Financial Management Notes Essay

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FINA3326: APPLIED FINANCIAL MANAGEMENT

MULTINATIONAL AND EXCHANGE RATES

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MULTINATIONAL CORPORATION (MNC)
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↓
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FOREIGN EXCHANGE MARKETS
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↓ ↓ ↓
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PRODUCT MARKETS SUBSIDIARIES INTERNAT. FINANCIAL MARKETS
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Importing&Exporting Dividend Remittance&Financing Investing&Financing

* MNC any firm that engages in some form of international business * Major goal: maximize shareholder wealth * Financial Decisions * Whether to discontinue operations in a particular country * Whether to peruse new business in a particular country * Whether to expand business in a particular country * How to finance expansion in a particular country * Agency Costs: cost of ensuring that managers maximize shareholder wealth * Conflict of interests * AC in MNC > AC in domestic firms * Monitoring managers in distant subsidiaries in foreign countries = difficult * Differences of culture in foreign counties= un-uniformed goals * MNC= larger = larger AC’s * The downplay of short term effects of decisions * Mediation * Patent control: clear communication of the goals to ensure maximisation of value * Ultimate goal to maximize MNC value not respective subsidiary values * Oversee decisions * Implement compensation plans that reward managers * Corporate control: entire mgmt. focused on maximising shareholder wealth * Sarbanes Oxley Act (SOX): ensures transparency to report on productivity and financial positions * Investors rely heavily on reporting of financial managers * Case of exaggerating performance or understating problems * Implement internal process that is monitored by directors and executives * Centralized database of information * Ensure all date reported consistently among subsidiaries * Implement a system that automatically checks data for unusual discrepancies * All departments have access * Executive personally verify accuracy * AC can vary w/ type of management: centralized management = low AC (E1.1 pg7) * Internet makes monitoring easier * WHY Pursue International Business? * Theory of competitive advantage: specialization = increase efficiency * Imperfect markets theory: FOP= immobile=incentive to invest overseas * Capitalize on foreign resources * Product cycle theory: maturity=recognize opportunities outside domestic market

(1) Firm creates product to accommodate local demand(2) Firm exports product to accommodate foreign demand (3) Firm established foreign subsidiary to establish presence in foreign country/reduce costs (4) Firm differentiates product/Expand product line in foreign country/Foreign business declines as competitive advantage is eliminated

* HOW Firms Engage in International Business * International trade * Exporting (penetrate markets) or Importing (obtain supplies at low cost) * No capital risk = minimal risk * Internet facilitation: allow firms to advertise and accept online orders
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MNCCash inflows from exporting Foreign Importers
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MNCCash outflows to pay for importingForeign Exporters * Licensing * Obligates firms
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