978-1337269964 Chapter 1 Solution Manual Part 1

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POINT/COUNTER-POINT:

Should an MNC Reduce Its Ethical Standards to Compete Internationally?

POINT: Yes. When a U.S.-based MNC competes in some countries, it may encounter some business norms

there that are not allowed in the U.S. For example, when competing for a government contract, firms might

provide payoffs to the government officials who will make the decision. Yet, in the United States, a firm

will sometimes take a client on an expensive golf outing or provide skybox tickets to events. This is no

different than a payoff. If the payoffs are bigger in some foreign countries, the MNC can compete only by

matching the payoffs provided by its competitors.

COUNTER-POINT: No. A U.S.-based MNC should maintain a standard code of ethics that applies to any

country, even if it is at a disadvantage in a foreign country that allows activities that might be viewed as

unethical. In this way, the MNC establishes more credibility worldwide.

WHO IS CORRECT? Use the Internet to learn more about this issue. Which argument do you support?

Offer your own opinion on this issue.

ANSWER: The issue is frequently discussed. It is easy to suggest that the MNC should maintain a

standard code of ethics, but in reality, that means that it will not be able to compete in some cases. For

Answers to End of Chapter Questions

1. Agency Problems of MNCs.

a. Explain the agency problem of MNCs.

b. Why might agency costs be larger for an MNC than for a purely domestic firm?

2. Comparative Advantage.

a. Explain how the theory of comparative advantage relates to the need for international business.

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Multinational Financial Management: An Overview  2

b. Explain how the product cycle theory relates to the growth of an MNC.

3. Imperfect Markets.

a. Explain how the existence of imperfect markets has led to the establishment of subsidiaries in

foreign markets.

b. Suppose perfect markets existed.Would If perfect markets existed, would wages, prices, and

interest rates among countries be more similar or less similar than under conditions of imperfect

markets? Why?

4. International Opportunities.

a. Do you think that either the acquisition of a foreign firm or licensing will result in greater growth

for an MNC? Which alternative is likely to have more risk?

b. Describe a scenario in which the size of a corporation is not affected by access to international

opportunities.

c. Explain why MNCs such as Coca Cola and PepsiCo, Inc., still have numerous opportunities for

international expansion.

5. International Opportunities Due to the Internet.

a. What factors cause some firms to become more internationalized than others?

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Multinational Financial Management: An Overview  3

b. Offer your opinion on why the Internet may result in more international business.

ANSWER: The Internet allows for easy and low-cost communication between countries, so that firms

could now develop contacts with potential customers overseas by having a website. Many firms use

6. Impact of Exchange Rate Movements. Plak Co. of Chicago has several European subsidiaries that

remit earnings to it each year. Explain how appreciation of the euro (the currency used in many

European countries) would affect Plak’s valuation.

7. Benefits and Risks of International Business. As an overall review of this chapter, identify possible

reasons for growth in international business. Then, list the various disadvantages that may discourage

international business.

8. Valuation of an MNC. Hudson Co., a U.S. firm, has a subsidiary in Mexico, where political risk has

recently increased. Hudson’s best guess of its future peso cash flows to be received has not changed.

However, its valuation has declined as a result of the increase in political risk. Explain.

9. Centralization and Agency Costs. Would the agency problem be more pronounced for Berkley Corp.,

whose parent company makes most major decisions for its foreign subsidiaries, or Oakland Corp.,

which uses a decentralized approach?

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Multinational Financial Management: An Overview  4

10. Global Competition. Explain why more standardized product specifications across countries can

increase global competition.

11. Exposure to Exhange Rates. McCanna Corp., a U.S. firm, has a French subsidiary that produces

wine and exports to various European countries. All of the countries where it sells its wine use the

euro as their currency, which is the same as the currency used in France. Is McCanna Corp. exposed to

exchange rate risk?

12. Macro versus Micro Topics. Review the table of contents and indicate whether each of the chapters

from Chapter 2 through Chapter 21 has a macro or micro perspective.

