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- Herausgeber: John Wiley & Sons
- Kategorie: Fachliteratur
- Serie: Wiley Finance Editions
- Sprache: Englisch
Deep coverage and rigorous examination of international corporate finance
Multinational Finance offers an advanced exploration of international corporate finance concepts and operations. Despite its status as one of the most rigorous texts on the topic, this book remains accessible and readable without sacrificing depth of coverage. Sidebars, key terms, essays, conceptual questions, and problems with solutions help aid in the learning process, while suggested readings and PowerPoint handouts reinforce the material and offer avenues for further exploration. This new sixth edition includes Excel templates that allow students to use real-world tools in a learning environment, and the modular structure facilitates course customization to individual objectives, interests, and preparatory level. The emphasis is on the basics of financial management, but coverage includes unique chapters on treasury management, asset pricing, hedging, options, and portfolio management in addition to traditional finance topics.
International finance is a diverse field with myriad specialties and a vast array of possible interests. This book allows students to view the field through the lens of a financial manager with investment or financial options in more than one country to give them a practical feel for real-world application.
- Understand the nature and operations of international corporate finance
- Evaluate opportunities, costs, and risks of multinational operations
- See beyond the numbers and terminology to the general principles at work
- Learn the markets, currencies, taxation, capital structure, governance, and more
Comprehensive, adaptable, and rigorously focused, this book gives students a solid foundation in international corporate finance, as well as a sound understanding of the tools and mechanics of the field. Designed for MBA and advanced undergraduate courses, Multinational Finance provides the deep coverage so essential to a solid education in finance.
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Veröffentlichungsjahr: 2016
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Table of Contents
Series Page
Title Page
Copyright
Preface
Key Features
Learning Aids for Students
Supplements for Instructors
Acknowledgments
About the Author
Part One: The International Financial Environment
Chapter 1: An Introduction to Multinational Finance
1.1 The Goals of the Multinational Corporation
1.2 The Challenges of Multinational Operations
1.3 The Opportunities of Multinational Operations
1.4 Financial Management of the Multinational Corporation
1.5 Summary
Key Terms
Conceptual Questions
Chapter 2: World Trade and the International Monetary System
2.1 Integration of the World's Markets
2.2 Balance-of-Payments Statistics
2.3 Exchange Rate Systems
2.4 A Brief History of the International Monetary System
2.5 Summary
Key Terms
Conceptual Questions
Problems
Chapter 3: Foreign Exchange and Eurocurrency Markets
3.1 Characteristics of Financial Markets
3.2 The Eurocurrency Market
3.3 The Foreign Exchange Market
3.4 Foreign Exchange Rates and Quotations
3.5 Hedging with Currency Forwards
3.6 The Empirical Behavior of Exchange Rates
3.7 Summary
Key Terms
Conceptual Questions
Problems
Chapter 4: The International Parity Conditions and Their Consequences
4.1 The Law of One Price
4.2 Exchange Rate Equilibrium
4.3 Covered Interest Arbitrage and Interest Rate Parity
4.4 Less Reliable International Parity Conditions
4.5 The Real Exchange Rate
4.6 Exchange Rate Forecasting
4.7 Summary
Key Terms
Conceptual Questions
Problems
Further Reading
Appendix 4A: Continuous Compounding
Continuously Compounded Rates of Return
International Parity Conditions in Continuously Compounded Returns
Real Exchange Rates in Continuously Compounded Returns
Summary
Problems
Part Two: Derivative Securities for Financial Risk Management
Chapter 5: Currency Futures and Futures Markets
5.1 The Evolution of Futures Markets
5.2 Futures Contracts
5.3 Forward versus Futures Market Hedges
5.4 Hedging with Currency Futures
5.5 Summary
Key Terms
Conceptual Questions
Problems
Chapter 6: Currency Options and Options Markets
6.1 What Is an Option?
6.2 Option Payoff Profiles
6.3 Currency Option Values Prior to Expiration
6.4 Hedging with Currency Options
6.5 Exchange Rate Volatility Revisited
6.6 Summary
Key Terms
Conceptual Questions
Problems
Further Reading
Appendix 6A: Currency Option Valuation
The Black-Scholes option pricing model
A currency option pricing model
Key Terms
Problems
Further Reading
Chapter 7: Currency Swaps and Swaps Markets
7.1 The Growth of the Swaps Market
7.2 Swaps as Portfolios of Forward Contracts
7.3 Currency Swaps
7.4 Interest Rate Swaps
7.5 Other Types of Swaps
7.6 Hedging the Swap Bank's Exposure to Financial Price Risk
7.7 Summary
Key Terms
Conceptual Questions
Problems
Advanced
Part Three: Managing the Risks of Multinational Operations
Chapter 8: Multinational Treasury Management
8.1 Determining Financial Goals and Strategies
8.2 Managing International Trade
8.3 Payment Methods and Financing for International Trade
8.4 Managing Cash Flows
8.5 Managing Exposures to Currency Risk
8.6 Summary
Key Terms
Conceptual Questions
Problems
Further Reading
Appendix 8A: The Rationale for Hedging Currency Risk
Key Terms
Conceptual Questions
Problems
Further Reading
Chapter 9: Managing Transaction Exposure to Currency Risk
9.1 Transaction Exposure to Currency Risk
9.2 Managing Transaction Exposures Internally
9.3 Managing Transaction Exposures in the Financial Markets
9.4 Treasury Management in Practice
9.5 Summary
Key Terms
Conceptual Questions
Problems
Further Reading
Chapter 10: Managing Operating Exposure to Currency Risk
10.1 Operating Exposures to Currency Risk
10.2 The Exposure of Shareholders' Equity
10.3 Managing Operating Exposures in the Financial Markets
10.4 Managing Operating Exposures Through Operations
10.5 Pricing Strategy and the Competitive Environment
10.6 Summary
Key Terms
Conceptual Questions
Problems
Further Reading
