FIN 534 Week 10: Multinational Financial Management Slide 1 Introduction Welcome to Financial Management. In this lesson we will discuss multinational financial management. Next slide Slide 2 Topics The following topics will be covered in this lesson: Multinational, or global, corporations; Multinational versus domestic financial management; Exchange rates; Exchange rates and international trade; The international monetary system and exchange rate policies; Trading in foreign exchange; Interest rate parity; Purchasing power parity; Inflation, interest rates, exchange rates; International money and capital markets; Multinational capital budgeting; International capital structures; and Multinational working capital management. Next slide Slide 3 Multinational, or Global, Corporations When the firm operates in another country it faces issues that it doesn’t face in its domestic country. Any time we talk about the firm operating in a foreign country we refer to it as a multinational, transnational or global corporation and these terms are used interchangeably. Firms choose to locate in a foreign country for a variety of reasons. First, the firm wants to broaden its markets. This usually happens when the domestic market becomes saturated. Second the firm may want to ensure a source of raw materials. Third the firm may need a new form of technology. Fourth it may shift production to a lower – cost country. Fifth, the firm may want to avoid political and regulatory issues in its home country. And sixth, the firm may want to diversify so it can have a cushion against any adverse impact of changing economic conditions in any one country. Next slide Slide 4 Multinational versus Domestic Financial Management The concepts and procedures we’ve studied up to this point apply to domestic as well as multinational operations. There are however, six major factors that distinguish financial management in a purely domestic firm from one that operates globally. First the global firm is affected by exchange rates because cash flows are denominated in different currencies. Second, since each country has its own economic and legal systems it can make it difficult for the firm to deploy resources and make it difficult for executives trained in one country to move to another. Third, language differences make it difficult to communicate. Fourth, different countries have different cultural differences that shape the values and influence the firm’s ability to conduct business. Fifth, sometimes in foreign countries governments negotiate directly with the firm. In this way, the marketplace does not determine the terms of trade on which transactions are determined. And sixth, a foreign country may place restrictions or expropriate assets within its boundaries. This is referred to as political risk and it varies from country to country. Terrorism is another form of political risk faced by the global firm. Next slide Slide 5 Exchan ...

1. FIN 534 Week 10: Multinational Financial Management
Slide 1
Introduction
Welcome to Financial Management. In this lesson we will
discuss multinational financial management.
Next slide
Slide 2
Topics
The following topics will be covered in this lesson:
Multinational, or global, corporations;
Multinational versus domestic financial management;
Exchange rates;
Exchange rates and international trade;
The international monetary system and exchange rate policies;
Trading in foreign exchange;
Interest rate parity;
Purchasing power parity;
Inflation, interest rates, exchange rates;
International money and capital markets;
Multinational capital budgeting;
International capital structures; and
Multinational working capital management.

2. Next slide
Slide 3
Multinational, or Global, Corporations
When the firm operates in another country it faces issues that it
doesn’t face in its domestic country. Any time we talk about
the firm operating in a foreign country we refer to it as a
multinational, transnational or global corporation and these
terms are used interchangeably. Firms choose to locate in a
foreign country for a variety of reasons.
First, the firm wants to broaden its markets. This usually
happens when the domestic market becomes saturated.
Second the firm may want to ensure a source of raw materials.
Third the firm may need a new form of technology.
Fourth it may shift production to a lower – cost country.
Fifth, the firm may want to avoid political and regulatory issues
in its home country.
And sixth, the firm may want to diversify so it can have a
cushion against any adverse impact of changing economic
conditions in any one country.
Next slide
Slide 4
Multinational versus Domestic Financial Management
The concepts and procedures we’ve studied up to this point
apply to domestic as well as multinational operations. There
are however, six major factors that distinguish financial
management in a purely domestic firm from one that operates
globally.
First the global firm is affected by exchange rates because cash
flows are denominated in different currencies.
Second, since each country has its own economic and legal
systems it can make it difficult for the firm to deploy resources
and make it difficult for executives trained in one country to
move to another.
Third, language differences make it difficult to communicate.
Fourth, different countries have different cultural differences
that shape the values and influence the firm’s ability to conduct

