Kirt C.

Butler, Multinational Finance, 4e, 2008, John Wiley & Sons Ltd

Multinational Finance by Kirt C. Butler

Learning objectives
Foreign exchange & Eurocurrency markets Financial risk management
Derivative instruments (futures, options, & swaps) Corporate management of FX risks

Everything should be made as simple as possible, but not simpler. Albert Einstein

International corporate finance

Country risk, capital budgeting, cost of capital, taxation, real options, corporate governance, & cross-border M&A

International portfolio investment

Capital markets, portfolio investment, and asset pricing
Butler / Multinational Finance 4e (2008) An Introduction to Ltd. Chapter 1 John Wiley & SonsMultinational Finance 1-1 Butler / Multinational Finance Chapter 1 An Introduction to Multinational Finance 1-2

Goals of the MNC Challenges of the MNC Opportunities of the MNC Financial management of the MNC

A definition of the MNC Governance of the MNC Claims on corporate revenues

Chapter 1 An Introduction to Multinational Finance

Learning objectives
Corporate governance and the goals of the multinational corporation The challenges of multinational operations
Cultural differences and country risks

A starting point
Multinational financial management is financial management conducted in more than one cultural, social, economic, or political environment Well develop a framework for evaluating the opportunities, costs and risks of operating in the worlds markets for goods, services, and financial assets and liabilities

The opportunities of multinational operations

Investment opportunities Financial opportunities

Financial management of the MNC

Butler / Multinational Finance Chapter 1 An Introduction to Multinational Finance

1-3 Butler / Multinational Finance Chapter 1 An Introduction to Multinational Finance

1-4

Goals of the MNC Challenges of the MNC Opportunities of the MNC Financial management of the MNC

A definition of the MNC Governance of the MNC Claims on corporate revenues

Goals of the MNC Challenges of the MNC Opportunities of the MNC Financial management of the MNC

A definition of the MNC Governance of the MNC Claims on corporate revenues

Governance of the MNC

Supervisory board

Claims on corporate revenues

REVENUES
EXPENSES GOVT OTHER
Shareholders Debt

Management

DEBT EQUITY

Assets Equity
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VREVENUES = VEXPENSES + VGOVT + VOTHER + VDEBT + VEQUITY

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Kirt C. Butler, Multinational Finance, 4e, 2008, John Wiley & Sons Ltd
Cultural challenges Additional risks

Goals of the MNC Challenges of the MNC Opportunities of the MNC Financial management of the MNC

Goals of the MNC Challenges of the MNC Opportunities of the MNC Financial management of the MNC

Cultural challenges Additional risks Risk versus exposure to risk

The MNCs additional risks

The gentle reader will never, never know what a consummate ass he can become, until he goes abroad.
Mark Twain
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Country risk - the risk that the business environment in a host country will unexpectedly change
- Political risk - the risk that the business environment in a host country will change unexpectedly due to political events - Financial risk - the risk of unexpected change in the financial or economic environment of a host country
1-8 Butler / Multinational Finance Chapter 1 An Introduction to Multinational Finance

Goals of the MNC Challenges of the MNC Opportunities of the MNC Financial management of the MNC

Cultural challenges Additional risks Risk versus exposure to risk

Goals of the MNC Challenges of the MNC Opportunities of the MNC Financial management of the MNC

The MNCs opportunities Imperfect financial markets Market inefficiencies

Risk versus risk exposure Risk exists whenever actual outcomes can differ from expectations A company has an exposure to risk when its value can change with unexpected changes in business conditions

The MNCs opportunities Value = t [E[CFt] / (1+it)t]

Multinational investment policy
- Higher returns from existing investments - New investment opportunities

Multinational financial policy

- Reduced capital costs through access to international capital markets
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Butler / Multinational Finance

Chapter 1 An Introduction to Multinational Finance

Goals of the MNC Challenges of the MNC Opportunities of the MNC Financial management of the MNC

The MNCs opportunities Imperfect financial markets Market inefficiencies

Goals of the MNC Challenges of the MNC Opportunities of the MNC Financial management of the MNC

The MNCs opportunities Imperfect financial markets Market inefficiencies

Return
25%

The optimal capital budget

Domestic firms cost of capital

Return
25%

The value of multinationality

MNCs investment opportunity set Domestic firms cost of capital

20%

20%

15%

15%

10%

10%

5%

Domestic firms investment opportunity set

5%

MNCs cost of capital

Domestic firms investment opportunity set

0% 0 100

0%

Domestic firm

200

300

400

500

100

Domestic firm

200

Multinational corporation (MNC)

300

400

500

Capital budget ($ millions)

Butler / Multinational Finance Chapter 1 An Introduction to Multinational Finance

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Capital budget ($ millions)

Chapter 1 An Introduction to Multinational Finance

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Kirt C. Butler, Multinational Finance, 4e, 2008, John Wiley & Sons Ltd

Goals of the MNC Challenges of the MNC Opportunities of the MNC Financial management of the MNC

The MNCs opportunities Imperfect financial markets Market inefficiencies

Goals of the MNC Challenges of the MNC Opportunities of the MNC Financial management of the MNC

The MNCs opportunities Imperfect financial markets Market inefficiencies

Perfect financial market assumptions

Frictionless markets
- No government intervention or taxes - No transactions, agency, or bankruptcy costs

Forms of market efficiency

Operational efficiency
- Frictionless markets are operationally efficient

Informational efficiency
- Rational investors with equal access to markets and information ensure informational efficiency, in which prices reflect all relevant information

Rational investors Equal access to costless information Equal access to market prices Financial opportunities often involve a violation of one of these assumptions
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Allocational efficiency
- Together, operational and informational efficiency promote allocational efficiency
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Goals of the MNC Challenges of the MNC Opportunities of the MNC Financial management of the MNC

International business Multinational finance Where the art resides

Goals of the MNC Challenges of the MNC Opportunities of the MNC Financial management of the MNC

International business Multinational finance Where the art resides

Viv la difference
Cross-border differences can affect all areas of business, particularly through differences in
- Language & culture - Accounting - Distribution - Financial markets - Human resource management - Marketing - Logistics - Corporate governance

Multinational financial management

Multinational finance is interdisciplinary within the field of finance Multinational financial managers must know
Foreign exchange and Eurocurrency markets Derivatives (futures, options, & swaps) International financial markets (debt & equity) International markets for real assets (e.g., land or labor) - International portfolio investment
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- Other business conventions (legal, accounting, taxation, regulation, etc.)

Butler / Multinational Finance

Chapter 1 An Introduction to Multinational Finance

Goals of the MNC Challenges of the MNC Opportunities of the MNC Financial management of the MNC

International business Multinational finance where the art resides

The notes I handle no better than many pianists, but the pauses between the notes ah, that is where the art resides. Arthur Schnabel
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