Chapter 11: Managing Translation Exposure and Accounting for Financial Transactions
11.1 Financial Accounting and Reporting Standards
11.2 The Current Rate Method of IAS 21 and ASC 830–30
11.3 Corporate Hedging of Translation Exposure
11.4 Accounting for Financial Market Instruments
11.5 Accounting, Disclosure, and Corporate Hedging Activities
11.6 Summary
Key Terms
Conceptual Questions
Problems
Further Reading
Part Four: Valuation and the Structure of Multinational Operations
Chapter 12: Foreign Market Entry and Country Risk Management
12.1 Strategic Entry into International Markets
12.2 Country Risk Assessment
12.3 Strategies for Managing Country Risk
12.4 Protecting the Multinational's Competitive Advantages
12.5 Summary
Key Terms
Conceptual Questions
Problem
Further Reading
Chapter 13: Multinational Capital Budgeting
13.1 The Algebra of Multinational Capital Budgeting
13.2 An Example: Wendy's Restaurant in Neverland
13.3 International Parity Disequilibria
13.4 Special Circumstances in Cross-Border Investments
13.5 Summary
Key Terms
Conceptual Questions
Problems
Further Reading
Chapter 14: Multinational Capital Structure and Cost of Capital
14.1 Capital Structure and the Cost of Capital
14.2 Valuation of a Foreign Project with the WACC
14.3 The Cost of Capital on Multinational Operations
14.4 Sources of Funds for Multinational Operations
14.5 The International Evidence of Capital Structure
14.6 Summary
Key Terms
Conceptual Questions
Problems
Further Reading
Chapter 15: Taxes and Multinational Corporate Strategy
15.1 The Objectives of National Tax Policy
15.2 Types of Taxation
15.3 Taxes and Organization Form
15.4 U.S. Taxation of Foreign-Source Income
15.5 Transfer Pricing and Tax Planning
15.6 Taxes and the Location of Foreign Assets and Liabilities
15.7 Summary
Key Terms
Conceptual Questions
Problems
Further Reading
Chapter 16: Real Options and Cross-Border Investment Strategy
16.1 Real Options and the Theory and Practice of Investment
16.2 Market Entry as a Simple Real Option
16.3 Uncertainty and the Value of the Option to Invest
16.4 Market Entry as a Compound Real Option
16.5 The Real Option Approach as Complement to NPV
16.6 Summary
Key Terms
Conceptual Questions
Problems
Further Reading
Chapter 17: Corporate Governance and the International Market for Corporate Control
17.1 Corporate Governance
17.2 The International Market for Corporate Control
17.3 The International Evidence on Mergers and Acquisitions
17.4 Summary
Key Terms
Conceptual Questions
Problems
Further Reading
Part Five: International Portfolio Investment and Asset Pricing
Chapter 18: International Capital Markets
18.1 Domestic and International Capital Markets
18.2 International Investment Vehicles
18.3 Cross-Border Financial Statement Analysis
18.4 Summary
Key Terms
Conceptual Questions
Problems
Further Reading
Chapter 19: International Portfolio Diversification
19.1 The Algebra of Portfolio Diversification
19.2 Returns on Foreign Investments
19.3 The Benefits of International Portfolio Diversification
19.4 Home Bias
19.5 Summary
Key Terms
Conceptual Questions
Problems
Further Reading
Chapter 20: International Asset Pricing
20.1 The International Capital Asset Pricing Model (IAPM)
20.2 Factor Models of Expected and Required Return
20.3 Contemporary Asset Pricing Models
20.4 Summary
Key Terms
Conceptual Questions
Problems
Further Reading
Appendix: Useful Rules and Formulas
Conventions Used in Multinational Finance
Symbols
Rules and Formulas
Glossary
Index
End User License Agreement
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Guide
Cover
Table of Contents
Begin Reading
List of Exhibit
Chapter 1: An Introduction to Multinational Finance
Exhibit 1.1 Corporate Governance
Exhibit 1.2 Corporate Stakeholders and Their Claims on the Revenues of the Firm
Exhibit 1.3 The Perfect Market Assumptions
Exhibit 1.4 The Potential Benefits of Multinationality
Chapter 2: World Trade and the International Monetary System
Exhibit 2.1 Worldwide Exports of Goods and Services as a percentage of GDP
Exhibit 2.2 Balance of Payments Statistics (billions of U.S. dollars)
Exhibit 2.3 2014 Merchandise Trade (ranked by 2014 GDP)
Exhibit 2.4 2014 Exchange Rate Regimes
Exhibit 2.5 History of the International Monetary System
Exhibit 2.6 The European Union and the Eurozone
Exhibit 2.7 Troubles in Latin America
Exhibit 2.8 The 1997 Asian Contagion
Exhibit 2.9 Russia's 1998 Currency Crisis
Chapter 3: Foreign Exchange and Eurocurrency Markets
Exhibit 3.1 Linkages between Domestic Credit and Eurocurrency Markets
Exhibit 3.2 Credit Spreads in Domestic and Eurocurrency Interest Rate Markets
Exhibit 3.3 Global Foreign Exchange Turnover
Exhibit 3.4 Foreign Exchange Turnover by Currency
Exhibit 3.5 Major Foreign Exchange Centers (average daily volume in $ billions during April)
Exhibit 3.6 Buying Low and Selling High
Exhibit 3.7 Yen-per-Dollar Spot Rates and Volatilities
Chapter 4: The International Parity Conditions and Their Consequences
Exhibit 4.1 The No-Arbitrage Condition in the Gold Market, with Transaction Costs
Exhibit 4.2 Arbitrage Profit in the Foreign Exchange Market, with Transactions Costs
Exhibit 4.3 Currency Cross Rates
Exhibit 4.4 Covered Interest Arbitrage and Interest Rate Parity
Exhibit 4.5 Relative Purchasing Power Parity: Japanese Yen versus the U.S. Dollar
Exhibit 4.6 Relative Purchasing Power Parity in the Long Run
Exhibit 4.7 Forward Parity: Japanese Yen versus the U.S. Dollar
Exhibit 4.8 Monthly Inflation and Eurocurrency Interest Rates in Dollars and Yen
Exhibit 4.9 The International Parity Conditions
Exhibit 4.10 Nominal versus Real Exchange Rate Changes
Exhibit 4.11 BIS Effective Exchange Rates
Chapter 5: Currency Futures and Futures Markets
Exhibit 5.1 Top 20 Derivatives Exchanges by Contract Volume
Exhibit 5.2 Exchange-Traded Currency Futures Outstanding at Year-End (in $ billions)
Exhibit 5.3 Currency Forwards versus Exchange-Traded Currency Futures Contracts
Exhibit 5.4 Currency Futures and Spot Price Convergence
Exhibit 5.5 A Classification of Futures Hedges
Exhibit 5.6 An Example of a Delta Hedge
Exhibit 5.7 OLS Regression and the Hedge Ratio
Chapter 6: Currency Options and Options Markets