3. business.
Fifth, sometimes in foreign countries governments negotiate
directly with the firm. In this way, the marketplace does not
determine the terms of trade on which transactions are
determined.
And sixth, a foreign country may place restrictions or
expropriate assets within its boundaries. This is referred to as
political risk and it varies from country to country. Terrorism is
another form of political risk faced by the global firm.
Next slide
Slide 5
Exchange Rates
The exchange rate specifies the number of units of the foreign
currency that can be purchased for one unit of another currency.
The Wall Street Journal and various online sources quote
change rates. A direct quotation is the number of U.S. dollars
required to purchase one unit of foreign currency. An indirect
quotation is the number of units of a foreign currency that can
be purchased for one U.S. dollar.
As a rule, trading centers use indirect quotations except for the
British pound and the Euro which use direct quotations. The
cross rate is the exchange rate between two currencies neither
of which is the U.S. dollar. All foreign currencies in some way
are tied to the U.S. dollar in a consistent manner. This ensures
that all currencies are related to each other. If this situation did
not exist, an arbitrage situation would arise where currency
traders could profit by buying undervalued currencies and
selling overvalued currencies and the equilibrium would be
restored.
Next slide
Slide 6
Exchange Rates and International Trade
Exchange rate changes make it difficult for firms to estimate the
amount of dollars overseas operations require. The demand for
consumer goods translates into a demand for currency. One

4. factor impacting currency demand is the balance of trade
between two countries and another factor demand is capital
movements.
In the case of the trade balance, U.S. importers must purchase
foreign currency buy foreign goods and foreign importers must
buy U.S. dollars to pay for U.S. goods. If U.S. imports from the
foreign country exceed U.S. exports to the foreign country the
U.S. has a trade deficit with the foreign country and the demand
foreign currency is greater than the demand for dollars.
In the case of capital movements if interest rates in U.S. are
higher than those in a foreign country, foreign banks,
corporations, and other investors buy dollars with foreign
currency and use the dollars to purchase high–yielding U.S.
securities. This results in a higher demand for dollars. If
governments did not intervene in the money markets the relative
prices of currencies would fluctuate in response to supply and
demand just as prices fluctuate for consumer goods.
However, governments do intervene in the money markets
through the central banks. They can artificially shore up its
currency using its gold reserves or foreign currencies to
purchase its own currency in the open market.
Additionally, it can also keep its currency artificially low by
selling its own currency in the open market. This results in an
increase in the currency’s supply which reduces the price.
Next slide
Slide 7
The International Monetary System and Exchange Rate Policies
The International Monetary Fund, under Bretton Woods,
administered the fixed exchange rate system that most of the
world operated under from the end of World War II until
nineteen seventy-one. The U.S. dollar was tied to gold and all
other currencies were tied to the dollar.
However, many countries found it very difficult to maintain a
fixed exchange rate and by the end of nineteen seventy–three
Bretton Woods was abandoned and countries resorted to using
different exchange rate systems. Many countries operated under

5. a system of floating exchange rates in which currency prices
sought their own levels with minimal intervention by the central
bank to smooth out extreme exchange rate fluctuations.
A currency appreciation occurs when a particular currency is
worth more than another. Currency depreciation occurs when a
particular currency is worth less than another. Exchange rate
risk refers to fluctuations in exchange rates between currencies
over time.
Currency fluctuations increase the uncertainty of the firm’s cash
flows because cash flows are generated in many countries and in
many currencies. Changes in exchange rates result in changes in
the dollar-equivalent value of the firm’s consolidated cash
flows. A managed floating rate system is one in which there is a
lot of government intervention to manage the exchange rate by
controlling the currency’s supply and demand.
A pegged exchange rate is a system in which a country’s
currency is pegged to the rate of another currency or a basket of
currencies. The country targets an exchange rate but allow its
currency to vary within a band or specific limits.
A devaluation occurs when government action reduces the target
rate and a revaluation occurs when government action increase
the targeted rate.
Just because a country has a pegged exchange rate it doesn’t
necessarily mean the firm should be prevented from investing in
that country. Under Bretton Woods, many pegged currencies
were considered to be convertible since the country that issued
the currency permitted it to be traded in the currency markets.
Some currencies are not traded on world markets but are
allowed to float in a very narrow band against a basket of
securities. Currencies of this type are called non-convertibles or
soft currencies. These types of currencies cause problems for
foreign firms wanting to make foreign direct investments. Some
countries don’t have a local currency but use the currency of
another country. For example Ecuador uses the U.S. dollar,
some countries use the Euro, and some countries use other
currency baskets as their local currency.

