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 appreciation of the yen against the dollar led to large currency
losses at Mazda. Suppose that Mazda’s quarterly operating profit in the United States averages $100 million
and the exchange rate is $1 = ¥116. How much would Mazda’s profit be worth in yen? What if the exchange
rate is $1 = ¥100?
At an exchange rate of 1 dollar to 116 yen the profit is worth $11.6 billion yen. If the exchange rate is 1 dollar to
Answers to Review Questions
1. One of the most important trading blocs was created by the North American Free Trade Agreement
(NAFTA), which is the treaty that establishes free trade and open markets between Canada, Mexico, and the
United States. Like NAFTA, the European Union (EU) is a trading bloc designed to eliminate tariff barriers
regional trade agreements.
An important component of free trade among countries, including those not part of one of the three trading
blocs, is the General Agreement on Tariffs and Trade (GATT). GATT extends free trade to broad areas of
2. A joint venture is a partnership under which the participants have contractually agreed to contribute
specified amounts of money and expertise in exchange for stated proportions of ownership and profit. It is
Laws and restrictions regarding joint ventures have effects on MNC operations in four major areas:
3. Note to instructors: Here is the answer to the review question from the first print run that did not
incorporate changes in the Tax Cuts and Jobs Act.
From the point of view of a U.S.-based MNC, key tax factors that need to be considered are (1) the level
Here is the answer to the review question as modified to focus on the Tax Cuts and Jobs Act.
The key benefits of the Tax Cuts and Jobs Act are the reduction in the corporate tax rate to 21% and the
4. The emergence and the subsequent growth of the Euromarket, which provides for borrowing and
lending currencies outside the country of origin, have been attributed to the following factors: the desire by
Certain cities around the worldincluding London, Singapore, Hong Kong, Bahrain, Luxembourg, and
5. FASB No. 52 requires MNCs first to convert the financial statement accounts of foreign
subsidiaries into functional currency (the currency of the economy where the entity primarily generates and
spends cash and where its accounts are maintained) and then to translate the accounts into the parent firm’s
6. The spot exchange rate is the rate of exchange between two currencies on any given day. The forward
exchange rate is the rate at which parties agree today to trade currencies on some future date. Foreign
exchange fluctuation affects individual accounts in the financial statements; this risk is called accounting
7. If one country experiences a higher inflation rate than a country it trades with, the high inflation
country will experience a decline (depreciation) in the value of its currency. This depreciation results from
the fact that relatively high inflation causes the price of goods to increase. Foreign purchasers will decrease
8. Macro political risk means that uncertainty due to political change, all foreign firms in the country
will be affected. Micro political risk is specific to the individual firm or industry that is targeted for
9. If cash flows are blocked by local authorities, the net present value (NPV) of a project and its level
of return is “normal,” from the subsidiary’s point of view. From the parent’s perspective, however, NPV in
terms of repatriated cash flows may actually be “zero.” The life of a project, of course, can prove to be quite
10. Several factors cause MNCs’ capital structure to differ from that of purely domestic firms. Because MNCs
have access to international bond and equity markets, and therefore to a greater variety of financial
instruments, certain capital components may have lower costs. The particular currency markets to which the
11. A foreign bond is an international bond sold primarily in the country of the currency in which it is issued. A
Eurobond is sold primarily in countries other than the country of the currency in which the issue is
denominated. Foreign bonds are generally sold by those resident underwriting institutions that normally
12. In terms of potential political risks and adverse actions by a host government, having more local debt (and
thus more local investors or investments) in a foreign project can prove to be a valuable protective measure
13. The Eurocurrency market provides short-term foreign currency financing to MNC subsidiaries. Supply and
demand are major factors influencing exchange rates in this market. In international markets, the nominal
interest rate is the stated interest rate charged when only the MNC’s parent currency is involved. Effective
14. In dealing with “third parties,” when the subsidiary’s local currency is expected to appreciate in value,
attempts must be made to increase accounts receivable and to decrease accounts payable. The net result
15. When it is expected that the subsidiary’s local currency will depreciate relative to the “home” currency of the
parent, intra-MNC accounts payable must be paid as soon as possible while intra-MNC accounts receivable
16. The motives of international business combinations are much the same as for domestic combinations:
growth, diversification, synergy, fund-raising, increased managerial skills, tax considerations, and increased
Suggested Answer to Focus on Ethics Box: Is Fair-Trade Coffee Fair?
Suppose market research by your company shows it would be profitable to become a fair-trade retailer.
Further suppose other internal research suggests producers in developing countries and their
communities would profit little from your fair-trade practices—no matter how well designed. Would it be
ethical for the company to commit to fair trade just to enhance shareholder wealth?
The primary ethical duty of managers is to shareholders, so taking action that make shareholders better off while
at least doing no harm to communities in developing countries may be justified. However, managers should
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
international internship. Once in the workforce, even though you may not be initially assigned to an overseas
Another way to develop global experience is to develop expertise in a particular area such as U.S. GAAP,
Answers to Warm-Up Exercises
E19-1. Taxation of income of a foreign subsidiary
Answer: Subsidiary income before local taxes $55,000
Foreign income tax at 40% 22,000
Dividend available to be declared $33,000
a. Santana’s receipt of dividends $31,350
U.S. tax liability at 34% $10,659
b. Foreign taxes cannot be applied against the U.S. tax liability
Santana’s receipt of dividends $31,350
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
Assume a basket of goods costs $100 in the United States and 1,200 pesos in Mexico. One year
next year.
E19-3. Effective interest rate of a foreign currency loan
E19-4. Effective interest rate of a foreign loan
Answer: F Forecast percentage change of the yen 9.09%
E19-5. Comparing effective interest rates of two loans
Answer: EMP N F (N F) 0.08 0.10 (0.08 0.10) 0.0280 2.80%