Exhibit 6.1 Exchange-Traded Currency Options Outstanding at Year-End
Exhibit 6.2 Currency Option Contract Terms
Exhibit 6.3 Profit or Loss on a Currency Call Option at Expiration
Exhibit 6.4 Profit or Loss on a Currency Put Option at Expiration
Exhibit 6.5 The Determinants of American Currency Option Values
Exhibit 6.6 Option Values ( and ) Prior to Expiration
Exhibit 6.7 Exchange Rate Volatility
Chapter 7: Currency Swaps and Swaps Markets
Exhibit 7.1 Notional Amounts Outstanding in OTC Derivatives Markets
Exhibit 7.2 A Fixed-for-Floating Currency Coupon Swap
Exhibit 7.3 A “Fully Covered” Fixed-for-Floating Currency Coupon Swap
Exhibit 7.4 A Fixed-for-Floating Coupon Swap (in U.S. dollars)
Chapter 8: Multinational Treasury Management
Exhibit 8.1 The Risks of International Payment Methods
Exhibit 8.2 Methods of Payment and the Financing of International Trade
Exhibit 8.3 A Taxonomy of Exposures to Currency Risk
Exhibit 8.4 Verizon's Exposures to Currency Risk in India
Exhibit 8.5 Risk Management Policy
Exhibit 8.6 Currency Risk Management at Ford Motor Company ($ millions)
Chapter 9: Managing Transaction Exposure to Currency Risk
Exhibit 9.1 Multinational Netting (Values in Thousands)
Exhibit 9.2 Leading and Lagging
Exhibit 9.3 An Australian Bank's Exposures to the U.S. Dollar
Exhibit 9.4 Financial Market Hedges of Transaction Exposures
Exhibit 9.5 Derivatives Usage by Nonfinancial Corporations
Exhibit 9.6 Active Currency Risk Management
Exhibit 9.7 Financial Risk Management Benchmarks
Exhibit 9.8 Evaluation of Risk Management Performance
Chapter 10: Managing Operating Exposure to Currency Risk
Exhibit 10.1 A Taxonomy of Exposures to Currency Risk
Exhibit 10.2 A Chinese Exporter's Exposures to the Euro
Exhibit 10.3 The Operating Exposure of Nonmonetary Assets
Exhibit 10.4 Exchange Rate Exposures in the Automotive Industry
Chapter 11: Managing Translation Exposure and Accounting for Financial Transactions
Exhibit 11.1 The Translation Accounting Standard of IAS 21 and ASC 830–30
Exhibit 11.2 The Current Rate Method for Consolidated Financial Statements
Chapter 12: Foreign Market Entry and Country Risk Management
Exhibit 12.1 The Risks of Foreign Operations as a Learning Curve
Exhibit 12.2 Political and Country Risk Rating Services
Exhibit 12.3 Country Risk Rankings
Exhibit 12.4 An Overview of Country Risks
Chapter 13: Multinational Capital Budgeting
Exhibit 13.1 Cross-Border Capital Budgeting Recipes
Exhibit 13.2 Wendy's Proposed Restaurant Project in Neverland
Exhibit 13.3 Interest and Inflation Rates for the Neverland Project
Exhibit 13.4 Spot and Forward Exchange Rates for the Neverland Project
Exhibit 13.5 Valuation of the Neverland Project (values rounded to the nearest integer)
Exhibit 13.6 Recipe #1: The Local Perspective on Project Valuation
Exhibit 13.7 Recipe #2: The Parent's Perspective on Project Valuation (V
0
d
|i
d
)
Exhibit 13.8 The Parent versus Project Perspectives and Currency Risk Hedging
Exhibit 13.9 Alternatives for Capturing the NPV of a Foreign Project
Exhibit 13.10 The Forgone Value of Blocked Funds
Chapter 14: Multinational Capital Structure and Cost of Capital
Exhibit 14.1 The Multinational Corporation's Cost of Capital and Optimal Investment
Exhibit 14.2 The Multinational Corporation's Cost of Capital
Exhibit 14.3 Real Returns and Equity Risk Premiums in Selected Global Markets
Exhibit 14.4 A Survey of CFO Estimates of the Equity Premium
Exhibit 14.5 Sources of Funds for Foreign Operations
Chapter 15: Taxes and Multinational Corporate Strategy
Exhibit 15.1 National Tax Rates in G20 Countries
Exhibit 15.2 The Organizational Form of Foreign Operations
Exhibit 15.3 A Typical Foreign Holding Company Structure
Exhibit 15.4 Repatriation of Foreign-Source Income under the U.S. Tax Code
Exhibit 15.5 Transfer Pricing and Tax Planning (in U.S. dollars)
Exhibit 15.6 Repatriation of Foreign-Source Income from Low-Tax Countries
Exhibit 15.7 Taxes and Cross-Border Mergers and Acquisitions
Exhibit 15.8 Taxes and Cross-Border Mergers and Acquisitions—An Example
Chapter 16: Real Options and Cross-Border Investment Strategy
Exhibit 16.1 The Value of BP's Option to Invest
Exhibit 16.2 Uncertainty and the Option to Invest
Chapter 17: Corporate Governance and the International Market for Corporate Control
Exhibit 17.1 National Corporate Governance Systems
Exhibit 17.2 National Legal Traditions
Exhibit 17.3 Characteristics of Corporate Governance Systems
Exhibit 17.4 The Mitsubishi Keiretsu
Exhibit 17.5 Percentage of Firms with Controlling Shareholders
Exhibit 17.6 The Importance of Large Banks to the Domestic Economy ($ trillions)
Exhibit 17.7 The Importance of Institutional Blockholders (in excess of 5 percent of shares)
Exhibit 17.8 Cross-Border M&A over $40 Billion in Value ($ billions)
Chapter 18: International Capital Markets
Exhibit 18.1 Publicly Traded Debt and Equity Securities ($ trillions)
Exhibit 18.2 National Debt Markets by Residence of Issuer ($ billions)
Exhibit 18.3 Bond Market Taxonomy from a U.S. Perspective
Exhibit 18.4 Government Bond Market Conventions
Exhibit 18.5 Market Cap of the World's Largest Stock Exchanges ($ billions)
Exhibit 18.6 Variation in Measurement Methods of IFRS and Domestic GAAP
Chapter 19: International Portfolio Diversification
Exhibit 19.1 Performance of National Stock Market Indices (1970–2014) in U.S. Dollars
Exhibit 19.2 Performance of National Stock Market Indices (2000–2014) in U.S. Dollars
Exhibit 19.3 Portfolio Diversification and the Correlation Coefficient
Exhibit 19.4 The Investment Opportunity Set and the Efficient Frontier
Exhibit 19.5 Return Variance on Foreign Investments from a U.S. Perspective
Exhibit 19.6
RiskMetrics
' Conditional Volatilities in National Stock Markets
Exhibit 19.7 60-Month Rolling Correlations with the U.S. Stock Market
Exhibit 19.8 Risk Reduction through International versus Domestic Portfolio Diversification
Exhibit 19.9 Risk Reduction through International versus Domestic Portfolio Diversification
Exhibit 19.10 Home Bias in International Equity Portfolios
Exhibit 19.11 Home Bias in International Equity Portfolios, 1989 versus 2010
Exhibit 19.12 Percentage of Market Cap in Closely Held Firms (selected countries)