6. Next slide
Slide 8
Trading in Foreign Exchange
The spot exchange rate is the exchange rate that exists two days
following the day of trade. The forward exchange rate is
exchange rate prevailing, for delivery at some agreed–upon
future date usually thirty, ninety, or one hundred eight days
from the date the transaction is negotiated.
The firms trade foreign currency based upon their spot and
forward exchange rates. The foreign currency sells at a forward
discount if you can obtain more of the foreign currency for a
dollar in the forward market vs. the spot market. In contrast, if
the U.S. dollar buys fewer units of a foreign currency in the
forward market than the spot market the foreign currency sells
at a forward premium.
Next slide
Slide 9
Interest Rate Parity
The market determines whether a currency sells at a forward
premium or discount. This concept is referred to as interest rate
parity. It means that investors should expect to earn the same
return on security investments after adjusting for risk. Foreign
investments include two factors, the return on investment and
changes in the exchange rate.
Then, if the foreign currency appreciates relative to the home
currency the overall return on investment will be higher.
Similarly, if the foreign currency depreciates the overall return
will be lower. Interest rate parity explains why a currency may
trade at a forward premium or discount.
When domestic interest rates are higher than foreign interest
rates the currency trades at a forward premium. When domestic
interest rates are lower than foreign interest rates the currency
trades at a discount. Arbitrage forces interest rates and
exchange rates back to parity if these conditions do not hold.
Next slide
Slide 10

7. Purchasing Power Parity
Sometimes referred to as the law of one price, purchasing power
parity, PPP, says that price levels and exchange rate levels
adjust so that identical goods sell for the same price in different
countries. The theory assumes that market forces eliminate
situations in which identical products sell for different prices.
Another assumption underlying PPP is that there are no
transactions or transportation costs and no restrictions on
imports.
Realistically, many times these assumptions are not valid and
this explains why PPP is violated. Additionally, real or
perceived differences in the quality of products can result in
price differences. Despite these drawbacks, companies and
investors use interest rate parity and PPP to anticipate future
conditions.
Next slide
Slide 11
Inflation, Interest Rates, Exchange Rates
The inflation rate in a foreign country versus the home country,
also called the relative inflation rates impact financial decisions
of the firm. They influence production costs at home as well as
abroad and also influence relative interest rates and exchange
rates. These factors impact the firm’s decision for financing of
investments and the profitability of foreign investments.
Currencies of countries where inflation rates have been
relatively higher than the United States depreciate against the
U.S. dollar. Currencies appreciate relative to the U.S. dollar if
their country’s inflation rate is lower relative to the inflation
rate in the U.S. On average, a foreign currency appreciates
against the U.S. dollar at a rate that is about equal to the
amount by which the foreign inflation rate exceeds the U.S.
inflation rate. The relative inflation rates also influence interest
rates because countries with higher inflation rates tend to have
higher interest rates. For countries with lower inflation rates
the reverse is true.

8. Next slide
Slide 12
International Money and Capital Markets
Until the nineteen sixties the U.S. capital market dominated the
world market. Now, U.S. securities are valued at less than one-
quarter of the world’s total value. For this reason it is
important that both managers and investors understand
international markets.
When a U.S. dollar is deposited in a bank not located in the
U.S. it is referred to as a Eurodollar. Most Eurodollar deposits
are for at least five hundred thousand dollars and have
maturities from one day to about one year. Since Eurodollars
are deposited outside the U.S. they are outside the authority of
U.S. monetary authorities and therefore are not subject to U.S.
banking regulations. For this reason Eurodollar deposits can
pay a higher interest rate when compared to equivalent U.S.
investments.
The rate paid on Eurodollars depends on the bank’s lending rate
and the rate of return paid on U.S. money market investments
and is tied to the London Interbank Offered Rate or LIBOR.
The LIBOR rate is similar to the U.S. prime rate because it is
the interest rate charged by the largest and strongest London
Banks on large dollar denominated deposits.
There are two types of significant international bonds, foreign
bonds and Eurobonds. A foreign bond is one that is sold by a
foreign borrower but it is denominated in the currency of the
country in which it is sold. An example of a foreign bond is a
French firm selling bonds denominated in U.S. dollars and sold
in the U.S.
Since the bond issue is denominated in U.S. dollars it is
referred to as a Yankee bond. When a bond is issued in one
country but denominated in the currency of another it is called a
Eurobond. An example of a Eurobond is a U.S. firm selling
dollar denominated bonds in Switzerland. Over half the
Eurobonds in the market are denominated in dollars.
Firms issue new equity in the international market for several

