intellectual property, and assorted
management fees for services
provided.
Finuncing cash flows are payments for the use of intercompany
and intracompany loans
(principal and interest) and stockholder equity (new equity
investments and dividends).
Each of these cash flows can occur at different time intervals, in
different amounts, and in dif-
ferent currencies of denomination, and each has a different
predictability of occurrence. We
summarize cash flow possibilities in Exhibit 71.2 for Tiident
China and Tiident U.S.
ffixp*eted v€rsu€ {Jncxpected ehanges in fash irlstir
Operating exposure is far more important for the long-run
health of a business than
changes caused by transaction or translation exposure.
However, operatine exposure is
inevitably subjective because it depends on estimates of future
cash flow changes ovel' an

17. 342 f it,ll i :i Foreign Exchange Exposure
Financial and operating cash Flows between Parent and
subsidiary
cash flows related to the financing of the subsidiary are
Financial cash Flows
Ci.f, tfo*r related to the businesi activities of the subsidiary are
Operating Cash Flows
Trident China
(toreign subsldiary)
Liabilities
Assets and Equity
-+ A/R Debt
Equity
Trident U.S. ,:
(parent companY)
rs..ffi F.1 Wffi Ptffiffi
Liabilities
Assets and Equity
Loan to Sub
lnvest in Sub
A/P --*+r
I
r+

18. I Debt Service I
t.+ ancl Dividends ---J
+-- ----------' Payments for Components -<---- -
arbitrary time horizon. Thus, it does not spring from
the'accounting process but rathe
from the operating analysis. Planning for operating exposule is
a total managemer
responsibiliiy O"perraittg ,rpon the inteiaction of strategies in
finance, marketing,
pulchaf
ing, and production.'
An ixpected change in foreign exchange rates is not included in
the definition
of operal
ing exposure, because Loth manigement and investors should
have factored
this informatio
inio tlieir evaluation of anticipated operating results and market
value.
l) From a management perspective, budgeted financial
statements already reflect informe
tion about the effect of an expected change in exchange rates'
* From a debt service perspective, expected cash flow to
amortize debt shouid alread
reflect the international Fisher effect. The level of expected
interest and principi

19. repayment should be a function of expected exchange rates
rather than existing
spc
rates.
* From an investor's perspective, if the foreign exchange market
is efficient, informatio
about expected changes in exchange rates should be widely
known and thus
reflected in
firm's market value. bnly unexpeclted changes in exchange
fates, or an inefficient
foreig
exchange market, should cause market value to change'
* From a broader macroeconomic perspective, operating
exposure is not just the sensitivit
of a firm's future cash flows to unexpected changes in foreign
exchange
rates, but also il
sensitivity to other key macroeconomic valiables. This factor
has been labeled z
n't acr o ec ono mic Ltncert aintY.
Chapter ? described the parity relationships among exchange
rates'
interest rates' and infli
tion rates. However, these variables are often in disequilibrium
with one another' Therefor'

20. rn"rp"ct"a changes in interest rates and inflation raies could
also have a
simultaneous bt
differential impact on future cash flows. As discussed in Globat
Finance in Practice ll'1'fixe
exchange rates obviously add an additional complexity to
managing
future cash flows an
generai corporate currency risk'
308 PART 3 Foreign Exchange Exposure
Expected dollar cash flow in every year exceeds the cash flow
of 52,074,320 that had
been originally expected. The increase in working capital causes
net cash flow to be onlr
$2,718.200 in20L2, but thereafter, the cash flow is $3,418,200
per year, with an additionai
5640,000 rvorking capital recovered in the fifth year. The key
to this improvement is opera!--
ing ieverage. If costs are incurred in euros and do not increase
after a depreciation, ai
increase in the sales price by the amount of depreciation will
lead to sharply higher profits.
Other Possibilities. If any portion of sales revenues were
incurred in other currencies, the sit-
uation would be different.Tiident Germany might leave the
foreign sales price unchanged. ir
effect raising the euro-equivalent price. Alternatively, it might