Chapter 20: International Asset Pricing
Exhibit 20.1 The CAPM and the Capital Market Line
Exhibit 20.2 The CAPM Security Market Line (SML)
Exhibit 20.3 Beta as a Regression Coefficient
Exhibit 20.4 The Potential Diversifiability of Exposure to Currency Risk
Exhibit 20.5 The Currency Risk Exposures of Importers and Exporters
Exhibit 20.6 The Value Premium: Equity Book-to-Market as a Predictor of Return
Exhibit 20.7 Difference in Excess Returns for Value and Growth Stock Portfolios
Exhibit 20.8 Return Difference Between Winner and Loser Portfolios
Exhibit 20.9 Value and Momentum Around the World
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MultinationalFinance
Evaluating the Opportunities, Costs, and Risks of Multinational Operations
Sixth Edition
KIRT C. BUTLER
Copyright © 2016 by Kirt C. Butler. All rights reserved.
Published by John Wiley & Sons, Inc., Hoboken, New Jersey.
First, Second, and Third Editions published by South-Western Pub in 1996, 1999, 2003. Fourth Edition published by Wiley-Blackwell in 2008. Fifth Edition published by John Wiley & Sons, Inc. in 2012.
Published simultaneously in Canada.
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Library of Congress Cataloging-in-Publication Data:
Names: Butler, Kirt Charles, author.
Title: Multinational finance : evaluating opportunities, costs, and risks of multinational operations / Kirt C. Butler.
Description: Sixth edition. | Hoboken, New Jersey : John Wiley & Sons, Inc., 2016 | Includes bibliographical references and index.
Identifiers: LCCN 2015047252 (print) | LCCN 2016003024 (ebook) | ISBN 9781119219682 (pbk. : alk. paper) | ISBN 9781119219705 (ePub) | ISBN 9781119219712 (Adobe PDF)
Subjects: LCSH: International business enterprises—Finance. | Foreign exchange. | International finance.
Classification: LCC HG4027.5 .B88 2016 (print) | LCC HG4027.5 (ebook) | DDC 658.15/99—dc23
LC record available at http://lccn.loc.gov/2015047252
Cover Design: Wiley
Cover Image: Skyscrapers © Fotoluminate LLC/Shutterstock
Preface
Everything should be made as simple as possible, but not simpler.
— Albert Einstein
Multinational Finance assumes the viewpoint of the financial manager of a multinational enterprise with operations in more than one country. The enterprise could be a multinational corporation, a large financial institution, or a small partnership or proprietorship. The book provides a framework for evaluating the many opportunities, costs, and risks of multinational operations in a manner that allows readers to see beyond the algebra and terminology to general principles. The text is organized into five parts:
Part I
: The International Financial Environment
. The text begins with an introduction to the international financial environment, currency and Eurocurrency markets, and the international parity conditions.
Chapters 3
and
4
on currency and Eurocurrency markets are necessary prerequisites for most of the chapters that follow.
Part II
: Derivative Securities for Financial Risk Management
.
Chapters 5
to
7
cover currency derivatives—futures, options, and swaps—because of the importance of these derivative instruments in financial risk management.
Part III
: Managing the Risks of Multinational Operations
. Part III covers the multinational treasury and the multinational corporation's management of transaction, operating, and translation exposures to currency risk.
Part IV
: Valuation and the Structure of Multinational Operations
. Valuing and structuring the corporation's international assets is the heart of the text.
Chapter 13
on cross-border capital budgeting has far more depth than competing texts, covering the international parity case as well as disequilibrium situations in which the international parity conditions do not hold. Additional chapters cover country risk, multinational financing, taxation, real option valuation, and corporate governance.
Part V
: International Portfolio Investment and Asset Pricing
. The text supplements the multinational corporate finance material in earlier chapters with separate chapters on international capital markets, portfolio diversification, and asset pricing.
Readers with an interest in corporate finance will find that Parts I, III, and IV provide a comprehensive coverage of these topics with a managerial focus throughout. Readers with an interest in financial markets will find that Part II provides a thorough coverage of currency derivatives and their use in financial risk management. Readers with an interest in international investments will find that Part V provides a rich insight into investors' required returns and the corporation's cost of capital.
Key Features
This edition of Multinational Finance retains the classic features developed in earlier editions, as well as new material on topics of interest to practitioners.
Comprehensive and up-to-date coverage of traditional topics
. Intended for advanced undergraduate and MBA classes in international financial management, the text requires only a single preparatory course in finance. Chapters that extend material from the first course begin with a brief review of the fundamentals. Numerous graphs and figures assist the reader in understanding key financial concepts and techniques. Real-world updates, applications, and examples are used to illustrate how the financial concepts and techniques are used in practice. Advanced material is placed in chapter appendices, so that study can be tailored to each individual's objectives.
Distinctive chapters on key topics
. Distinctive chapters are devoted to topics of special interest to practitioners of multinational finance.
Chapters 5
to
7
provide detailed treatments of futures, options, and swaps. These specialized chapters are appropriate for students desiring a deep understanding of the financial tools available for currency risk management.
Appendix 8A develops the valuation consequences of currency risk management for the firm's stakeholders. This allows a deeper understanding of the motives of the firm's stakeholders in managing currency risks.
Chapter 16
takes a real options approach to valuing flexibility in cross-border investments.