9. reasons. Non-U.S. firms may issue stock in the U.S. market
because it has access to a larger capital market than exists in its
home country. A U.S.-based firm may issue stock in a foreign
market because it has operations in that market. Sometimes
firms issue new equity in multiple markets at the same time.
Today, outstanding stocks of large multinational corporations
listed on multiple international exchanges.
Next slide
Slide 13
Multinational Capital Budgeting
While there are similarities between domestic and foreign
capital budgeting there are some important differences. The
first is risk exposure. Risk exposure can lead to a higher cost of
capital for foreign projects and is a result of exchange risk and
political risk.
Exchange risk affects the cash flow in the firm’s home currency
because foreign currency must be converted to say, U.S. dollars
at the expected future exchange rate. It is important that the
firm analyze the effect of variations in the exchange rate on the
dollar and add an exchange rate premium to its domestic cost of
capital.
Political risk is the possibility that host government actions will
reduce the value of the firm’s investment. Examples of political
risk include expropriation, higher taxes, currency controls, and
restrictions on prices charged.
Cash flow estimation is more difficult for a foreign firm than
for a foreign domestic one. Usually the firm sets up a subsidiary
in each foreign country in which it wants to operate.
The cash flows consist of dividends and royalties paid by the
subsidiaries to the parent company translated into dollars. They
are tax both by the foreign country and the domestic country but
sometimes the domestic country may allow tax credits for
foreign taxes paid. Moreover, foreign governments may restrict
the amount of funds that can be repatriated to the parent
company.
Any cash flows that are blocked by the foreign country cannot

10. be used to pay dividends to its shareholders or use for other
investments. Firms sometimes use transfer pricing to
circumvent repatriation restrictions. To use transfer pricing the
subsidiary may purchase inputs from the parent corporation. If
the price is high enough there may be little profit available for
repatriation.
Project analysis is another area in which capital budgeting
differs between domestic and foreign operations. A domestic
firm may require raw materials or may sell its finished product
in a foreign market.
In the short–run converting from foreign currency to dollars is
not a problem. However, over the long–run it is difficult to
estimate the exchange rate at which the firm will convert
foreign cash flows into dollars because forward rates are not
available for more than one hundred eighty days.
If a project is based in a foreign country most of its cash flows
are denominated in foreign currency. There are two ways in
which the firm can calculate the project’s NPV. One approach
requires that the firm convert the expected future repatriations
to dollars and then calculate the NPV using the firm’s cost of
capital. The second approach requires that the firm take the
projected repatriations denominated in the foreign currency and
discount them at the foreign cost of capital. Then, the results
can be converted to dollars at the spot exchange rate.
Next slide
Slide 14
International Capital Structures
The debt to total assets ratio varies from country to country. It
is difficult to compare capital structures because different
countries use different accounting conventions regarding the
reporting of assets, the treatment of leased assets, pension fund
planning, and capitalizing versus expensing R&D costs.
Empirical evidence suggests that the difference in accounting
practices explains most of the variation in capital structures. It
also suggests that firms in Germany and the United Kingdom
tend to use less leverage than firms in the United States, France,