21. leave the euro-equivalec;
price unchanged, thus lowering the foreign sales price in an
attempt to gain volume. C:
course, it could also position itself between these two extremes.
Depending on elasticities an*
the proportion of foreign to domestic sales, total sales revenue
might rise or fall.
If some or all raw material or components were imported and
paid for in hard currenciei.
euro operating costs would increase after the depreciation of the
euro. Another possibilitf is
that local (not imported) euro costs would rise after a
depreciation.
Measurement of Loss. Exhibit 11.5 summarizes the change in
expected y'ear-end cash florvs
for the three cases and compares them with the cash flow
expected should no depreciatior
occur (base case). These changes are then discounted by
Tiident's assumed weighted averasr
cost of capital of 20"/" to obtain the present value of the gain
(loss) on operating exposure.
In Case 1, in which nothing changes after the euro is devalued,
Tiident incurs an operai-
ing ioss with a present value of ($1,033,914). In Case 2, in
which volume doubled with nc
price change after depreciation,Tiident experienced an operating
gain with a present value
of $2,866,106. In Case 3, in which the euro sales price was
increased and volume did na:
change, the present value of the operating gain from
depreciation was $3,742,892. An almos:
infinite number of combinations of volume, price, and cost
could follow any depreciation, ani

22. any or all of them might take effect over time.
Strategie Managernent of Operating Expostlre
The objective of both operating and transaction exposure
management is to anticipate anci
influence the effect of unexpected changes in exchange rates on
a firm's future cash flows.
rather than merely hoping for the best, To meet this objective,
management can diversfu the
firm's operating and financing base. Management can also
change the firm's operating and
financing policies.
The key to managing operating exposure at the strategic level is
for management to rec-
ognize a disequilibrium in parity conditions when it occurs and
to be pre-positioned to react
most appropriately. This task can best be accomplished if a firm
diversifies internationallr'
both its operating and its financing bases. Diversifying
operations means diversifying sales.
location of production facilities, and raw material sources.
Diversifying the financing base
means raising funds in more than one capital market and in
more than one currency.
A diversification strategy permits the firm to react either
actively or passively, depending
on management's risk preference, to opportunities presented by
disequilibrium conditions in
the foreign exchange, capital, and product markets. Such a
strategy does not require manage-
ment to predict disequilibrium but only to recognize it when it
occurs. It does require man-

23. agement to consider how competitors are pre-positioned with
respect to their olvn operating
exposures. This knowledge should reveal which firms would be
helped or hurt competitively
by alternative disequilibrium scenarios.
CHAFTf F II OperatingExposure 309
#5ver*9f.iring *p*rati***
If a firm's operations are diversified internationally,
management is pre-positioned both torecognize disequiiibrium
when it occurs and to ."u.i
"o*pJtitively.
consider the case wherepurchasing power parity is temporarily
in disequilibrium. Although the disequilibrium mayhave been
unpredictable' manigem"nt
"un.ofGn
recognize its symptoms as soon as theyoccur' For
example,.management might notice a chang! in comparative
costs in the firm,sown plants iocated in different countries. It
might alsJ observe changed profit margins orsales volume in
one area compared to another, dlpending on price and income
elasticities ofdemand and competitors' reaitions.
Recognizing a temporary change in worldwide competitive
conditions permits manage-ment to make changes in operating
strategies. Management might mut" *urginur ,r,irr, insourcing
raw materials, cornponents, or tinistred prodricts. If spare
capacity exists, productionruns can be lengthened in one
country and reduced in anothfr. Tne ma.teting
"tio.t "un

24. t"strengthened in export markets where the firm's products have
become more price competi-tive because of the disequilibrium
condition.
Even if management does not actively distort normal operations
when exchange rateschange, the firm should experience some
beneficial portfolio ettects. The variability of itscash flows is
probably reduced by international diveisification of its
production, sourcing,and sales because exchange rate changes
under disequilibrium conditions are likely toincrease the firm's
competitiveness in sote markets whiie reducing it in others. In
that case,operating exposure would be neutralized.
In contrast to the internationally diversified MNE, a purely
domestic firm might be sub-
iect to the fuli impact of foreign
"*.hu.rg.
operating exposure even though it does not haveforeign
currency cash flows. Foi example]it
"outa
exieri"nce intense import competition in itsdomestic market frol
c^gmpeting firms producing in countries with undervalued
currencies.A purely domestic firm does not have the opiion to
react to an international disequilib-rium condition in the same
manner as an MNE. In fact, a furety domestic firm will not
bepositioned to recognize that a disequilibrium exists because it
lacks comparative data from itsown internal sources' By the
time external data are available, it is often too late to react.
Evenif a domestic firm recognizes the disequilibrium, it cannot
qri"try shift production and salesinto foreign markets in which
it has had no previous pr"r"n.".
constraints exist that may limit the feasibility oi diversifying
production locations. Thetechnology of a particuiar industry
may require iurg"