Chapter 17
describes differences in national corporate governance systems and their implications for the international market for corporate control. The chapter provides a survey of the rich and ongoing academic research into corporate governance and corporate control.
Chapter 19
applies the classic mean-variance algebra to an internationally diversified portfolio of assets, including a discussion of home asset bias.
Chapter 20
on international asset pricing provides an up-to-date treatment of this interesting and important topic, including a presentation of state-of-the-art international asset pricing models.
Exciting new material on topics of contemporary interest
. The text includes information on the best practices of multinational corporations, as well as the current thinking of top scholars in the field:
Concepts
: Project valuation under both equilibrium and disequilibrium conditions, time-varying expected returns and volatilities, private equity, agency costs, moral hazard, behavioral finance, home bias, the legal environment and investor protections, asset allocation styles, the success of politically connected CEOs, and the impact of the 2008 financial crisis on the theory and practice of multinational finance.
Tools
: The no-arbitrage condition, exchange rate forecasting, volatility estimation, all-in costs, currency option pricing, capital budgeting, cost of capital, taxation of foreign-source income, real option valuation, asset pricing, international size and value premia, and international momentum strategies.
Learning Aids for Students
Several learning aids are used to highlight the main points in each chapter and assist the student in learning the material:
Callouts in the text highlight key concepts and definitions.
Market Updates and Applications appear as boxed essays and provide real-world examples and practical applications of the conceptual material.
Key Terms appear in boldface the first time they are used. Key terms are listed at the end of each chapter and defined in a comprehensive Glossary.
End-of-chapter Conceptual Questions summarize the key ideas and allow readers to test their understanding of the material.
End-of-chapter Problems provide practice in applying the concepts, techniques, and strategies.
Excel templates for many of the models in the text are available from Wiley's website.
Supplements for Instructors
The following supplements are available to adopting instructors:
More than 600
PowerPoint slides
review the key elements in each chapter and illustrate how to apply the material. The accompanying Notes Pages provide additional anecdotes, insights, and examples for classroom use.
A
Solutions Manual
provides answers to all of the end-of-chapter questions.
A
Test Bank
contains more than 1,000 questions and solutions, including true–false and multiple-choice questions, numerical problems, and short essays.
Great care is taken in providing these supplements in order to reduce instructors' burden of preparation and allow them to spend their time where it is most needed—in helping students to understand the domain of multinational finance.
Acknowledgments
At my karate dojo in Michigan, we begin and end each class with the Japanese phrase onegai shimasu, or, “Please teach me.” This is appropriate for both students and teachers. Although I have learned a great deal from my own colleagues, I have learned at least as much from my students. Their varied approaches to learning have enriched my life and made me a better teacher, scholar, and student.
I am particularly grateful to the following scholars, whose thoughtful comments and suggestions over the years have helped to make my work on multinational finance both interesting and enjoyable.
Richard Ajayi
University of Central Florida
Anne Allerston
Bournemouth University
Arindam Bandopadhyaya
University of Massachusetts–Boston
Jeffrey Bergstrand
University of Notre Dame
Shyam Bhati
University of Wollongong
Rita Biswas
SUNY–Albany
Gordon Bodnar
Johns Hopkins University
Donald J.S. Brean
University of Toronto
Rajesh Chakrabarti
Indian School of Business
Louis K.C. Chan
University of Illinois
David B. Cox
University of Denver
Adri de Ridder
Göteborg University
Miranda Lam Detzler
Salem State University
Mark Eaker
University of Virginia
Joseph E. Finnerty
University of Illinois
Julian Gaspar
Texas A&M
Thomas Gjerde
Marian University
Thomas Grennes
North Carolina State University
Dora Hancock
Birmingham City University
Roger D. Huang
University of Notre Dame
Kwang Nam Jee
Korea Development Bank
Kurt Jesswein
Sam Houston State University
Jun-Koo Kang
Nanyang Technological University
Andrew Karolyi
Cornell University
Aditya Kaul
University of Alberta
Tae-Jung Kim
Michigan State University
Yong-Cheol Kim
University of Wisconsin–Milwaukee
Gerhard Kling
University of London
Paul Koch
University of Kansas
C.R. Krishnaswamy
Western Michigan University
Chuck Kwok
University of South Carolina
Hyang Lee
SK Energy
Christian Lundblad
University of North Carolina
Peter MacKay
Hong Kong University of Science and Technology
Thomas J. O'Brien
University of Connecticut
Barbara Ostdiek
Rice University
Ed Outslay
Michigan State University
Terry Pope
Abilene Christian University
Mitchell Ratner
Rider College
Jonathan Reeves
University of New South Wales
Ashok Robin
Rochester Institute of Technology
Antonio Rodriguez
Texas A&M International
Mehdi Salehizadeh
San Diego State University
Hakan Saraoglu
Bryant University
Vijay Singal
Virginia Tech
Jacky C. So
University of Macao
Michael Solt
California State University–Long Beach
Wei-Ling Song
Louisiana State University
Richard Stehle
Humboldt University
Chris Stivers
University of Louisville
Philip Swicegood
Wofford College
Lawrence Tai
Zayed University
Tilan Tang
Clemson University
Dean Taylor
University of Colorado–Denver
Antoinette Tessmer
Michigan State University
Dosse Toulaboe
Fort Hays State University
Gwinyai Utete
Tulane University
Masahiro Watanabe
Rice University
Rohan Williamson
Georgetown University
Jiawen Yang
George Washington University
Yun (Ellen) Zhu
Oakland University
The Finance team at Wiley again proved their mettle in bringing this project to fruition. My thanks go to Executive Editor Bill Falloon, Developmental Editor Meg Freeborn, and Production Editor Sharmila Srinivasan for their continuing support and conscientious attention to detail in matters both small and large.
Ongoing inspiration and direction are provided by my parents, Bruce and Jean Butler, and my sensei, Seikichi Iha.
Finally, I wish to thank my family—my wife, Erika, and our children, Rosemarie and Vincent—for their love and tolerance. Erika—you are my life partner as we dance to the end of time.
About the Author
Kirt C. Butler is an associate professor in the Department of Finance at Michigan State University, where he teaches multinational finance and global strategy in MSU's Eli Broad College of Business. He joined the faculty in 1985 after completing his doctorate in Finance at MSU. He also holds an MBA in Finance from the College of Business, an MS in Computer Science from the College of Engineering, and a BA in Psychology from the Honors College at Michigan State University.
