CONTENTS PREFACE m PART I ENVIRONMENT OF INTERNATIONAL. FINANCIAL. MANAGEMENT 1 INTRODUCTION Learning Objectives 2 Key Terms 2 1.1 The Rise of the Multinational Corporation 4 Evolution of the Multinational Corporation 9 Search for Row Haterías 10 Market Seeking 11 Cost Minimization 13 Knowledge Seeking 17 Keeping Domestic Customers 18 Exploiting Financial Market Imperfections 18 The Process of Overseas Expansion by Multinationals 19 Exporting 20 Overseas Production 20 licensing 21 Trade-offs Between Alternative Modes of Overseas Expansion 21 A Behavioral Definition of the Multinational Corporation 22 The Global Manager 25 1.2 The Internationalization of Business and Finance 26 Political and Labor Union Concerns About Global Competition 27 Consequences of Global Competition 34 1.3 Multinational Financial Management: Theory and Practice 42 Criticisms of the Multinational Corporation 43 Functions of Financial Management 44 Theme of This Book 44 Relationship to Domestic Financial Management 45 Arbitrage 46 Market Effidency 46 Capital Asset Príáng 47 The Importance of Total Risk 47 The Global Financial Marketplace 48 The Role of the Financial Executive in an Efficient Market 48 1.4 Outline of the Book 49 Environment of International Financial Management 49 Foreign Exchange and Derivatives Markets 49 Foreign Exchange Risk Management 50 Financing die Multinational Corporation 50
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CONTENTS
PREFACE m
PART I ENVIRONMENT OF INTERNATIONAL.FINANCIAL. MANAGEMENT
1 INTRODUCTION
Learning Objectives 2Key Terms 2
1.1 The Rise of the MultinationalCorporation 4
Evolution of the MultinationalCorporation 9Search for Row Haterías 10Market Seeking 11Cost Minimization 13Knowledge Seeking 17Keeping Domestic Customers 18Exploiting Financial Market
Imperfections 18
The Process of Overseas Expansionby Multinationals 19Exporting 20Overseas Production 20licensing 21Trade-offs Between Alternative Modes
of Overseas Expansion 21
A Behavioral Definition of theMultinational Corporation 22
The Global Manager 251.2 The Internationalization of Business
and Finance 26
Political and Labor Union ConcernsAbout Global Competition 27
Consequences of Global Competition 341.3 Multinational Financial Management: Theory
and Practice 42Criticisms of the Multinational
Corporation 43Functions of Financial Management 44Theme of This Book 44Relationship to Domestic Financial
Management 45Arbitrage 46Market Effidency 46
Capital Asset Príáng 47
The Importance of Total Risk 47The Global Financial Marketplace 48The Role of the Financial Executive in an
Efficient Market 481.4 Outline of the Book 49
Environment of International FinancialManagement 49
Foreign Exchange and Derivatives
Markets 49Foreign Exchange Risk Management 50Financing die Multinational
Corporation 50
CONTENTS XI
Foreign Investment Analysis 50Multinational Working Capital
Management 50Questions 51Web Resources 51Web Exercises 52Appendix 1A: The Origins andConsequences of International Trade 53
The Gains from Trade 53Specialized Factors of Production 54Monetary Prices and Exchange
Rates 55Tariffs 55
Questions 56
2 UNDERSTANDING EXCHANGERATES 5 7
Learning Objectives 57Key Terms 57
2.1 Setting die Equilibrium SpotExchange Rate 58
Demand for a Currency 58Supply of a Currency 59Factors That Affect the Equilibrium
3 DEFINING AND ANALYZING THEINTERNATIONAL MONETARY SYSTEM 9 9
Learning Objectives 99Key Terms 99
3.1 Alternative Exchange Rate Systems 100Free Float 101Managed Float 101Target-Zone Arrangement 103Fixed-Rate System 103The Current System of Exchange Rate
Determination 1053.2 A Brief History of the International Monetary
System 105The Classical Gold Standard 108
XII CONTENTS
How the Classical Gold Standard Workedin Practice: 1821-1914 110
The Gold Exchange Standard and ItsAftermadi: 1925-1944 111Competitive Devaluations 111Bretton Woods Conference and the Postwar
Monetary System 111Role of the IMF 111Role of the World Bank 112Role of the Bank for International
Settlements 112
The Bretton Woods System:1946-1971 113
The Post-Bretton Woods System:1971 to the Present 114
Assessment of the Floating-RateSystem 119Increasing Currency Volatility 120Requirements for Currency Stability 120