13. Methods Used to Conduct International Business. Duve, Inc., desires to penetrate a foreign market

with either a licensing agreement with a foreign firm or by acquiring a foreign firm. Explain the

differences in potential risk and return between licensing with a foreign firm, and acquiring a foreign

firm.

14. International Business Methods. Snyder Golf Co., a U.S. firm that sells high-quality golf clubs in the

U.S., wants to expand internationally by selling the same golf clubs in Brazil.

a. Describe the tradeoffs that are involved for each method (such as exporting, direct foreign

investment, etc.) that Snyder could use to achieve its goal.

b. Which method of international method would you recommend for this firm? Justify your

recommendation.

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Multinational Financial Management: An Overview  5

15. Impact of Political Risk. Explain why political risk may discourage international business.

16. Impact of 9/11. Following the terrorist attack on the U.S., the valuations of many MNCs declined by

more than 10 percent. Explain why the expected cash flows of MNCs were reduced, even if they were

not directly hit by the attacks.

Advanced Questions

17. International Joint Venture. Anheuser–Busch, (which is now part of AB InBev due to a merger), the

producer of Budweiser and other beers, has engaged in a joint venture with Kirin Brewery, the largest

brewery in Japan. The joint venture enables Anheuser–Busch to have its beer distributed through

Kirin’s distribution channels in Japan. In addition, it could utilize Kirin’s facilities to produce beer that

would be sold locally. In return, Anheuser-Busch provided information about the American beer

market to Kirin.

a. Explain how the joint venture enabled Anheuser-Busch to achieve its objective of maximizing

shareholder wealth.

b. Explain how the joint venture limited the risk of the international business.

c. Many international joint ventures are intended to circumvent barriers that normally prevent foreign

competition. What barrier in Japan did Anheuser-Busch circumvent as a result of the joint

venture? What barrier in the United States did Kirin circumvent as a result of the joint venture?

d. Explain how Anheuser-Busch could have lost some of its market share in countries outside Japan

as a result of this particular joint venture.

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Multinational Financial Management: An Overview  6

18. Impact of Eastern European Growth. The managers of Loyola Corp. recently had a meeting to

discuss new opportunities in Europe as a result of the recent integration among Eastern European

countries. They decided not to penetrate new markets because of their present focus on expanding

market share in the United States. Loyola’s financial managers have developed forecasts for earnings

based on the 12 percent market share (defined here as its percentage of total European sales) that

Loyola currently has in Eastern Europe. Is 12 percent an appropriate estimate for next year’s Eastern

European market share? If not, does it likely overestimate or underestimate next year’s actual Eastern

European market share next year?

ANSWER: It would likely overestimate its market share because the competition should increase as

19. Valuation of an MNC. Birm Co., based in Alabama, is considering several international opportunities

in Europe that could affect the value of its firm. The valuation of its firm is dependent on four factors:

(1) expected cash flows in dollars, (2) expected cash flows in euros that are ultimately converted into

dollars, (3) the rate at which it can convert euros to dollars, and (4) Birm’s weighted average cost of

capital. For each opportunity, identify the factors that would be affected.

a. Birm plans a licensing deal in which it will sell technology to a firm in Germany for $3,000,000;

the payment is invoiced in dollars, and this project has the same risk level as its existing

businesses.

b. Birm plans to acquire a large firm in Portugal that is riskier than its existing businesses.

c. Birm plans to discontinue its relationship with a U.S. supplier so that can import a small amount of

supplies (denominated in euros) at a lower cost from a Belgian supplier.

d. Birm plans to export a small amount of materials to Ireland that are denominated in euros.

ANSWER:

Opportunity Dollar CF Euro CF

Exchange rate at

which Birm Co.

converts euros to

dollars

Birm’s weighted

average cost of

capital

20. Assessing Motives for International Business. Fort Worth Inc. specializes in manufacturing some

basic parts for sports utility vehicles that are produced and sold in the U.S. Its main advantage in the

U.S. is that its production is efficient, and less costly than that of some other unionized manufacturers.