Professor Butler's research has appeared in a variety of academic and practitioner journals, including the Journal of Finance, Journal of Accounting Research, Financial Analysts Journal, Journal of Portfolio Management, Journal of International Money and Finance, and the Journal of International Business Studies, among others. His academic research has been profiled in the New York Times, Time and Money magazines, and on the CNN and CNBC websites.
Professor Butler also is a sensei of Okinawan Shido-kan (Shorin Ryu) Karate, with more than 40 years of experience and a rank of eighth-degree black belt.
Part OneThe International Financial Environment
Even if you're on the right track, you'll get run over if you just sit there.
—Will Rogers
Chapter 1An Introduction to Multinational Finance
The notes I handle no better than many pianists, but the pauses between the notes—ah, that is where the art resides!
—Artur Schnabel
This book assumes the viewpoint of the financial manager of a multinational corporation (MNC) with investment or financial operations in more than one country. Managers encounter new opportunities as they extend their operations into international markets, as well as new costs and risks. The challenge facing the multinational financial manager is to successfully develop and execute business and financial strategies in more than one culture or national business environment.
1.1 The Goals of the Multinational Corporation
Exhibit 1.1 presents the ownership and control structure that is typical of companies in market economies. In these countries, the primary goal of the firm is to maximize shareholder wealth. However, shareholder wealth maximization is far from the only objective of the MNC. Many other stakeholders have an interest in the firm, including suppliers, customers, debtholders, managers, business partners, employees, and society at large. The objectives of these other stakeholders often are in conflict with shareholder wealth maximization, especially during periods of financial distress.
Stakeholders include those with an interest—or stake—in the firm
Exhibit 1.1 Corporate Governance
Exhibit 1.2 represents the value of the various claimants on the firm's revenues. In this view, the value of revenues is allocated to operating expenses, governments, suppliers of debt and equity capital, and other potential claimants such as domestic or foreign litigants, in proportion to their claims on the firm.
Exhibit 1.2 Corporate Stakeholders and Their Claims on the Revenues of the Firm
Stakeholders sometimes are narrowly defined as the providers of capital, particularly debt and equity. These claims are paid out of operating income and are represented by VDEBT and VEQUITY in Exhibit 1.2. The values of these claims depend on the business environments of the nations in which the MNC operates.
A broader definition of stakeholder includes anyone with an interest in the firm, including customers, suppliers, employees, host governments, and anyone else with an actual or potential claim on the firm. The firm's customers help determine the value of revenues, VREVENUES. Suppliers and employees determine the value of operating expenses, VEXPENSES. Governmental claims, VGOVT, represent the claims of society at large and include taxes, tariffs, and the explicit and implicit costs of compliance with local laws and regulations (e.g., environmental laws and corporate governance regulations).
The objectives of these other stakeholders are seldom the same as those of debt or equity shareholders. Labor is concerned with wages and job security. Customers and suppliers are concerned with prices, costs, and quality. The “maximize shareholder wealth” objective often is in conflict with host countries' cultural, economic, political, social, environmental, or religious goals.
Managers have their own objectives, which are not the same as those of other stakeholders. Agency costs refer to any loss in value from conflicts of interest between managers and other stakeholders, particularly equity shareholders. These costs include the costs of contracting and monitoring to reduce potential conflicts of interest. A good example of an agency cost is the physician who recommends a costly procedure that may or may not be good for the patient—but is certainly good for the physician's pocketbook. The presence of agency costs does not mean that management will not act in the best interests of shareholders, only that it is costly to encourage managers to do so. As the residual owners of the firm, it is the shareholders who typically bear these agency costs.
Agency costs arise from conflicts of interest
Countries differ in the extent to which they protect each of these stakeholders. Countries with strong socialist traditions place an emphasis on employee welfare. Some countries are sensitive to environmental concerns, while others actively promote their local economy to the detriment of the local—and global—environment. Most countries protect or subsidize key industries deemed to be of vital importance to the nation's economy or national identity. Protected industries often include products related to local agriculture, such as rice in Japan, beer in Germany, and champagne in France. Agricultural products that are vulnerable to foreign competition often are protected through price supports in the domestic economy and tariffs on foreign imports.
Nations determine the nature of the playing fields on which MNCs operate. Managers must work within the rules and respect the sensitivities of the societies in which they operate. Ignore the local rules of the game at your own peril.
1.2 The Challenges of Multinational Operations
Multinational operations can create additional costs in every business discipline, including in marketing, human resource management, logistics and supply chain management, accounting, finance, business law, taxation, and strategy.
Multinational operations also increase exposures to risk. Risk exists whenever actual outcomes can differ from expectations. The MNC has a risk exposure when its assets or liabilities can change in value with unexpected changes in business conditions. As individuals and businesses pursue cross-border opportunities, they expose themselves to a wide variety of new risks.
An important risk exposure arising from cross-border operations is country risk—the risk that the business environment in a host country or the host country's relations with another country will unexpectedly change. Important sources of country risk include political risks and financial risks.
Political risk is the risk that the business environment in a host country will unexpectedly change due to political events. Political risk usually is determined within a country as local political forces influence the business environment. Sources of political risk include unexpected changes in repatriation restrictions, taxes, local content and employment regulations, foreign ownership restrictions, business and bankruptcy laws, foreign exchange controls, and expropriation.
Financial risk refers to the risk of unexpected change in the financial or economic environment of a host country. Financial risk is influenced by political factors, but also by myriad economic factors that are outside the control of local political forces. A particularly important financial risk for MNCs with operations in more than one country is currency risk. The MNC is exposed to currency risk—also called foreign exchange, forex, or FX risk—if unexpected changes in currency values affect the value of the firm.
Multinational managers must deal with unfamiliar cultures as they seek to extend the firm's competitive advantages into new and unfamiliar markets. Being able to understand, adapt to, and manage these cultural differences can make the difference between a successful and an unsuccessful international venture.
1.3 The Opportunities of Multinational Operations
According to the discounted cash flow approach to valuation, the value of an asset or liability is equal to the present value of expected future cash flows discounted at an appropriate risk-adjusted discount rate.
This valuation equation has an important implication for the firm. If a corporate decision has no impact on the firm's expected future cash flows or discount rate, then the decision also has no impact on the value of the firm. Conversely, if a decision is to add value, then the decision must either increase expected cash flows or decrease the cost of capital.