11. Italy, and Japan. Moreover, firms with a lower times–interest–
earned ratio tend to use more leverage. The ratio is highest in
United Kingdom and Germany and lowest in Canada.
Next slide
Slide 15
Multinational Working Capital Management
Like domestic firms, the multinational has similar cash
management goals. It wants to maximize net float, shift cash as
quickly as possible, and to maximize the risk adjusted after–tax
return on cash balances. Since foreign governments can place
restrictions on transferring funds out of the country, cash
management is more difficult. In the international market credit
management is more complex than it is in the domestic market.
In this case, the importer must finance the transaction from the
time it pays the accounts payable until it collects on its sales.
From the exporter’s point of view, it is more difficult to analyze
the foreign customer’s credit. To resolve these issues the
importer can obtain a letter of credit from its bank which
certifies that the importer will meet the terms of the accounts
payable.
A second option is to issue a banker’s acceptance which is
created when the importer’s bank agrees to accept a postdated
check written by the importer to the exporter whether or not
there are sufficient funds in the importer’s account.
A third option is for the exporter to buy export credit insurance
in which the insurance company guarantees payment even if the
importer defaults.
An area that is more complex is inventory management. One
issue pertains to the physical location of inventories. A
solution is to maintain inventories in a few strategic areas and
ship goods when needed. Inventory policy is also influenced by
exchange rates.
If the foreign currency were expected to rise against the dollar,
a U.S. firm operating in a foreign country would want to
increase inventories of local products and if the foreign
currency were expected to decrease relative to the dollar the

12. U.S. firm would want to decrease inventories of local products.
Another factor the firm must consider is the possibility of
import or export quotas or tariffs. If there is a large threat of
expropriation the firm would want to minimize inventory levels
and only increase them when necessary.
Taxation has two effects on inventory management. Foreign
countries usually impose taxes on assets including inventories
and the tax is imposed as of a specific date. In this case it is
advantageous for the firm to ensure that inventories are low on
the assessment date and should the assessment dates vary store
inventory in different countries at different times during the
year.
Finally, the firm may choose to store inventory at sea. Doing
this avoids the issues of expropriation, or minimizes property
taxes and maximizes flexibility so the firm can ship to areas
where they need is greatest or prices highest.
Next slide
Slide 16
Check Your Understanding
Slide 17
Summary
We have now reached the end of this lesson. Let’s review what
we’ve covered.
First, we learned that when a firm operates in another country it
faces issues that it doesn’t face in its domestic country. Any
time we talk about the firm operating in a foreign country we
refer to it as a multinational, transnational or global corporation
and these terms are used interchangeably.
Next, we compared multinational versus domestic financial
management. Surprisingly, the concepts and procedures that
apply to domestic operations also apply to multinational
operations.
Also, we defined exchange rates as specifying the number of

13. units of the foreign currency that can be purchased for one unit
of another currency.
Then, we discussed exchange rates and international trade.
Exchange rate changes make it difficult for firms to estimate the
amount of dollars overseas operations require. The demand for
consumer goods translates into a demand for currency. One
factor impacting currency demand is the balance of trade
between two countries and another factor demand is capital
movements.
Next, we learned about the international monetary system and
exchange rate policies. Many countries operated under a system
of floating exchange rates in which currency prices sought their
own levels with minimal intervention by the central bank to
smooth out extreme exchange rate fluctuations.
Also, we discussed trading in foreign exchange. Firms trade
foreign currency based upon their spot and forward exchange
rates. The foreign currency sells at a forward discount if you
can obtain more of the foreign currency for a dollar in the
forward market vs. the spot market.
Next, we defined the interest rate parity as the concept where
the market determines whether a currency sells at a forward
premium or discount.
Then, we learned that the law of one price, or purchasing power
parity, says that price levels and exchange rate levels adjust so
that identical goods sell for the same price in different
countries.
Also, we covered inflation, interest rates, and exchange rates.
The inflation rate in a foreign country versus the home country,
also called the relative inflation rates impact financial decisions
of the firm. They influence production costs at home as well as
abroad and also influence relative interest rates and exchange
rates.
Next, we discussed international money and capital markets.

14. There are two types of significant international bonds, foreign
bonds and Eurobonds. A foreign bond is one that is sold by a
foreign borrower but it is denominated in the currency of the
country in which it is sold. When a bond is issued in one
country but denominated in the currency of another it is called a
Eurobond.
Also, we examined multinational capital budgeting. Some
important differences between domestic and foreign capital
budgeting. These include: risk exposure, exchange risk, and
political risk.
Next, we learned that it is difficult to compare international
capital structures because the debt to total assets ratio varies
from country to country.
Finally, we learned about working capital management in the
multinational environment. Like domestic firms, the
multinational has similar cash management goals. It wants to
maximize net float, shift cash as quickly as possible, and to
maximize the risk adjusted after–tax return on cash balances.
This concludes this lesson.
FIN534 Week 10 Scenario Script: International monetary
system and exchange rate policies.
Slide #
Scene/Interaction
Narration
Slide 1
Intro Scene
Create input for student to type their name in.
Slide 2
Scene 2
FIN534_10_2_Don-1: Good day, everyone. This is a big day
for the company; we will find out if we will be expanding out
west or not!