25. "rono-i".
of scale. High tech firms,such as Intel, prefer to iocate in places
*tt"r" they ha:ve easy access to olher high tech suppli-ers' a
highly educated workforce, and one or more leading
universities. Their R&D efforts areclosely tied to initial
production and sales activities.
-tJi'rergri
i ii-iU ht fi anFinrr
If a firm diversifies its financing sources, it will be pre-
positioned to take advantage of tempo-
rary deviations from the international Fisher effect. If interest
rate differentials do not equal
expected changes in exchange rates, opportunities to lower a
firm's cosf of capitalwill exist.
However, to be able to switch financing sources, a firm must
already be weli known in the
international investment community, with banking contacts
firmly established.. Again, this is
not typically an option for a domestic firm.
As we will demonstrate in Chapter 12, diversifying sources of
financing, regardless of the
currency of denomination, can lower a firm's cost of capital and
increasJ its"availability ot
capital' It could also diversify such risks as resfn'cfive
"upitulmarket
policies,
"ro "tt
* *"-
straints if the firm is located in a segmented capital -uik"t. This
is especially important forfirms resident in emerging markets.

26. 312 PA fi T -r Foreign Exchange Exposure
world markets. They became something of a rarity during the
1960s when exchange rates
were reiatively stable under the Bretton Woods Agreement. But
with the return to floating
exchange rates in the 1970s, firms with long-term customer-
supplier relationships across bor-
ders have returned to some old ways of maintaining mutually
beneficial iong-term trade.
#**k-tc-*a*k l-*a*s
A back+o-back loan, also referred to as a parallel loan or credit
swap,occurs when two busi-
ness firms in separate countries arrange to borrow each other's
currency for a specific period
of time, At an agreed terminal date they return the borrowed
currencies. The operaiion is
conducted outside the foreign exchange markets, although spot
quotations may be used as
the reference point for determining the amount of funds to be
swapped. Such a swap creates
a covered hedge against exchange losg since each company, ofi
jrs own books, borrows lhe
same currency it repays. Back-to-back loans are also used at a
time of actual or anticipated
legal limitations on the transfer of investment funds to or from
either country.
The structure of a typical back-to-back loan is illustrated in
Exhibit 17.7 . A British parent
firm wanting to invest funds in its Dutch subsidiary locates a
Dutch parent firm that wants to

27. invest funds in the United Kingdom.Avoiding the exchange
markets entirely, the British par-
ent lends pounds to the Dutch subsidiary in the United
Kingdom, while the Dutch parent
lends euros to the British subsidiary in the Netherlands. The two
loans would be for equal val-
ues at the current spot rate and for a specified maturity. At
maturity, the two separate loans
would each be repaid to the original lender, again without any
need to use the foreign
exchange markets. Neither loan carries any foreign exchange
risk, and neither loan normally
needs the approval of any governmentai body regulating the
availabiiity of foreign exchange
for investment purposes.
Parent company guarantees are not needed on the back-to-back
loans because each loan
carries the right of offset in the event of default of the other
loan. A further agreement can
Back-to-Back Loans for Currency Hedging
1. British firm wishes to invest funds
in its Dutch subsidiary
British Parent
Firm
iri+*Fgi-l,t1tffi ii*;;t
t'
Direct loan I
in oounds I,I
I t....'