Multinational Investment Opportunities
The set of investments available to the firm is called its investment opportunity set. The firm's investment objective is to identify the set of assets that maximizes the value of the firm to its key stakeholders. In terms of Equation (1.1), the objective is to identify the investments that maximize the present value of future operating cash flows—accepting projects with an expected return that exceeds investors' required return and rejecting projects that do not meet this hurdle.
MNCs have many opportunities for enhancing revenues and reducing costs that are not available to local firms. These opportunities include the following:
Global marketing
. Global marketing can provide access to markets that domestic competitors cannot reach, and allow MNCs to more easily shift sales efforts toward markets willing to pay higher prices for their products.
Access to low-cost labor or raw materials
. MNCs seek low-cost resources to reduce costs and ensure supplies. The lure of low-cost resources is powerful, and access to low-cost resources can be a primary advantage of the MNC.
Flexibility in global site selection
. MNCs have greater flexibility than domestic firms in the location and timing of their investments.
Flexibility in sourcing and production
. By having a diversified sourcing and production base, MNCs can shift their inputs in response to currency movements or other factors. Local competitors do not enjoy this flexibility.
Economies of scale and scope
. Firms possess economies of scale when size itself results in lower per-unit costs as fixed development or production costs are spread over a larger output. Economies of scope arise across product lines, such as when joint production results in lower per-unit costs. Large and diversified firms often enjoy advantages in scale and scope.
Economies of vertical integration
. Firms possess economies of vertical integration when they enjoy lower costs through their control of a vertically integrated supply chain. Firms vertically integrate when it is more efficient to arrange the steps of a production process through internal rather than external markets. Vertical integration is common in industries that need to protect their processes or technologies from competitors. Mature MNCs often integrate their supply chains from labor and raw material inputs right through the final marketing, distribution, and after-sale service of their products.
Multinational tax planning
. Firms with operations in more than one tax jurisdiction have more flexibility than domestic firms in managing their tax burden through multinational tax planning.
MNCs also have advantages over domestic firms in forming and implementing their business strategies. Here are examples of strategies for preserving or enhancing operating cash flows through multinational operations:
Follow the customer
. Service firms, such as banks and accounting firms, often follow their domestic customers into foreign markets. Parts suppliers also often follow this strategy. As these firms learn the nuances of operating in foreign countries, they often begin to pursue foreign clients as well.
Lead the customer
. This strategy seeks to attract foreign companies into a domestic market as a way of solidifying relations with the foreign firms before they establish relations with other local competitors.
Follow the leader
. When one's competitors are acquiring foreign assets, a common response is to similarly acquire foreign assets to reduce the threat of falling behind in market share or production costs.
Go local
. MNCs often build capacity directly in foreign markets to avoid quotas or tariffs on imported goods. This can increase local sales and reduce the risk of protectionism, as the MNC is seen as less of an outsider.
Multinational Financial Opportunities
The objective of financial policy is to maximize the value of the firm through its financing choices, given the firm's investment decisions. Financial decisions include the mix of debt and equity capital, debt's maturity structure, the markets in which capital is denominated and issued, and financial risk management. How financial policy is implemented depends on the firm's access to capital, and multinational corporations with access to international financial markets can enjoy advantages over domestic firms in this regard.
The most important characteristic of any financial market is its liquidity. Liquidity refers to the ease with which an asset can be exchanged for cash. In a liquid market, an asset can be converted into cash quickly and without loss of value. If it takes time to convert an asset into cash or there is a loss of value in the conversion, then the asset and its market are said to be illiquid. Multinational corporations with access to liquid international markets can have advantages over domestic firms without access to the same financial resources.
Liquidity refers to the ability to quickly capture an asset's value
Perfect Financial Markets and Concepts of Market Efficiency
A more nuanced characterization of a well-functioning financial market is provided by the perfect financial market assumptions.
In a perfect financial market, rational investors have equal access to market prices and information in a frictionless market
Many financial opportunities arise from financial market imperfections, so this definition will prove useful at several points in the text. A perfect market has several components, summarized in Exhibit 1.3:
Frictionless markets
. A frictionless market has no transaction costs, taxes, government intervention, agency costs, or costs of financial distress. Some market frictions such as transaction costs depend on market volume and liquidity. Other frictions such as taxes are externally imposed.
Equal access to market prices
. If all participants have equal access to market prices, then no single party can influence prices. This is a convenient assumption, but it seldom holds, and many actors can influence prices. Governments influence market values through their fiscal and monetary policies, cartels (e.g., the Organization of Petroleum Exporting Countries) influence commodity prices through their control of production, and hedge funds (e.g., George Soros's Quantum Fund) affect prices through trades.
Rational investors
. Rational investors price assets with a dispassionate eye toward expected returns and risks. This sounds great in theory, but investors are not always rational. The study of the impact of psychological factors on behaviors and asset prices is referred to as
behavioral finance
, and is an active area of financial research.
Equal access to costless information
. Equal access to information puts market participants on an equal footing with one another. However, this assumption belies the fact that language serves as a very real barrier to the flow of information. There are also many cross-border differences in accounting measurement and disclosure requirements.
Exhibit 1.3 The Perfect Market Assumptions
Rational investors with equal and frictionless access to market prices and information.
1.
Frictionless markets
There are no transaction costs, taxes, government intervention, agency costs, or costs of financial distress.
2.
Equal access to prices
Perfect competition with no barriers to entry.
3.
Rational investors
Return is good and risk is bad.
4.
Equal access to costless information
All market participants have instantaneous and costless access to information.
The assumption of frictionless markets is an assumption of operational efficiency such that there are no drains on funds as they are transferred from one use to another. The last three assumptions listed are sufficient to ensure informational efficiency in a market in which prices fully reflect all relevant information. Informational efficiency does not require a frictionless market, as prices can reflect available information despite the existence of transaction costs. For example, a bid–ask spread on currency transactions could allow exchange rates in two different locations to differ slightly, although prices might still be in equilibrium within the bounds of transaction costs.
Operational efficiency and informational efficiency together promote allocational efficiency—that is, an efficient allocation of capital toward its most productive uses. Allocational efficiency—the basic objective of any financial market—is greatest when there is high liquidity and transaction volume in freely traded assets. Less liquid financial markets do not allocate capital between savers and borrowers as efficiently as more liquid markets do.
