Global corporate finance - Kim
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CONTENTS |
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16.2 |
The Benefits of International Diversification |
407 |
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16.3 |
Methods of International Diversification |
413 |
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Summary |
419 |
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Questions |
419 |
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Problems |
420 |
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References |
421 |
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Case Problem 16: Investing in DaimlerChrysler in the USA |
421 |
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Chapter 17: Corporate Strategy and Foreign Direct Investment |
425 |
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Opening Case 17: How Can Companies Get the Most Out of Their Foreign |
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Investment? |
425 |
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17.1 |
An Overview of Foreign Direct Investment |
426 |
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17.2 |
Foreign Direct Investment in Developing Countries |
429 |
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17.3 |
Cross-Border Mergers and Acquisitions |
433 |
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Summary |
441 |
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Questions |
441 |
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Problems |
442 |
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References |
443 |
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Case Problem 17: BP’s Acquisition of Amoco |
443 |
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Chapter 18: International Capital Budgeting Decisions |
447 |
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Opening Case 18: External Factors Affecting Foreign Project Analysis |
447 |
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18.1 |
The Foreign Investment Decision-Making Process |
448 |
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18.2 |
Portfolio Theory |
458 |
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18.3 |
Capital Budgeting Theory and Practice |
460 |
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18.4 |
Political Risk Management |
462 |
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Summary |
468 |
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Questions |
468 |
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Problems |
469 |
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References |
471 |
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Case Problem 18: Multinational Capital Budgeting Practices |
472 |
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Chapter 19: The Cost of Capital for Foreign Projects |
474 |
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Opening Case 19: GM’s Target Debt Ratio in its Overseas Expansion |
474 |
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19.1 |
The Weighted Average Cost of Capital |
476 |
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19.2 |
The Optimum Capital Structure |
480 |
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19.3 |
The Marginal Cost of Capital and Investment Decisions |
482 |
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19.4 |
Cultural Values and Capital Structure |
484 |
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Summary |
486 |
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Questions |
486 |
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Problems |
487 |
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References |
488 |
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Case Problem 19: Do Multinational Firms Have Lower Debt Ratios than |
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Domestic Firms? |
488 |
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CONTENTS xi
Chapter 20: Corporate Performance of Foreign Operations |
490 |
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Opening Case 20: Offshore Workers Increase IBM’s Profits |
490 |
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20.1 |
The Global Control System and Performance Evaluation |
491 |
20.2 |
International Taxation |
499 |
20.3 |
Transfer Pricing and Tax Planning |
506 |
Summary |
509 |
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Questions |
510 |
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Problems |
510 |
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References |
513 |
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Case Problem 20 : Advanced Technology’s Ethical Dilemma |
514 |
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Web Resources and Internet Exercises |
518 |
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Answers to Selected End-of-Chapter Problems |
538 |
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Glossary |
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545 |
Index |
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564 |
Figures
1.1 |
An integrated decision-making model in global finance |
15 |
1.2 |
Expanded opportunity set for international business |
16 |