28. Dutch Firm's
British Subsidiary
: [email protected]:+e4s!i:Ea*+€4€l;
3. British firm loans British pounds
directly to the Dutch firm's British
subsidiary
2. British firm identifies a Dutch firm wishing
to invest funds in its British subsidiary
Dutch Parent
Firm
Direct loan
in euros
British Firm's
Dutch Subsidiary
4. British firm's Duich subsidiary loans
euros from the Dutch parent
The backJo-back loan provides a method for parent-subsidiary
cross-border financing
without incurring direct currency exposure.
CS
1g
rr-

29. ;i-
)d
is
a5
3S
le
:d
-rt
o
1t
l-
l!
i
CHAPTER 1 1 Operating Exposure 313
provide for maintenance of principal parity in case of changes
in the spot rate between the two
countries. For example, if the pound dropped by more than, say,
6"/o for as long as 30 days, the
British parent might have to advance additional pounds to the
Dutch subsidiary to bring the
principal value of the two loans back to parity. A simiiar
provision would protect the British if
the euro should weaken.Although this parity provision might
lead to changes in the amount of
home currency each party must lend during the period of the

30. agreemenqlt does not increase
foreign exchange risk, because at maturity all loans are repaid
in the same currency loaned.
There are two fundarlental impediments to widespread use of
the back-to-back loan.
First, it is difficult for a firm to find a partner, termed a
cowterparty, for the currency,
amount, and timing desired. Secondly, a risk exists that one of
the parties will fail to return
the borrowed funds at the designated maturity-although this risk
is minimized because each
party to the loan has, in effect, 100% collateral, albeit in a
different currency. These disadvan-
tages have led to the rapid development and wide use of the
currencv su,ap.
eross Curreney Swaps
A cross currency swap resembles a back-to-back loan except
that it does not appear on a
firm's balance sheet. As we noted briefly in Chapter 6, thi term
swap is wldely used to
describe a foreign exchange agreement between trvo parties to
exchange a given amount of
one currency for anothet and, after a period of time, to give
back the original amounts
swapped. Care should be taken to clarify which of the many
different swaps is being referred
to in a specific case.
In a currency swap, a firm and a swap dealer or swap bank agree
to exchange an equiva-
lent amount of two different currencies for a specified period of
time. Currency swaps can be
negotiated for a wide range of maturities up to at leasi 1O years.
If funds are more expensive

31. in one country than another,afee may be required to compensate
for the interest differen-
tial' The swap dealer or swap bank acts as a middleman in
setting up the swap agreement.
A typical currency swap first requires trvo firms to borrow
funds in the markets and cur-
rencies in which they are best known. For example, a Japanese
firm would typically borrow
yen on a regular basis in its home market. If. however, the
Japanese firm were exporting to
the United States and earning U.S. dollars. it might rvish to
construct a match,ing cash flow
hedge which would allow it to use the U.S. doilars earned to
make regular debt-service pay-
ments on U'S. dollar debt. If, however, the Japanese firm is not
well known in the U.S. finan-
cial markets, it may have no ready access to U.S. dollar debt.'
One way in which it could, in effect, borrow dollars, is to
participate in a cross-currency
swap (see Exhibit 11.8). The Japanese firm couid swap its yen-
denominated debt service pay-
ments with another firm that has U.S. dollar-debt service
payments. This swap would have the
Japanese firm "paying dollars" and "receiving yen." The
Japanese firm would then have
dollar-debt service wifhout actually borrowing U.S. dollars.
Simultaneously, a U.S. corpora-
tion could actually be entering into a cross-"u.i"n.y swap in the
opposite diiection-.,paying
yen" and "receiving dollars."The swap dealer is taking the role
of a middleman.
Swap dealers arrange most swaps on a "blind basis," meaning
that the initiating firm does
not know who is on the other side of the swap arrangement-the

32. counterpartf. The firm
views the dealer or bank as its counterparty. Beciuse the swap
markets are dominated by the
major money center banks worldwide, the counterparty risk is
acceptable. Because the irvap
dealer's business is arranging swaps, the dealer cun g"rerully
arrange for the currency,
amount, and timing of the desired swap.
Accountants in the United States treat the currency swap as a
foreign exchange transac-
tion rather than as debt and treat the obligation to reverse the
swap at some later.date as a
forward exchange contract. Forward exchange contracts can be
matched against assets, but
they are entered in a firm's footnotes rather than as balance
sheet items. The result is that
314 PART 3 Foreign Exchange Exposure
ffim Using Cross-Cunency Swaps
Japanese
Corporation
Liabilities and Equity
United States
Corporation
Liabilities and Equity
Debt in US$