It has a substantial market share in the U.S. Its manufacturing process is labor-intensive. The company

pays relatively low wages compared to U.S. competitors, but it has guaranteed the local workers that

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Multinational Financial Management: An Overview  7

their positions will not be eliminated for the next 30 years. It hired a consultant to determine whether it

should set up a subsidiary in Mexico, where the parts would be produced. The consultant suggested

that Forth Worth expand for the following reasons. Offer your opinion on whether the consultant’s

reasons are logical:

a. Theory of Competitive Advantage: There are not many SUVs sold in Mexico; hence, Fort Worth

Inc. would not face much competition there.

b. Imperfect Markets Theory: Fort Worth Inc. can not easily transfer workers to Mexico, but it can

establish a subsidiary there in order to penetrate a new market.

c. Product Cycle Theory: Fort Worth Inc. has been successful in the U.S. It has limited growth

opportunities because it already controls much of the U.S. market for the parts it produces. Thus,

the natural next step is to conduct the same business in a foreign country.

d. Exchange Rate Risk. The exchange rate of the peso has weakened recently, so this would allow

Fort Worth Inc. to build a plant at a very low cost (by exchanging dollars for the cheap pesos to

build the plant).

e. Political Risk. The political conditions in Mexico have stabilized in the last few months, so Fort

Worth should attempt to penetrate the Mexican market now.

ANSWER: None of the arguments by the consultant are logical. If SUVs are not sold in the Mexican

21. Valuation of Walmart’s International Business In addition to its stores in the United States, Walmart

Stores, Inc. has 107 retail units in Argentina, 359 in Brazil, 395 in Canada, 412 in China, 2,296 in

Mexico, and 604 in the United Kingdom. Overall, it has 6,100 retail units in foreign countries.

Consider that the value of Walmart is composed of two parts, a U.S. part (due to business in the United

States) and a non-U.S. part (due to business in other countries). Explain how to determine the present

value (in dollars) of the non–U.S. part assuming that you had access to all the details of Walmart

businesses outside the United States.

ANSWER: The non-U.S. part can be measured as the present value of future dollar cash flows

22. Impact of International Business on Cash Flows and Risk. Nantucket Travel Agency specializes in

tours for American tourists. Until recently, all of its business was in the U.S. It just established a

subsidiary in Athens, Greece, which provides tour services in the Greek islands for American tourists.

It rented a shop near the port of Athens. It also hired residents of Athens, who could speak English and

provide tours of the Greek islands. The subsidiary’s main costs are rent and salaries for its employees

and the lease of a few large boats in Athens that it uses for tours. American tourists pay for the entire

tour in dollars at Nantucket’s main U.S. office before they depart for Greece.

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Multinational Financial Management: An Overview  8

a. Explain why Nantucket may be able to effectively capitalize on international opportunities such as

the Greek island tours.

ANSWER: It already has established credibility with American tourists, but could penetrate a new

b. Nantucket is privately-owned by owners who reside in the U.S. and work in the main office.

Explain possible agency problems associated with the creation of a subsidiary in Athens, Greece.

How can Nantucket attempt to reduce these agency costs?

c. Greece’s cost of labor and rent are relatively low. Explain why this information is relevant to

Nantucket’s decision to establish a tour business in Greece.

d. Explain how the cash flow situation of the Greek tour business exposes Nantucket to exchange rate

risk. Is Nantucket favorably or unfavorably affected when the euro (Greece’s currency) appreciates

against the dollar? Explain.

e. Nantucket plans to finance its Greek tour business. Its subsidiary could obtain loans in euros from

a bank in Greece to cover its rent, and its main office could pay off the loans over time.

Alternatively, its main office could borrow dollars and would periodically convert dollars to euros

to pay the expenses in Greece. Does either type of loan reduce the exposure of Nantucket to

exchange rate risk? Explain.

f. Explain how the Greek island tour business could expose Nantucket to country risk.

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