2.1 |
Economic freedom and consumption |
35 |
2.2 |
The Mercosur trade group |
40 |
2.3 |
Progress on tariffs |
50 |
2.4 |
The tax on trade |
51 |
2.5 |
An organizational chart of the World Trade Organization |
52 |
3.1 |
Global capital flows: sources and uses of global capital in 2001 |
69 |
3.2 |
The J-curve effect |
71 |
3.3 |
US trade balances with Mexico and China |
75 |
4.1 |
Argentine pesos per US dollar (inverted scale) |
83 |
4.2 |
Market determination of exchange rates |
84 |
4.3 |
How an increase in demand for pounds affects the equilibrium |
85 |
4.4 |
How an increase in supply of pounds affects the equilibrium |
86 |
4.5 |
The US dollar under floating exchange rates |
90 |
4.6 |
The US dollar’s doldrums fuel the euro’s rise |
101 |
4.7 |
Mexican international reserves in 1994 |
107 |
4.8 |
Mexican pesos per US dollar (inverted scale) |
108 |
5.1 |
Shares of the reported foreign-exchange trading volume, 2001 |
114 |
5.2 |
A map of major foreign-exchange markets with time zones |
117 |
5.3 |
Bank of Japan intervention |
119 |
5.4 |
Relationships among various financial rates |
136 |
5.5 |
Covered-interest arbitrage |
139 |
6.1The number of currency futures contracts traded on the Chicago
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Mercantile Exchange |
158 |
6.2 |
The market share for currency futures, 2001 |
158 |
FIGURES xiii
6.3 |
The market value of a call option |
166 |
6.4 |
The market value of a put option |
167 |
6.5 |
Profit–loss profiles for an option holder |
168 |
7.1 |
The structure of a parallel loan |
179 |
7.2 |
An interest rate swap |
184 |
7.3 |
A currency swap |
186 |
7.4 |
Motivation for the interest rate swap |
188 |
7.5 |
Motivation for the currency swap |
190 |
7.6 |
The size of the over-the-counter derivatives market |
194 |
8.1Technical analysis: charting and the filter rule; peaks, troughs, trends,
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resistance, and support levels illustrated for the $/DM |
205 |
8.2 |
Technical analysis: moving-average rule (5- and 20-day moving averages) |
206 |
9.1 |
Survey results of 110 chief financial officers |
237 |
10.1 |
Exchange rates for the Brazilian real and the US dollar |
257 |
11.1 |
Asian markets boom as foreigners pile in |
264 |
11.2 |
International interest rate linkages |
272 |
11.3 |
Major stock exchanges as a share of world stock market capitalization |
283 |
11.4 |
Developing countries’ privatization revenues |
284 |
11.5(a) Net financial flows to developing countries, 1995–2002; (b) net
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financial flows to developing countries from the private sector, 1995–2002 |
285 |
11.6 |
Stock prices and gross domestic product |
290 |
11.7 |
The boom and bust of the US and Japanese stock markets |
292 |
12.1 |
The real exchange rate between Argentina and Brazil |
294 |
12.2 |
Currency devaluations for five crisis countries |
303 |
12.3 |
Stock market drops for five crisis countries |
303 |
13.1 |
The process of a typical trade transaction |
326 |
13.2 |
US arms exports and offset obligations |
343 |
15.1 |
Corporate paradise |
379 |
15.2 |
The recent financial performance of Navistar International |
396 |
16.1 |
All for one, and one for all |
399 |
16.2 |
The security market line |
403 |
16.3 |
An efficient frontier |
407 |
16.4 |
An optimal portfolio |
408 |
16.5 |
Gains from international diversification |
409 |
16.6 |
Risk–return trade-offs of international portfolios, 1926–97 |
411 |
16.7 |
Efficient international portfolios |
413 |
16.8 |
Total American investment in foreign securities |
415 |
16.9 |
Hedge funds: the number of funds and the net new assets |
416 |
16.10 |
Key financial statistics of DaimlerChrysler |
423 |
16.11 |
DaimlerChrysler’s revenues and profits |
423 |
17.1 |
Net inward FDI flows to developing countries, 1995–2003 |
430 |
17.2 |
FDI as the share of GDP in developing countries, 1995–2003 |
431 |
17.3 |
Privatization and M&A in developing countries, 1995–2003 |
431 |
17.4 |
Incentives for foreign direct investment |
432 |
17.5 |
Corporate ownership in five major countries |
434 |
17.6 |
A pickup in merger activity |
437 |
xiv FIGURES
17.7 |
Major oil companies: their reserves and market capitalization |
444 |
18.1 |
The risk–return trade-off and company goals |
461 |
18.2 |
Expropriation acts, by year |
465 |
19.1 |
GM’s Asia-Pacific forays |
475 |
19.2 |
Debt ratio and the cost of capital |
482 |
19.3 |
Optimum capital budget: domestic firm versus multinational |
483 |
Tables
2.1 |
Production alternatives of wheat and cameras |
31 |
2.2 |
Gains to both nations from specialization and trade |
31 |
2.3 |
The cost of protectionism |
37 |
3.1 |
The US balance of payments (billions of US dollars) |
60 |
3.2 |
The US dollar as a fraction of government reserves around the world |
62 |
3.3 |
Major-country balances on current account (billions of US dollars) |
64 |
3.4 |
Major-country balances on financial account (billions of US dollars) |
64 |
3.5 |
World merchandise trade |
65 |
3.6 |
The international investment position of the USA (billions of US dollars) |
66 |
3.7 |
The international investment position of Japan (billions of US dollars) |
66 |
4.1 |
The history of the international monetary system |
95 |
4.2 |