33. Receive
dollars
Wishes to enter into a swap to
"pay yen" and "receive dollars."
:1
..i
l
'':
:
:
a:
lnflow
+
of US$
Sales to U.S. Debt in yen
t
I R.ceiue
I v"nt.Pay
dollars
Wishes to enter into a swap to
"pay dollars" and "receive yen."
lnflow
---}>of yen

34. Swap llealer
' !=ib,****6s;sF!.
both translation and operating exposures are avoided, and
neither a long-term receivable nor
a long-term debt is created on the balance sheet.
Contractual Approaches: Hedging the Unhedgeatrle
Some MNEs now attempt to hedge their operating exposure with
contractual strategies. A
number of firms like Merck (U.S.) have undertaken long-term
currency option positions,
hedges designed to offset lost earnings from adverse exchange
rate changes. This hedging of
what many of these firms refer to as strategic exposure or
competitive exposure seems to fly in
the face of traditional theory.
The ability of firms to hedge the "unhedgeable" is dependent
upon predictability: 1,) the
predictability of the firm's future cash flows, and 2) the
predictability of the firm's competi-
tor's responses to exchange rate changes. Although the
management of many firms may
believe they are capable of prediciing their own cash flows, few
in practice feel capable of
accurately predicting competitor response. As illustratedby
Global Finance in Practice 11.2,
many firms still find even timely measurement of exposure a
challenge.
Merck is an example of a firm whose management feels capable
of both. The company
possesses relatively predictable long-run revenue streams due to
the product-niche nature of

35. the pharmaceuticals industry. As a U.S.-based exporter to
foreign markets, markets in which
sales levels by product are relatively predictable and prices are
often regulated by govern-
ment, Merck can accurately predict net long-term cash flows in
foreign currencies five and
ten years into the future. Merck has a relatively undiversified
operating structure. It is highly
centralized in terms of where research, development, and
production costs are located.
Merck's managers feel Merck has no real alternatives but
contractual hedging if it is to
weather long-term unexpected exchange rate changes. Merck
has purchased over-the-
counter (OfC) long-term put options on foreign currencies
versus the U.S. dollar as
:i*.
FJ.
:.?r
+r
'T4
e
tair:
+
i:
::-:.
;lir
f;

36. 1;'i
:i
Both the Japanese corporation and the U.s. corporation would
like to enter into a
cross-currency swap which would allow them to use foreign
currency cash inflows
lo service debt.
Sales to Japan
I
Pav I
rlj
ne
Ir-
ral
ri-
tal
Cs,
.u-
rb
tal
'it

37. rd.
ln
ii
tL
s,
!i
:a
CHAI':j" f.n 1 2 The Global Cost andAvailability of Capital -1-
1 I
worse we have achieved a global market for securities. The
good news is that many firms have
been assisted to become MNEs because they now have access to
a global cost and availabil-
ity of capital. The bad news is that the correlation among
securities markets has increased,
thereby reducing, but not eliminating, the benefits of
international portfolio diversification.
Globaiization of securities markets has also led to more
volatility and speculative behavior as
shown by the emerging market crises of the 1995-2A01 period,
and the 2008-2009 globai
credit crisis.
Corporate Governance and the Gost of Capital. Would global
investors be willing to pay a
premium for a share in a good corporate governance company?
A recent study of Norwegian
and Swedish firms measured the impact of foreign board
membership (Anglo-American) on

38. firm value. They summarized their findings as follows:
Using a sample of firnts with headquerters in Norway or
Sweden the studv indicates a sig-
nificantty higher value for firms that have outsicler Anglo-
Anterican board member(s),
after a variety of flrm-specific and corporate goverftance
related factors have been con-
trolled for. We argLte that this superior perforntance reflects
the fact that these contpanies
have successfully broken away front a partly segmented
domestic capital matket by
"importing" an Anglo-American corporate governance system.
Such an "itnport" signals a
willingness on the part of the .firm to expose itsetf to intproved
corporate governance ond
enhances its reputation in the financial market.s
Strategi* &!!la**es
Strategic alliances are normally formed by firms that expect to
gain synergies from one or
more of the following joint efforts.They might share the cost of
developing technology, or
pursue complementary marketing activities. They might gain
economies of scale or scope
or a variety of other commercial advantages. However, one
synergy that may sometimes by
overlooked is the possibility for a financially strong firm to
help a financially weak firm to
lower its cost of capital by providing attractively priced equity
or debt financing' This is
illustrated inthe Gtobal Finance in Practice 12.1 on the strategic