15. Joe is meeting with the Board of Directors about the expansion
project. He is reviewing all of the information that you have
thoroughly analyzed.
FIN534_10_2_Don-2: When you think about it, you have done
several analyses in such a small time window. We really
pushed you and the results have been impeccable! We are
presenting a good case for expansion but the Board is cash
conscious so I am not sure how they are going to vote. I like to
think that the “C” in TFC is for “Cash” and not “Center”.
FIN534_10_2_Linda-1: Don, we have really learned a lot
about TFC over this time as well. One thing for sure is there is
a lot of analysis that goes into a project no matter the size. I
can’t even imagine what it would be like if we decided to
expand internationally?
FIN534_10_2_Don-3: That is interesting that you should
mention international expansion as TFC has that in its long term
planning.
So, as we wait for a decision to be made on the west coast
expansion project, we would like you to look at one more area
of consideration. This area includes the international monetary
system including exchange rates. This is only in the discussion
phase, so don’t worry about completing another full analysis
like we did with the expansion project. This is only for
information gathering. I bet you are happy to hear that!
<laughter>
Slide 3
Scene 3
· Linda in conference room
· Cash Budget on Screen
· Go to next slide

16. FIN534_10_3_Linda-1: Thanks, Don. I remember my
international finance course at Strayer University. We learned
about the factors that influence trade and capital flows and the
economic variables that influence exchange rate movements.
FIN534_10_3_Linda-2: Money is considered a medium of
exchange and every nation has some form of monetary system in
place. We use the dollar as our means of exchange. In many
countries in Europe the Euro is used. And in Japan there is the
Yen. Whereas Hong Kong has the Hong Kong dollar.
It is important for one to know the exchange rates and how each
country’s monetary system works, as that may contribute to
additional risk by a company when dealing internationally.
FIN534_10_3_Linda-3: Let’s get back to the United States.
In the U.S., the Federal Reserve is the monetary authority. Its
prime responsibility is to try to have the economy grow while
keeping inflation in check.
But when it comes to trading between nations with different
currencies, the international monetary system is used in
determining how companies in different nations can exchange
with another.
Let’s look at some exchange rate systems over time.
Slide 4
Scene 4
· Exchange Rates
· Linda speaking
FIN534_10_4_Linda-1: The first system was called the
Fixed Exchange Rate System. With this system, non U.S.
currencies were tied to the U.S. dollar. The U.S. dollar was tied
to gold at thirty five dollars an ounce. During this time, the

17. United States would try to ensure that the price of gold would
stay at thirty five dollars an ounce, hence keeping it fixed,
while other countries used these monetary policies to keep their
exchange rates within reason of the United States. It is also
used to control inflation.
FIN534_10_4_Linda-2: This might sound like a good system
but there were flaws. Mainly the reasons for spikes or drops in
the economy were not being addressed. For example, if the
demand for the Hong Kong dollar was high, steps would be
taken by Hong Kong to put more Hong Kong dollars into the
economy.
FIN534_10_4_Linda-3: With this system, countries would
basically fabricate the supply and demand system instead of
looking at the real reasons behind the rise or fall in currency
prices. As you probably guessed, a system like this one didn’t
last too long.
Slide 5
· Exchange Rate systems
FIN534_10_5_Linda-1: Another system is called the Floating
Exchange Rates; it is also called the fluctuating exchange rate.
With this system, the prices of currency for countries are based
on supply and demand in regard to international trade and
investing. So, the exchange rates float as supply and demand
varies.
FIN534_10_5_Linda-2: With the Floating Exchange Rate
system, domestic currency can appreciate or depreciate against
foreign currency. This fluctuation produces an exchange rate
risk.
FIN534_10_5_Linda-3: Another system is the Managed
Floating Rate system. With this system, there is a lot of
government involvement in controlling a country’s exchange

