Chapter 19 International Managerial Finance 145
Chapter 19
International Managerial Finance
Instructor’s Resources
Overview
In today’s global business environment, the financial manager must also be aware of the international aspects of
finance. A variety of international finance topics are presented in this chapter, including taxes, accounting
practices, risk, the international capital markets, and the effect on capital structure of operating in different
countries. This chapter discusses limited techniques but provides a broad overview of the financial considerations
of the multinational corporation (MNC). Chapter 19 highlights the fact that international differences in culture,
currencies, and taxes impact the student’s personal life as well as his or her future professional activities.
Suggested Answer to Opener-in-Review Question
In the chapter opener you read about how a gain on Air New Zealand’s foreign currency hedging program
contributed to the firm’s overall profits. Air New Zealand pays large operating expenses in U.S. dollars,
mostly to pay operating costs on flights to and from the United States. Suppose the New Zealand dollar rises
in value against the U.S. dollar, and suppose that Air New Zealand does nothing to hedge its U.S. currency
exposure. What impact would a rise in the New Zealand currency have on the airline’s profits?
If the NZ dollar rises, then that will make the operating costs paid in U.S. dollars less expensive, so Air New
Zealand’s profits will rise.
Answers to Review Questions
1. One of the most important trading blocs was created by the North American Free Trade Agreement (NAFTA)
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2. A joint venture is a partnership under which the participants have contractually agreed to contribute specified
3. From the point of view of a U.S.-based MNC, key tax factors that need to be considered are (1) the level of
4. The emergence and the subsequent growth of the Euromarket, which provides for borrowing and lending
5. FASB No. 52 requires MNCs first to convert the financial statement accounts of foreign subsidiaries into
6. The spot exchange rate is the rate of exchange between two currencies on any given day. The forward exchange
7. If one country experiences a higher inflation rate than a country it trades with, the high inflation country will
8. Macro political risk means that uncertainty due to political change, all foreign firms in the country will be
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9. If cash flows are blocked by local authorities, the net present value (NPV) of a project and its level of return
10. Several factors cause MNCs’ capital structure to differ from that of purely domestic firms. Because MNCs
11. A foreign bond is an international bond sold primarily in the country of the currency in which it is issued. A
denominated. Foreign bonds are generally sold by those resident underwriting institutions that normally
handle bond issues. Eurobonds are usually handled by an international syndicate of financial institutions
13. The Eurocurrency market provides short-term foreign currency financing to MNC subsidiaries. Supply and
14. In dealing with “third parties,” when the subsidiary’s local currency is expected to appreciate in value, attempts
15. When it is expected that the subsidiary’s local currency will depreciate relative to the “home” currency of the
16. The motives of international business combinations are much the same as for domestic combinations: growth,
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Suggested Answer to Focus on Ethics Box: Chiquita’s Slippery
Situation
Chiquita saw their options in Columbia as (a) pay extortion to a terrorist organization or (b) put their
employees’ safety at risk. Is it ethical to break the law in an effort to save lives?
Most will probably agree that Chiquita’s initial decision to pay for protection was justified. However, Chiquita
What, if anything, do you think Chiquita should do differently?
Suggested Answer to Global Focus Box: Take an Overseas Assignment
to Take a Step Up the Corporate Ladder
If going abroad for a full-immersion assignment is not possible, what are some substitutes for a global
assignment that may provide some—albeit limited—global experience?
International experience can begin as early as your college years if you seek out a study abroad program or
Answers to Warm-Up Exercises
E19-1. Taxation of income of a foreign subsidiary
Answer: Subsidiary income before local taxes $55,000
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b. Foreign taxes cannot be applied against the U.S. tax liability
E19-2. Currency valuation
Answer: a. Dollar price for the Mexican peso 1 / 12 = US$0.083333
b. Calculate the exchange rates 1 year from now
E19-3. Effective interest rate of a foreign currency loan
E19-4. Effective interest rate of a foreign loan
E19-5. Comparing effective interest rates of two loans
Solutions to Problems
P19-1. Tax credits
LG 1; Intermediate
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a. If tax credits are allowed, then the so-called “grossing up” procedure will be applied:
Additional MNC income $250,000
P19-2. Translation of financial statements
LG 3; Intermediate
Balance Sheet
12/31/15 12/31/16
U.S.$ U.S.$*
Cash 48.00 50.88
Partial income statement
12/31/15 12/31/16
U.S.$ U.S.$
P19-3. Personal finance problem: Exchange rates
LG 3; Easy
a. Cost of tour (EUR)
$ 2,750
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b. Amount of euros needed in Italy
P19-4. Personal finance: International investment diversification
LG 4; Intermediate
b. (1) Global funds are the most diverse of the four categories. But don’t be fooled by their
(2) International funds invest most of their assets outside the United States. Depending
(3) Emerging-market funds are the most volatile. They invest in undeveloped regions of
(4) Country-specific funds are invested in one country or region of the world. That kind
P19-5. Euromarket investment and fund raising
LG 5; Challenge
The effective rates of interest can be obtained by adjusting the nominal rates by the forecast percent
revaluation in each case:
US$ MP ¥
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Effective rates
P19-6. Ethics problem
LG 1; Intermediate
Case
Case studies are available on www.myfinancelab.com.
Assessing a Direct Investment in Chile by U.S. Computer Corporation
In this case, students evaluate the feasibility of a proposed foreign investmentconstruction of a factory in Chile.
a. Cost of capital—US$:
Type of Capital Amount Weight Cost Weighted Cost
Long-term debt 6,000,000 60.00% 6.0% 3.60%
b. Present value (PV), 5 years:
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c. USCC faces foreign exchange risks because the value of the Chilean peso can fluctuate against the dollar, and
d. Local (peso) financing carries a much higher cost, 14% for long-term funds versus 6% in the Eurobond
Spreadsheet Exercise
The answer to Chapter 19’s MNC economic exposure spreadsheet problem is located on the Instructor’s Resource
Center at www.pearsonhighered.com/irc under the Instructor’s Manual.
Group Exercise
Group exercises are available on www.myfinancelab.com.
This final chapter broadens the view of the firm internationally. This is also the direction of this final assignment.
Integrative Case 8: Organic Solutions
Integrative Case 8, Organic Solutions, asks students to evaluate a proposed acquisition by means of either a cash
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154 Gitman/Zutter • Principles of Managerial Finance, Fourteenth Edition
a. Price for cash acquisition of GTI:
Year
Incremental
Cash Flow Discount Rate
Present Value
of GTI
1 $18,750,000 16% $139,243,245
b. 1. Straight bonds—Financing such a large portion of the acquisition with straight bonds will dramatically
2. Convertible bonds—Initially, convertibles will provide much of the same concern as straight bonds
3. Bonds with stock purchase warrants attached—The benefits and disadvantages of this security mix are
c. 1. Ratio of exchange: $30 $50 0.60
2. The exchange of stock should increase OS’s EPS to $3.93, an increase from $3.50.
OS GTI
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Price per share $50 $30
(market) (price paid)
3. Over the long run, the EPS of the merged firm would probably not increase. Usually the earnings
d. OS could make a tender offer to GTI’s stockholders or the firm could propose a combination cash
e. The fact that GTI is actually a foreign-based company would impact many areas of the foregoing analysis.
for foreign-based subsidiaries. Certain factors influence the risk and return characteristics of a MNC,
particularly economic and political risks. There are two forms of political risk: macro, which involves all
foreign firms in a country, and micro, which involves only a specific industry, individual firm, or corporations
from a particular country. International cash flows can be subject to a variety of factors, including local taxes