39. alliance between Bang
and Olufsen and Philips.
ket where Philips did not have the quality image enjoyed by
Bang & Glufsen and phitip$ N.f. B & o. phitips was concerned
that financial pressure might
one exceilenr exampre or rinanciar synersy that rowered " iT::
?:r".tiyT:; "-i?ff::n*ilTt't3Tf T*T:
firm's cost of capital was provided by the cross-border strate-
supported Philips' political efforts to gain EU support to
gic alliance of Philips N.V. of the Netherlands and Bang &
make the few remaining European-owned consumer elec-
Olufsen (B & O) of Denmark in 1990. Philips N.V. is one of the
tronics firms more competitive than their strong Japanese
largest multinational firms in the world and the ieading con-
competitors.
sumer electronics firm in Europe. B & O is a small European
competitor hrut with a nice market niche at the high end of the
B & O,s Motivation
audiovisual market.
philips was a major supplier of components to B & O, B & O
was interested in an alliance with Philips to gain more
a situation it wished to continue. lt also wished to join rapid
access to its new technology and assisiance in
5lars Oxelheim and Tiond Rand6y, "The impact of foreign board
membership on firm value," -/o urnal of Banking
and Finance,Yol. 27, No. 12, 2003, p. 2369.
!f

40. lt
PA RT 4 Financing the Global Firm
converting that technology into B & O product applications.
B & O wanted assurance of timely delivery of components at
large volume discounts irom Philips itself, as well as access
io Philip's large network of suppliers under terms enjoyed by
Philips. Equally important, B & O wanted to get an equity infu-
sion from Philips to strengthen its own shaky financial posi-
tion. Despite its commercial artisiry in recent years B & O had
been only marginally profitabJe, and its publiciy traded shares
were considered too risky to justiflz a new public equity issue
either in Denmark or abroad. lt had no excess borrowing
capacity.
The Strategic Alliance
A strategic alliance was agreed upon that would give each
pariner what ii desired commercially. Philips agreed to invest
DKK342 million (about $50 million) to increase the equiiy of
B & O's mdn operating subsidiary ln return it received a 25%
ownership of the expanded company.
When B & O's strategic alliance was announced to the
public on May 3, 1990, the share price of B & O Holding, the
iisted company on the Copenhagen Stock Exchange.
jumped by 35ok during the next two days. lt remained at thai
level until the Gulf War crisis temporarily depressed B & O's
share price. The share price has since recovered and the
expected synergies eventually materialized. B & O eventually
bought back its shares from Philips at a price thai hacl been
predetermined at the start.
ln evaluating what happened, we recognize lhal an

41. industrial purchaser might be willing to pay a higher price for
a firm that will provide it some synergies than would a porlfo-
lio investor who does not receive these synergies. Portfolio
investors are only pricing firm's shares based on the normal
risk versus return tradeoff. They cannot normally anticipate
the value of synergies that might accrue to the firm from an
unexpected strategic alliance pariner. The same conclusion
should hold for a purely domestic strategic alliance but this
example happens to be a cross-border alliance.
i::., ,
h=dil
The Cost of Capital for MNEs
Compared to Dcmestic Firms
Is the weighted average cost of capital for MNEs higher or
lower than for their domestic
counterparts? The answer is a function of the marginal ceist of
capital, the relative after-tax
cost of debt, the optimal debt ratio, and the relative cost of
equity.
Availabitity of Capital
We saw earlier in this chapter that international availability of
capital to MNEs, or to other
large firms that can attract international portfoiio investors,
may allow them to lower their
cost of equity and debt compared with most domestic firms. In
addition, international avail-
ability permits an MNE to maintain its desired debt ratio, even
when significant amounts of
new funds must be raised. In other words, an MNE's marginal
cost of capital is constant for
considerable ranges of its capital budget. This statement is not
true for most domestic firms.