The composition of the special drawing rights |
97 |
4.3 |
How the EU and the USA stack up as of December 2002 |
100 |
5.1 |
Currency cross rates and exchange rates |
121 |
5.2 |
The hamburger standard |
147 |
6.1 |
Currencies traded on the Chicago Mercantile Exchange |
151 |
6.2 |
Currency futures quotations in the CME: the Australian dollar |
153 |
6.3 |
Buying two franc futures contracts on February 1 |
156 |
6.4 |
Reversing the earlier futures contracts on March 1 |
156 |
6.5 |
Currency options prices traded on the Philadelphia Exchange |
159 |
6.6 |
Swiss franc option quotations |
160 |
6.7 |
Option: in the money, out of the money, or at the money? |
161 |
6.8 |
Futures positions after an option exercise |
169 |
7.1 |
The value of outstanding swaps (billions of US dollars) |
182 |
8.1 |
A summary of intervention survey responses |
214 |
8.2 |
Selected economic indicators for the USA and Mexico |
219 |
xvi TABLES
8.3 |
Mexico’s balance of payments (millions of US dollars) |
219 |
9.1 |
Major differences among three types of exposure |
227 |
9.2 |
The relative importance of different exchange exposures |
236 |
10.1 |
Exchange rates used to translate balance-sheet items |
246 |
10.2 |
A comparison of the four translation methods |
247 |
10.3 |
Translation of foreign-currency operations under FASBs 8 and 52 |
250 |
11.1 |
Money market instruments |
268 |
11.2 |
Euronote issue facilities (billions of US dollars) |
269 |
11.3Selected indicators on the size of the capital markets, 2001
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(billions of US dollars) |
276 |
11.4 |
Outstanding amounts of international debt securities (billions of US dollars) |
279 |
11.5 |
The percentage breakdown of the total bond market by instrument |
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(billions of US dollars) |
281 |
11.6 |
Developing countries’ debt-to-equity ratios, 1997 and 2002 |
286 |
11.7 |
The performance of the major US stock indexes |
291 |
12.1The world’s 10 largest financial companies and the world’s 10 largest
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economies (billions of US dollars as of December 31, 2002) |
296 |
12.2 |
Characteristics of US foreign banking offices |
298 |
12.3 |
International syndicated loans (billions of US dollars) |
307 |
12.4 |
The total external debt of 138 developing countries (billions of US dollars) |
307 |
12.5 |
Classification of developing countries by debt ratios |
311 |
12.6 |
Country risk rankings |
312 |
12.7 |
Bond ratings by Moody’s and Standard & Poor’s |
312 |
12.8 |
Sovereign ratings by Moody’s and Standard & Poor’s |
313 |
12.9 |
The organization of the World Bank Group |
317 |
13.1 |
Differences between factoring and forfaiting |
337 |
13.2 |
The usage of export-financing methods |
338 |
15.1Days working capital for selected US and European technology hardware and
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equipment companies |
372 |
15.2 |
The international payments matrix |
375 |
15.3 |
The multilateral netting schedule |
375 |
15.4 |
The effects of low versus high transfer price on the flow of funds |
377 |
15.5 |
The tax effect of low versus high transfer price |
378 |
15.6 |
Bundled versus unbundled contribution to consolidated income |
382 |
15.7 |
The use of international cash management techniques |
388 |
15.8 |
The effect of pricing on profits |
392 |
16.1 |
Betas for selected firms in two industries |
402 |
16.2 |
Average returns for US stock funds from July 17, 1998, to August 31, 1998 |
403 |
16.3 |
Correlations of major stock market returns from 1980 to 2001 |
409 |
16.4 |
Dollar-adjusted rates of return and standard deviations |
412 |
17.1 |
Foreign direct investment (billions of US dollars) |
430 |
17.2 |
The effects of a tax loss carryforward |
439 |
18.1 |
Projected earnings after taxes for the proposed project |
456 |
18.2 |
Depreciation cash flows |
457 |
18.3 |
The parent’s net present value |
457 |
18.4 |
Net cash flows under different weather conditions |
459 |
TABLES xvii
18.5 |
Types of political risk and their importance |
463 |
18.6 |
The use of primary project evaluation techniques |
472 |
19.1 |
Three different financial plans |
481 |
19.2 |
Debt ratios for seven regions |
485 |
20.1 |
The impact of inflation on financial statements |
493 |
20.2 |
The impact of currency fluctuations on profits |
494 |
20.3 |
The tax effects of low versus high transfer prices |
507 |
20.4 |
Key statistics for Computer Engineering and High Tech |
516 |
Preface and
Acknowledgments
The Intended Market
The sixth edition of Global Corporate Finance is suitable for both undergraduateand graduatelevel courses in international finance, no matter where in the world it is taught, because it does not adopt any specific national viewpoint. Moreover, it is self-contained, and it combines theory and applications. The earlier editions of Global Corporate Finance have been adopted by teachers in over 200 colleges, universities, and management development programs worldwide, particularly because the book stresses practical applications in a user-friendly format. As evidence of its wide-ranging appeal, a translation of the fourth edition into Chinese Complex Characters was published in 2001 by a major Chinese publishing company in Taiwan.