18. rate by managing the supply and demand for the country.
FIN534_10_5_Linda-4: And a fourth system is a Pegged
Exchange Rate system. Under this system, a country’s currency
exchange rate follows the currency of another country or a
conglomerate of country currencies. However, if the exchange
rate for a country starts to vary too much from what the pegged
country’s established, the country’s government may become
highly involved to ensure the currency exchange rate is back on
track.
Slide 6
Scene 6
· CYU Matching Drag and Drop
Match the description to the correct Exchange Rate System.
Exchange Rate System
Description
Fixed
Is tied to the Gold rate
Floating
International Trade and investing helps set rate
Managed
Has a lot of government intervention
Pegged
Has a target fixed rate with another currency
If they get it right – Great job. There are different types of
Exchange Rates and countries should choose the one that best
helps their economy.
If they get it wrong – Nice try but Fixed Exchange Rates used
gold as a standard, while Floating has more fluctuation. With
Managed Exchanged Rates the particular country’s government
intervenes. And Pegged Exchange Rates tend to follow other
currencies.

19. Slide 7
Scene 7
· Don speaking
· Exchange Rate picture
FIN534_10_7_Don-1: Great job!
Excuse me a second, Joe just texted me,
<looks at phone>
He said he is still in the board meeting and would like us to
continue with our international analysis and focus on the
exchange rate risks. He also is hoping for a decision by the
board soon regarding the expansion proposal.
FIN534_10_7_Linda-1: While I was hoping for a quick
decision, the good news is they are still discussing the
expansion. Let us take a look at Exchange Rate Risk.
As we all know, not every country uses the same currency. Due
to this, there can be fluctuations in prices paid or received
through exports and imports. Companies need to consider this
when dealing with other currencies. What they paid for an item
the first time it may not be the same the second time if the
exchange rate differs.
Let’s look at an example.
Slide 8
Scene 8 – Exchange Rate Example
· Equation:
· 1 US Dollar/.7414 Euros = X U.S. Dollars/10,000 Euros

20. · Next slide
FIN534_10_8_Linda-1: Let’s assume you are dealing with a
company that has the Euro as its currency. Note the Euro is the
basic unit of currency among participating European Union
countries. The rate today is that one U.S. Dollar can buy point
seven-four-one-four Euros. So, if TFC was going to buy
something that cost ten thousand Euros, it would cost TFC, in
U.S. dollars, thirteen thousand four hundred eighty seven
dollars. That is because each U.S. Dollar can only be
exchanged for point seven-four-one-four Euros.
FIN534_10_8_Linda-2: Looking at it mathematically, we can
set up the rate of the two currencies. Look at the formula on the
board and notice that we are looking for U.S. Dollars. We can
do the same if we were exchanging for Euros instead of U.S.
dollars.
Slide 9
Scene 9 –
· Linda
· Exchange Rate Risk
FIN534_10_9_Linda-1: With the example you can see what is
needed under each country’s currency. But where is the risk?
That comes from the currency rates. The rate from our example
was
one U.S. Dollar can buy point seven-four-one-four Euros. What
if the exchange rate was one U.S. Dollar can buy point six-five-
two-four Euros? Assuming the same ten thousand Euros, it
would cost TFC, in U.S. dollars, fifteen thousand three hundred
twenty eight. That is because each U.S. Dollar can only be
exchanged for point six-five-two-four Euros. That is where the
risk is. If we waited for a better rate with the international
country and it never happened, as in our case it got worse, the
money paid out would be greater. That is why timing is
important when dealing with foreign currencies.

21. FIN534_10_9_Linda-2: Let us go even further. What if the
rate was one U.S. Dollar can buy point eight six seven three
Euros? Assuming the same ten thousand Euros, it would cost
TFC, in U.S. dollars, eleven thousand five hundred thirty. That
is because each U.S. Dollar can be exchanged for a better rate
of point eight six seven three Euros.
FIN534_10_9_Linda-3: With the above in mind, can you look
at a few more exchange rates while I check on the progress of
the board meeting?
Slide 10
Scene 10
1. CYU
2. Linda would like you to calculate the exchange rates as
follows:
TFC is considering doing business with an international
company that uses the Japanese Yen as its currency. Please
calculate the US Dollar or Japanese Yen as indicated below:
The exchange rate is 1 US Dollar = 98.7641 Yen. Round each
to whole number (no decimals).
1) How much would it be in U.S. dollars to purchase something
that costs 1500 Yen?
Answer: $15
If get wrong, remember the rate:
· 1 US Dollar/98.7641Yen = X U.S. Dollars/1,500 Yen
2) How much would it be in U.S. dollars to purchase something
that costs 25,000 Yen?
Answer: $253
If get wrong, nice try but remember:
· 1 US Dollar/98.7641Yen = X U.S. Dollars/25,000 Yen
3) How much would it be in Japanese Yen to purchase

