Unlock document.
This document is partially blurred.
Unlock all pages and 1 million more documents.
Get Access
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.
© 2018 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
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?
© 2018 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
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?
© 2018 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
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.
© 2018 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
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.
© 2018 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
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
© 2018 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
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.
© 2018 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
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.
© 2018 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