A Highly Competitive Set of Supplements
The following textbook-related items are available: a Study Guide, transparency masters of lecture notes in Microsoft® Word and PowerPoint, prepared by the authors, and currency symbols and codes. The Study Guide is provided at www.blackwellpublishing.com/kim. Each chapter in the Study Guide includes a list of chapter objectives, detailed chapter outlines, a list of key terms and concepts with definitions, multiple-choice questions, and review problems with solutions for key chapters. The transparency masters of lecture notes, and the currency symbols and codes are also provided on the website.
A comprehensive Instructor’s Manual is also available on the website. The manual contains a complete set of ancillary materials, including chapter outlines, chapter objectives, key terms and concepts with definitions, answers to end-of-chapter questions, solutions to end-of-chapter problems, answers to end-of-case questions, a test bank of 500 multiple-choice questions, and transparency masters of key tables and figures from the book.
PREFACE AND ACKNOWLEDGMENTS |
xix |
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Adopters of this book can also request a complimentary subscription to Multinational Business Review (MBR). MBR publishes application-oriented articles and cases dealing with international aspects of accounting, finance, and economics. Some MBR articles may be used as supplemental materials for international finance courses.
The Underlying Philosophy
CORPORATE PERFORMANCE OF FOREIGN OPERATIONS Overall, this book explores two questions: Why do companies increase profits as they boost their foreign presence? Why are they far more successful than domestic firms? By extending the exploration of these questions into detailed operations and strategies, students learn the successful concepts and techniques of multinational firms. For example, students are introduced to seven key principles of global finance. Only then can they grasp the platform on which multinational firms build their strategic plans and, at the same time, sharply define the limited outlook of domestic companies that operate without these seven principles. The sixth edition relentlessly pursues the techniques and concepts that boost the performance of global companies until, almost as if by second nature, students can pinpoint the formula for growth in foreign markets. We then conclude the book by discussing how multinational companies can use international accounting, taxation, and transfer pricing to improve their overall performance even further. This is why we are confident that this book will enable students to develop the requisite skills in international finance, which are essential to improve corporate performance through foreign operations.
SHAREHOLDER VALUE AND CORPORATE GOVERNANCE Global Corporate Finance treats shareholder value and effective corporate governance as its foundation. Why? The maximization of shareholder value through effective corporate governance is the best way to strengthen the welfare of all corporate constituents. The stockholders are the owners of the company, and they supply the risk capital that protects the welfare of other constituents. Thanks to them, a higher stock price makes it easier for a company to attract additional equity capital. Effective corporate governance is especially crucial to the success of multinational companies with operations all over the world.
GLOBAL STRATEGY To be competitive in the new economy, which is characterized by information and global competition, companies need to think globally. Thus, this book emphasizes global strategy in order to equip readers with fresh ideas and concepts for successful business operations on a global basis.
AN EMPHASIS ON THE BASICS We believe that students learn most effectively when they first achieve a firm grasp of basics. To stress the basics, we have initially devoted several chapters to the fundamental concepts of international finance. Once the basics have been learned, the advanced material flows naturally. As more advanced topics are developed in later chapters, we tie this material back into the fundamentals, in order to facilitate the learning process and to provide students with the big picture.
USER-FRIENDLINESS This book builds on knowledge derived from basic courses in economics and corporate finance. All traditional areas of corporate finance are explored, but from the view-