3.3 The European Monetary System andMonetary Union 121
The Exchange Rate Mechanism 121Lessons from the European Monetary
System 121The Currency Crisis of September
1992 122The Catalyst 122
The High Cost of Intervention 122
Abandonment of the Exchange RateMechanism in August 1993 122The Catalyst 123Governments Surrender to the Market 123
A Postmortem an the EMS 124
European Monetary Union 124Maastricht Convergence Criteria 125Launch of the Euro 125EMU and the European Welfare State 125Consequences of EMU 127
Performance of the Euro 129
Optimum Currency Area 1323;4 Emerging Market Currency Crises 135
Transmission Mechanisms 135Trade UiAs 135Financial System 135
Debt Policy 136
Origins of Emerging MarketCrises 136Moral Hazard 136
Key Indicators of Country Risk andEconomic Health 248Market-Oriented Policies Work 251Market-Onented Reform in latin
America 252Obstacles to Economic Reform 254
6.3 Country Risk Analysis in InternationalBanking 256
Country Risk and the Terms ofTrade 256
The Governments Cost/BenefitCalculus 257
Lessons from the International DebtCrisis 258Onset of the Crisis 258Reform Takes Hold 258Debt Relief 258The Crisis Ends 259Lessons from Successful Economic
Relationship Between Domestic andEurocurrency Money Markets 492Interest Differentials 492
XVIII CONTENTS
Eurocurrency Spreads 492Euromarket Trends 493
13.2 Eurobonds 494 :-Swaps 494 ;links Between the Domestic and
Eurobond Markets 494Placement 495Currency Denomination 496Interest Rates on Fixed-Rate Eurobonds 496Interest Rates on Floating-Rate Eurobonds 497Eurobond Retirement 498Ratings 498
Rationale for Existence of EurobondMarket 498
Eurobonds versus EurocurrencyLoans 501
13.3 Note Issuance Facilities and Euronotes 502Note Issuance Facilities versus
Eurobonds 504
Euro-Medium-Term Notes 505Reasons for Success 505Costs of a Euro-MTN Program 505Characteristics 505Risks 506
13.4 Euro-Commercial Paper 50613.5 The Asiacurrency Market 50813.6 Summary and Conclusions 509
Questions 509Problems 509
> Web Resources 510Web Exercises 510Bibliography 510
1 4 FOREIGN INVESTMENTS:
THE COST OF CAPITAL 511
Learning Objectives 511Key Terms 511
14.1 The Cost ôf Equity Capital 51214.2 The Weighted Average Cost of Capital
for Foreign Projects 513
14.3 Discount Rates for Foreign Investments 515Evidence from the Stock Market 516Key Issues in Estimating Foreign Project
Discount Rates 517Proxy Companies 518
Local Companies 518Proxy Industry 519Adjusted Ú.S. industry Beta 519
The Relevant Base Portfolio 520The Impact of Globalization on the Cost
of Capital 521• Empirica Evidence ' 523
A Recommendation. 524.
The Relevant Market Risk Premium 524Recommendations 525
14.4 The Cost of Debt Capital 526Annual Exchange Rate Change 527Using Sovereign Risk Spreads 528
14.5 Establishing a Worldwide CapitalStructure 528
Foreign Subsidiary Capital Structure 529Political Risk Management 532Currency Risk Management 532Leverage and Foreign Tax Credits 533Leasing and Taxes 533Cost-Minimizing Approach to Global Capital
Structure 534
Joint Ventures 53414.6 Valuing Low-Cost Financing
Opportunities 535Taxes 537
Zero-Coupon Bonds 537Debt versus Equity Financing 538
1 6 FOREIGN DIRECT INVESTMENTAND CORPORATE STRATEGY
Learning Objectives 578Key Terms 578
16.1 Theory of the MultinationalCorporation 579
578 1 T MULTINATIONAL CORPORATIONS
AND CAPITAL BUDGETING 599
Learning Objectives 599Key Terms 599
17.1 Basics of Capital Budgeting 600
X X CONTENTS
Net Present Value 600Incremental Cash Flows 601
Cannibahzation 601Saks Creation 602Opportunity Cost 602Transfer Pricing 602Fees and Royalties 603Getting the Base Case Right 603Accounting for Intangible Benefits 604
Alternative Capital-BudgetingFrameworks 605An Adjusted Present Value Approach 605
interest Subsidies 613Sales and Revenue Forecasts 614Production Cost Estimates 614Projected Net Income 616Additions to Worhing Capital 616Terminal Value 616Estimated Project Present Value 617
Estimation of Parent Cash Flows 617Loan Payments 617Remittances to IDC-U.S. 618Earnings on Exports to 1DC-U.K. 618Estimated Present Value of Project
to ¡DC-U.S. 618Lost Sales 620
17 A Political Risk Analysis 621Expropriation 621Blocked Funds 622