22. something that costs 500 US? Dollars?
Answer: 49,382 Yen
If get wrong, nice try but remember:
· 1 US Dollar/98.7641Yen = 500 U.S. Dollars/X Yen
3) How much would it be in Japanese Yen to purchase
something that costs 20,000 US? Dollars?
Answer: 1,975,282 Yen
If get wrong, nice try but remember:
· 1 US Dollar/98.7641Yen = 20,000 U.S. Dollars/X Yen
Next screen
Slide 11
Scene 11
· Review
·
· Next Slide
FIN534_10_11_Linda-1: Great work. When companies are
looking at doing business internationally exchange rate risk is
one area that needs to be considered. Your analysis will
provide a strong basis as TFC explores this area further.
We also learned that international expansion comes with risk
and timing can save or cost a company a lot of money. We also
learned that there are different types of exchange rate systems
and companies need to understand what each country is
following when doing business.
<the phone rings>
FIN534_10_11_Linda-2: Linda speaking. <pauses 1 second>
Hi! <pauses for 2 more seconds> Okay, Don. Thanks. We will

23. stay right here and wait for you to join us with Joe. See you in a
little bit.
FIN534_10_11_Linda-3: That was Don on the phone. He
said the Board reached a decision and he wanted to break the
news to us in person. I wonder what they decided?
Slide 12
Scene 12
· Don , Joe, Linda in conference room
· Strayer banner
Have students name appear using the input text function from
beginning of scenario.
FIN534_10_12_Don-1: Thanks for meeting with Joe and
myself on short notice. As you know, Joe has been meeting
with the board and presenting them all of your analyses
regarding the expansion. It is great that we have such a
dedicated board. They really have taken an interest in this
expansion project as the scope is unprecedented for TFC’s
standards.
<Joe interrupts>
FIN534_10_12_Joe-1: I am sorry, Don, but I can’t wait to tell
everyone the news. The Board APPROVED the expansion
project!!! They were very pleased with all of your hard work
and said it was due to your detailed analyses that they decided
to approve the project. Congratulations and great job everyone!
I am so proud of the work that you all did on the project. It was
a total team effort.
FIN534_10_12_Joe-2: There is even more good news!
The Board has decided to offer Linda a position as the Director
of Overall Operations which is a promotion to Vice-President in

24. TFC’s structure.
Our Board also wants us to commend Strayer University for
providing us with a top MBA student. And in doing so, the
board doesn’t want to lose you. At this time, TFC would like to
extend you an offer to join our management team as the
Manager of the “New” West Coast Operations, where you will
be reporting to Linda. With Linda’s new role, she will need
someone with your expertise to manage this expansion venture
and help make this project successful.
We sure hope you will accept!
FIN534_10_12_Joe-3: Congratulations on a job well done
FIN534_10_12_Don-2: Great work. You were the deciding
factor on moving forward with the project.
Slide 13
Scene 13
· Linda Summary slide
· Next Slide
FIN534_10_13_Linda-1: You did it! Great job. You did so
much analyzing, calculating, and decision making in such a
short amount of time. And in each instance your work was top
notch. During our time together, you analyzed financial
statements, performed ratio analysis and time value of money
situations, valued bonds, stock prices, and the costs of capital at
TFC. You also looked at capital budgeting, cash flow, financial
planning and agency conflicts. Furthermore, you analyzed

25. TFC’s dividend policy and exchange rate risks.
I would say that is a complete agenda for anyone.
FIN534_10_13_Linda-2: Again, congratulations on
performing at the highest level and being the main reason we
are moving forward with this expansion project. Without you,
this expansion probably would not have happened. To keep the
TFC tradition going, I think a workout is in order to celebrate
your accomplishments.
I’ll see you at the gym in a few minutes! (ha ha)
Slide 14
Scene 14
· Closing slide
Closing slide