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Introduction to Multinational Finance Chapter Exploring Goals, Challenges and Opportunities
- 1. Butler / Multinational Finance 6e Chapter 1 An Introduction to Multinational Finance 1-1 Multinational Finance by Kirt C. Butler Capital markets & investments Multinational corporate finance Parity conditions Financial risk management
- 2. Butler / Multinational Finance 6e Chapter 1 An Introduction to Multinational Finance 1-2 Everything should be made as simple as possible, but not simpler. Albert Einstein Multinational Finance by Kirt C. Butler
- 3. Butler / Multinational Finance 6e Chapter 1 An Introduction to Multinational Finance 1-3 Part I The International Financial Environment Chapter 1 An Introduction to Multinational Finance Chapter 2 World Trade and the International Monetary System Chapter 3 Foreign Exchange and Eurocurrency Markets Chapter 4 The International Parity Conditions and Their Consequences
- 4. Butler / Multinational Finance 6e Chapter 1 An Introduction to Multinational Finance 1-4 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 Chapter 1 An Introduction to Multinational Finance
- 5. Butler / Multinational Finance 6e Chapter 1 An Introduction to Multinational Finance 1-5 A starting point… Multinational financial management is financial management conducted in more than one cultural, social, economic, or political environment. We’ll develop a framework for evaluating the opportunities, costs, and risks of operating in the world’s markets for goods, services, and financial assets and liabilities. 1.1 The Goals of the MNC
- 6. Butler / Multinational Finance 6e Chapter 1 An Introduction to Multinational Finance 1-6 Supervisory board Management Assets Debt Equity Share- holders Corporate governance 1.1 The Goals of the MNC
- 7. Butler / Multinational Finance 6e Chapter 1 An Introduction to Multinational Finance 1-7 VREVENUES = VEXPENSES + VGOVT + VOTHER + VDEBT + VEQUITY EXPENSES GOVT OTHER DEBT EQUITY REVENUES Claims on corporate revenues 1.1 The Goals of the MNC
- 8. Butler / Multinational Finance 6e Chapter 1 An Introduction to Multinational Finance 1-8 The gentle reader will never, never know what a consummate ass he can become, until he goes abroad. Mark Twain 1.2 The Challenges of Multinational Operations
- 9. Butler / Multinational Finance 6e Chapter 1 An Introduction to Multinational Finance 1-9 The MNC’s 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 1.2 The Challenges of Multinational Operations
- 10. Butler / Multinational Finance 6e Chapter 1 An Introduction to Multinational Finance 1-10 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. 1.2 The Challenges of Multinational Operations
- 11. Butler / Multinational Finance 6e Chapter 1 An Introduction to Multinational Finance 1-11 The MNC’s opportunities Value = Σt [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 1.3 The Opportunities of Multinational Operations
- 12. Butler / Multinational Finance 6e Chapter 1 An Introduction to Multinational Finance 1-12 Return 0% 5% 10% 15% 20% 25% 0 100 200 300 400 500 Capital budget ($ millions) Domestic firm’s cost of capital Domestic firm’s investment opportunity set Domestic firm The optimal capital budget 1.3 The Opportunities of Multinational Operations
- 13. Butler / Multinational Finance 6e Chapter 1 An Introduction to Multinational Finance 1-13 Return 0% 5% 10% 15% 20% 25% 0 100 200 300 400 500 Capital budget ($ millions) MNC’s investment opportunity set Domestic firm’s cost of capital MNC’s cost of capital Domestic firm’s investment opportunity set Domestic firm Multinational corporation (MNC) The value of multinationality 1.3 The Opportunities of Multinational Operations
- 14. Butler / Multinational Finance 6e Chapter 1 An Introduction to Multinational Finance 1-14 Perfect financial market assumptions Frictionless markets - No government intervention or taxes - No transactions, agency, or bankruptcy costs Equal access to market prices Rational investors Equal access to costless information Financial opportunities often involve a violation of one of these assumptions. 1.3 The Opportunities of Multinational Operations
- 15. Butler / Multinational Finance 6e Chapter 1 An Introduction to Multinational Finance 1-15 Characteristics of financial markets Types of market efficiency - Operational efficiency refers to the influence of transactions costs. - Informational efficiency refers to whether prices reflect information. - Allocational efficiency refers to whether capital moves to productive uses. Each of these is promoted by market liquidity (i.e., the ease with which you can capture an asset’s value). 1.3 The Opportunities of Multinational Operations
- 16. Butler / Multinational Finance 6e Chapter 1 An Introduction to Multinational Finance 1-16 Vivé la difference Cross-border differences can affect all areas of business, particularly through differences in - Language & culture - Human resource management - Accounting - Marketing - Distribution - Logistics - Financial markets - Corporate governance - Other business conventions (legal, accounting, taxation, regulation, etc.) 1.4 Financial Management of the MNC
- 17. Butler / Multinational Finance 6e Chapter 1 An Introduction to Multinational Finance 1-17 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 1.4 Financial Management of the MNC
- 18. Butler / Multinational Finance 6e Chapter 1 An Introduction to Multinational Finance 1-18 The notes I handle no better than many pianists, but the pauses between the notes— ah, that is where the art resides. Arthur Schnabel 1.4 Financial Management of the MNC
Editor's Notes
- Chapter 1 serves as a starting point. Review basic financial terminology and concepts such as efficient markets, perfect markets, and liquidity. Review the goals of the multinational corporation in the context of a nation’s corporate governance mechanism. Introduce the key opportunities and challenges of international business.
- To add value, multinationality must either increase E[CFt] in the numerator or decrease the discount rate it in the denominator. The objective of investment policy is to identify and invest in the set of assets that maximizes firm value. Find the investments yielding the greatest value based on the level and riskiness of operating cash flows (ala capital budgeting in Chapter 13). Cash flows can be increased by increasing revenues or reducing costs (e.g., operating costs, financial costs, taxes, costs of financial distress). The MNC has more flexibility than domestic firms in the timing and location of its investments (ala real options in Chapter 16). The objective of financial policy is to maximize firm value by minimizing the cost of capital given the firm’s investments. The amount and type of debt (including the currency of denomination) influences the cost of capital. Hedging and risk management activities also influence capital costs. MNCs have more flexibility than domestic firms in the timing and location (e.g., currency of denomination) of financing choices.