Arbitrage refers to the simultaneous purchase and sale of the same or equivalent asset in order to ensure a profit with no net investment or risk. Arbitrage promotes all three types of market efficiency. Arbitrage ensures that market prices do not diverge substantially from their fair value. When arbitrage does exist, the source of the opportunity is invariably some form of market imperfection. This has important implications for real-world financial policies.
Implications of Perfect Financial Markets
The perfect market assumptions provide a convenient starting point for investigating many issues in finance. In particular, the firm's financial policy is irrelevant in a perfect financial market because—with equal access to prices and information in a frictionless market—individual investors can replicate or reverse any action that the firm can take. (Franco Modigliani and Merton Miller each won a Nobel Prize in Economics, largely for this insight.) In such a world, financial policy cannot affect firm value.
The converse of this irrelevance proposition also must be true.
If financial policy is to increase firm value, then it must increase expected cash flows or decrease the discount rate
Financial market imperfections are more prominent internationally than domestically, so MNCs have more opportunities than domestic firms to create value through their financial policies. Here are a few examples:
Hedging policy
. Appendix 8A shows how multinational financial managers can create value by reducing drains on operating cash flows (e.g., by reducing expected bankruptcy costs) through the firm's hedging policy.
Cost of capital when there are capital flow barriers
.
Chapter 14
discusses how MNCs can lower their cost of capital by selling debt or equity to foreign investors that are willing to pay higher prices than domestic investors.
Reducing taxes through multinational operations
.
Chapter 15
shows how MNCs can reduce their tax burden through multinational tax planning.
Barriers to the free flow of capital across international markets
.
Chapter 18
describes some of the barriers that impede the cross-border flow of capital, and discusses vehicles for diversifying across national boundaries.
Currency risk and cost of capital
.
Chapter 20
discusses the MNC's exposure to currency risk, and the impact of this exposure on the cost of capital.
Violations of any of the perfect market assumptions can lead to financial opportunities, particularly for MNCs with access to international markets.
Multinational Opportunities and Firm Value
Exhibit 1.4 illustrates the potential increase in firm value provided by multinational opportunities. The downward-sloping lines represent the investment opportunity set of a multinational corporation and a comparable domestic corporation, under the simplifying assumption that all projects are of the same risk. Each firm accepts its most lucrative projects first, so expected returns fall as more capital is invested. The expected return on the domestic firm's first dollar of investment is 16 percent along the y-axis. With more attractive investment alternatives, the MNC's initial investments are displayed with an expected return of 20 percent.
Exhibit 1.4 The Potential Benefits of Multinationality
The upward-sloping lines represent the required return or cost of capital on these investments. Firms draw upon their lowest cost sources of funds first, so cost of capital is an increasing function of the capital budget. The domestic firm in Exhibit 1.4 has a cost of capital of 8 percent on the first dollar that it invests. With access to lower-cost funds from international sources, the MNC in Exhibit 1.4 faces a required return of only 7 percent on its initial investment.
The multinational corporation in Exhibit 1.4 earns an expected return of 20 percent at a required return of only 7 percent along the y-axis, so its first dollar of investment increases shareholder wealth by 13 cents. This MNC will continue to invest until its expected return falls below its required return at a capital budget of approximately $350 million. The value of the multinational corporation in Exhibit 1.4 is represented by the shaded triangular area, which includes the lightly shaded area representing the value of the comparable domestic firm.
Although a multinational corporation experience places it in a better position than its domestic rivals to manage cross-border opportunities, each opportunity must be evaluated on its own merit. Sometimes value creation will be positive and the MNC should proceed. Sometimes, the costs and risks of cross-border operations exceed the benefits. The goal of this text is to develop a framework for evaluating these opportunities in light of their costs and risks.
1.4 Financial Management of the Multinational Corporation
At the heart of the opportunities, costs, and risks of multinational operations are the differences among the countries and peoples of the world. Culture influences the conduct of business in subtle and profound ways, creating important cross-border differences in financial, economic, political, regulatory, accounting, and tax environments. The multinational financial manager must be sensitive to these differences in the conduct of both professional and personal life. Failing to accommodate cultural patterns and expectations can obstruct negotiations and result in hostility and mistrust even if both parties have the best of intentions.
‘The multinational financial manager must be knowledgeable in all of the disciplines of business and finance, and sensitive to local norms and values.’
Because of the far-reaching influence of local environments on multinational operations, the multinational financial manager must be well versed in each of the traditional fields of business, including marketing, management of physical and human resources, law, regulation, taxation, accounting, and finance. Successful operation in each of these areas depends on knowing local cultures and their written and unwritten conventions. Business problems are rarely the province of a single discipline, and the challenges facing multinational corporations are especially prone to be multidisciplinary.
To be able to recognize and develop opportunities in foreign markets, the multinational financial manager also must be an expert in several fields within finance. Multinational financial managers must understand the capabilities and limitations of traditional investment analysis, have a plan of attack for entry into and exit from foreign markets, and value the flexibilities presented by investment opportunities in foreign markets. Multinational financial management also requires a thorough knowledge of the international financial markets for debt and equity securities, currencies, commodities, and financial derivatives (futures, options, and swaps). Today's multinational financial manager must be a jack-of-all-trades, as well as a master of finance.
1.5 Summary
An understanding of multinational financial management is crucial to success in today's—and tomorrow's—marketplace. This is true for firms competing directly with foreign firms, such as a domestic automaker in competition with foreign automakers. It also is true for firms whose suppliers, customers, and competitors are increasingly likely to be from foreign countries. The MNC depends on its managers' abilities to recognize and exploit imperfections in national markets for products and factors of production, and to work effectively within the political and economic constraints imposed by host governments.
This book develops a framework for evaluating the opportunities, costs, and risks presented by the world's marketplaces. Although we usually take the perspective of the financial manager of a large multinational corporation, this framework works just as well for government entities, small businesses, and even individuals. Along the way, we provide a tour of business environments in many countries around the world. Bon voyage.
Key Terms
agency costs
arbitrage
allocational, informational, and operational efficiency
country (political and financial) risk
currency (foreign exchange) risk
discounted cash flow
investment opportunity set
liquidity
multinational corporation (MNC)
perfect financial market assumptions
risk vs. risk exposure
stakeholders
Conceptual Questions
1.1
List the MNC's key stakeholders and describe their stake in the firm.
1.2
What is country risk? Describe several types of country risk.
1.3
What is foreign exchange risk?
1.4
What opportunities might MNCs enjoy that are not available locally?
1.5