42. They must either rely on internally generated funds or borrow in
the short and medium term
from commercial banks.
Financial $tructure, $ystematic Risk. and the esst cf eapitalfcr
MNEs
Theoretically, MNEs should be in a better position than their
domestic counterparts to
support higher debt ratios because their cash flows are
diversified internationally. The
probability of a firm's covering fixed charges under varying
conditions in product, finan-
cial, and foreign exchange markets should improve if the
variability of its cash flows is
minimized.
By diversifying cash flows internationally, the MNE, might be
able to achieve the same
kind of reduction in cash flow variability as portfolio investors
receive from diversifying
their security holdings internationally. The same argument
applies - namely, that returns are
not perfectly correlated between countries. For example, in
2000 Japan was in recession but
C H A P T I F 1 2 The Global Cost and Availability of Capitat
339
the United States was experiencing rapid growth. Therefore, we
might have expected
returns, on either a cash flow or an earnings basis, to be
depressed in Japin and favorable in
the United States. An MNE with operations located in both
these countries could rely on its

43. strong U'S. cash inflow to cover debt obligations, even if its
Japanese subsidiary produced
weak net cash inflows.
Despite the theo_retical elegance of this hypothesis, empirical
studies have come to the
opposite conclusion.b Despite the favorable effect of
international diversification of cash
flows, bankruptcy risk was only about the same for MNEs as for
domestic firms. However,
MNEs faced higher agency costs, political risk, foreign
exchange risk, and asymmetric infor-
mation' These have been identified as the factors liading to
low"r debt raiios and even a
higher cost of long-term debt for MNEs. Domestic firms rely
much more heavily on short and
intermediate debt, which lie at the low cost end of the yield
curve.
. Even more surprising, one study found that MNEs have a
higher level of systematic
risk than their domestic counterparts.T The same factor,
"rured
this phenomenon as
caused the lower debt ratios for MNEs. The study concluded
that the increased standard
deviation of cash flows from internationalization more than
offset the lower correlation
from diversification.
As we stated earlier in this chapter, the systematic risk term, F;,
is defined as
B =
pJ&i

44. om
Yhr.r".pi-
is the correlation coefficient between securityT and the market;
o; is the standard
deviation of the return on firm j; and o,, is the standard
deviation of the'market return.
The MNE's systematic risk could increase if the decrease in the
correlation coefficient, pp,
due to international diversification, is more than offset by an
increase in s,, the standard
deviation due to the aforementioned risk factors. This
conclusion is consistent with the
observation that many MNEs use a higher hurdle rate to
discount expected foreign project
cash flows' In essence, they are accepting projects they consider
to be riskier tharidomestic
projects, thus potentially skewing upward their perteived
systematic risk. At the least,
MNEs need to earn a higher rate of return than their domistic
equivalents in order to
maintain their market value.
A more recent study found that internationalization actually
allowed emerging market
MNEs to carry a higher level of debt and lowered their
systematic risk.8 Tliis iccurr"d
because the emerging market MNEs are investing in morl stable
economies abroad, a
strategy that lowers their operating, financial, for-ign exchange,
and political risks. The
reduction in risk more than offsets their increased agency costl
and aliows the emerging
ryt"t MNEs to enjoy higher leverage and lower systematic risk

45. than their U.S.-based
MNE counterparts.
6lee, Kwang Chul and Chuck C.Y. Kwok, "Multinational
Corporations vs. Domestic Corporations: International
Environmental Factors and Determinants of Capital Structure," -
Iourn a! of International Business Studles, Summer
1988, pp. 195-217.
?Reeb, David M., Chuck C'Y. Kwok, and H. Young Baek,
"systematic Risk of the Multinational Corporation,
Joumal of International Business Srudies, Second euarter 199g,
pp. 263_279.
8Kwok, Chuck C.Y', and David M. Reeb,"Internationalization
and Firm Risk:An Upstream-Downstream Hypoth-
esis," Journal of International Business Studies,Vol.31, Issue
4,2O0O, pp.611-630.
340 PA R-f 4 Financing the Global Firm
Solving a Rid€lle: [s the Weighteel Average
Cost cf C*pital for tu{NEs Realtry FXigher tBaasa
f*r Their Domestie CcunterPafts?
The riddle is that the MNE is supposed to have a lower marginal
cost of capital (MCC) than
a domestic firm because of the MNE's access to a global cost
and availability of capital.
On
the other hand, the empirical studies we mentioned show that
the MNE's weighted average

