International Managerial FinanceThe MNC and its EnvironmentSlide 3The MNC and its Environment (cont.)Slide 5The MNC and its Environment: Legal Forms of BusinessThe MNC and its Environment: Legal Forms of Business (cont.)The MNC and its Environment: TaxesThe MNC and its Environment: Financial MarketsSlide 10Financial Statements: ConsolidationFinancial Statements: Translation of Individual AccountsFinancial Statements: Translation of Individual Accounts (cont.)Slide 14Risk: Exchange Rate RiskRisk: Exchange Rate Risk (cont.)Slide 17Slide 18Slide 19Slide 20Slide 21Risk: Political RisksRisk: Political Risks (cont.)Slide 24Long-Term Investment and Financing DecisionsLong-Term Investment and Financing Decisions (cont.)Slide 27Slide 28Slide 29Short-Term Financial DecisionsShort-Term Financial Decisions (cont.)Slide 32Slide 33Slide 34Short-Term Financial Decisions: Cash ManagementSlide 36Short-Term Financial Decisions: Credit and Inventory ManagementMergers and Joint VenturesMergers and Joint Ventures (cont.)International Managerial FinancePrepared by Keldon BauerThe MNC and its EnvironmentIn recent years, international finance has become an increasingly important element in the management of MNCs.Although the principles of managerial finance are applicable to MNCs, certain factors unique to the international setting tend to complicate the financial management of MNCs.A simple comparison between a domestic U.S. firm and a U.S.–based MNC is given in Table 16.1.The MNC and its EnvironmentThe MNC and its Environment (cont.)During the 1990s, three important trading blocks emerged.In 1992, the United States, Mexico and Canada signed the North American Free Trade Agreement (NAFTA).In 1992, Western Europe also strengthened previously existing European Union by forming the European Open Market which included the adoption of a common currency called the EURO in January, 1999.In 1991, the Mercosur Group of South America, including the countries of Brazil, Argentina, Paraguay and Uruguay formed a trading block.The General Agreement on Tariffs and Trade (GATT) is currently the most important international treaty governing trade.It extends free trading rules to broad areas of economic activity and is policed by the World Trade Organization (WTO).The MNC and its Environment (cont.)The MNC and its Environment: Legal Forms of BusinessIn many countries outside the U.S., operating foreign subsidiaries can take two forms similar to a U.S. corporation.In German-speaking nations, the two forms are the Aktiengesellschafts (A.G.) or the Gesellschaft mit beschrankter Haftun (GmbH). In many other countries, the similar forms are Societe Anonymes (S.A.) or Societe a Responsibilite Limitee (S.A.R.L.).One major difference however, is that it is often essential to enter into joint-ventures with private investors or with government-based agencies in the host country.Such joint-venture laws can result in a substantial degree of management control by host countries and may result in disagreements among the partners as to the distribution of profits, the portions to be allocated for reinvestment, and the remittance of profits.The MNC and its Environment: Legal Forms of Business (cont.)The MNC and its Environment: TaxesFrom the perspective of a U.S.-based MNC, several factors related to taxation in foreign countries must be considered.First, the level of foreign taxes needs to be examined.Second, the definition of what constitutes taxable income must be ascertained.Foreign tax rates and tax rules must be understood.In general, U.S.–based MNCs may often take foreign taxes as a direct credit against U.S. tax liabilities.The MNC and its Environment: Financial MarketsDuring the past two decades the Euromarket—which provides for borrowing and lending currencies outside their country of origin—has grown rapidly and provides MNCs with an external opportunity to borrow or lend funds with little government regulation.One aspect of the Euromarket is offshore centers, which is composed of cities or states (including London, Singapore, Nassau, and Hong Kong) that have achieved prominence as major centers for Euromarket business.The MNC and its Environment: Financial MarketsIn addition, a variety of new financial instruments – including currency and interest rate swaps, forward contracts, options contracts, and international commercial paper – have been created to facilitate international trade and finance.The Euromarket is still dominated by the U.S. dollar.However, other currencies such as the Euro, Swiss Franc, Japanese Yen, and British Pound have increased in importance.Financial Statements: ConsolidationPresently, U.S. tax rules require the consolidation of financial statements of subsidiaries according to the percentage of ownership by the parent as described in Table 18.2 below.Financial Statements: Translation of Individual AccountsUnlike domestic items in financial statements, international items require translation back into U.S. dollars.Since 1982, all financial statements of U.S. MNCs have to conform to FASB No. 52.Under FASB 52, the current rate method of translation is used.The current rate method is implemented in two steps:First, each subsidiary’s balance sheet and income statements are measured in terms of their functional currency.Second, as described in Figure 18.1 on the following slide, balance sheet items are translated at the closing date exchange rate and all income statement items are translated at average rates.Financial Statements: Translation of Individual Accounts (cont.)Financial Statements: Translation of Individual Accounts (cont.)Risk: Exchange Rate RiskExchange rate risk is the risk caused by varying exchange rates between two currencies.The foreign exchange rate between the U.S. dollar (US$) and Swiss Franc (SF) is expressed as follows:US $1 = SF 1.4175SF 1 = US $0.7055The usual exchange rate quotation in international markets is given as SF1.4175/US$.Risk: Exchange Rate Risk (cont.)Under the current system of floating exchange rates, the value of any two major currencies with respect to one another is allowed to fluctuate on a daily basis.For smaller country currencies, however, exchange rates are fixed or semi-fixed with respect to one of the major currencies.The spot exchange rate is the rate of exchange between any two currencies on a given day.The forward exchange rate is the rate of exchange between two currencies at some specific future date.These rates and their relationships