46. cost of capital (WACq is actually higher than for a comparable
domestic firm because of
agency costs, foreign exchange risk, political risk, asymmetric
information' and other com-
plexities of foreign oPerations.
The answer io tfris riddle lies in the link between the cost of
capital, its availability, and
the opportunity set of projects. As the opportunity set of
projects increases, eventually
the
firrn needs to increase its capital budgef io the point where its
marginal cost of capital is
increasing. The optimal capital budgeiwould stili be at the point
where the rising
marginal
cost of caiital equals the declining rite of return on the
opportunity set of projects' However'
this wouli be ai a higher weighted average cost of capital than
would have occurred
for a
lower level of the optimal capital budget'
To illustrate this linkage, p,xhibif1z3 shows the marginal cost
of capital given
different
optimal capital budgets. AJsume that there are two different
demand schedules

47. based on the
opportunity set of piojects for both the multinational enterprise
(MNE) and domestic
coun-
terpart (DC).
The line MRRDC depicts a modest set of potential projects' It
intersects the line
MCCrn{E at15Y" unO u $rtio million budget level. Ii intersects
the MCCp6 at10"/o and
a $140
milli#'|udget level. At these low budget levels the MCCMNE
has a higher MCC and
F"T?Sg*TlFll-ftre Cost of Capitalfor MNE and Domestic
Counterpart Compared
Marginal Cost of CaPital
andhate ol Return (Percentage)
300 350
Budget (millions ot $)
CHAPTER 12 The GlobalCost andAvailability of Capital
Counterparts?
ls MNEu/asg > or < Domesticitlog6 ?
kwecc = ku
I Eouitv I t Debt I

48. I vrr"t I + ka(1-t) L vatue j
lii'v
Empirical studies indicate MNEs have a lower
debt/capital ratio than domestic counterparls, indicating
MNEs have a higher cost oi capitat.
I
I
And rndicatrons are ihat MNEs have a lower average
cost of debt than domestic counterparts, indicating
MNEs have a |ower cost of capital.
341
probably weighted average cost of capital than its domestic
counterpart (DC), as discovered
in the recent emPirical studies.
The line MRR**, depicts a more ambitious set of projects for
both the MNE and its
domestic counterpart.It ini"rr""ts the line MCCMNE still at
L5o/" and a $350 million budget'
However, it intersects the MCCpg at20% and a budget level of
$300 million' At these higher
budget levels, the MCCNIb{E has a lower MCC and probably
weighted avefage cost of capital
than its domestic counterpart, as predicted earlier in this
chapter. In order to generalize this

49. conclusion, we would need to know under what conditions a
domestic firm would be willing
to undertake the optimal capital budget despite its increasing
the firm's marginal cost of cap-
ital. At some point the MNE might also have an optimal capital
budget at the point where its
MCC is rising.
Empirical studies show that neither mature domestic firms nor
MNrEs are typically willing
to assume the higher agency costs or bankruptcy risk associated
with higher MCCs and capital
budgets. In fact, most mature firms demonstrate some degree of
corporate rvealth maximizing
behivior.They are somewhat risk averse and tend to avoid
returnilg to the market to raise fresh
equity. They prefer to limit their capital budgets to what can be
financed with free cash flows'
Indeed, they have a so-called p..Ling order that determines the
priority of which sources of
funds they tap and in what order.This behavior motivates
shareholders to monitor management
more closely. They tie management's compensation to stock
performance (options)' They may
also require othei types of contractual arrangements that are
collectively part of agency costs'

50. In conclusion, if both MNEs and domestic firms do actually
limit their capital budgets
to what can be financed without increasing their MCC, then the
empirical findings that
tUNgt have higher WACC stands. If the domestic firm has such
good growth opportunities
that it chooses to undertake growth despite an increasing
marginal cost of capital, then the
MNE wouid have a lower WACC. Exhibit 12.8 summarizes
these conclusions'
HigherorLowerCostofGapitalThanTheirDomestic
The cost of equity required by investors is higher for
multinational firms than for domestlc
firms. Possible explanations are higher levelJ of politicat risk,
foreign exchange rsk, and higher
agency costsof doing business in a multinational managerial
environment. However, at
i"iitiu"fy high tevels df the optimal capital budget, the MNE
would have a lower cost of capital