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Global corporate finance - Kim

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CONTENTS

 

 

 

 

 

 

 

16.2

The Benefits of International Diversification

407

 

16.3

Methods of International Diversification

413

 

Summary

419

 

Questions

419

 

Problems

420

 

References

421

 

Case Problem 16: Investing in DaimlerChrysler in the USA

421

 

Chapter 17: Corporate Strategy and Foreign Direct Investment

425

 

Opening Case 17: How Can Companies Get the Most Out of Their Foreign

 

 

Investment?

425

 

17.1

An Overview of Foreign Direct Investment

426

 

17.2

Foreign Direct Investment in Developing Countries

429

 

17.3

Cross-Border Mergers and Acquisitions

433

 

Summary

441

 

Questions

441

 

Problems

442

 

References

443

 

Case Problem 17: BP’s Acquisition of Amoco

443

 

Chapter 18: International Capital Budgeting Decisions

447

 

Opening Case 18: External Factors Affecting Foreign Project Analysis

447

 

18.1

The Foreign Investment Decision-Making Process

448

 

18.2

Portfolio Theory

458

 

18.3

Capital Budgeting Theory and Practice

460

 

18.4

Political Risk Management

462

 

Summary

468

 

Questions

468

 

Problems

469

 

References

471

 

Case Problem 18: Multinational Capital Budgeting Practices

472

 

Chapter 19: The Cost of Capital for Foreign Projects

474

 

Opening Case 19: GM’s Target Debt Ratio in its Overseas Expansion

474

 

19.1

The Weighted Average Cost of Capital

476

 

19.2

The Optimum Capital Structure

480

 

19.3

The Marginal Cost of Capital and Investment Decisions

482

 

19.4

Cultural Values and Capital Structure

484

 

Summary

486

 

Questions

486

 

Problems

487

 

References

488

 

Case Problem 19: Do Multinational Firms Have Lower Debt Ratios than

 

 

Domestic Firms?

488

CONTENTS xi

Chapter 20: Corporate Performance of Foreign Operations

490

Opening Case 20: Offshore Workers Increase IBM’s Profits

490

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

Questions

510

Problems

510

References

513

Case Problem 20 : Advanced Technology’s Ethical Dilemma

514

Web Resources and Internet Exercises

518

Answers to Selected End-of-Chapter Problems

538

Glossary

 

545

Index

 

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

 

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,

 

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

 

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

 

(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

 

 

(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

 

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

 

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

 

 

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-

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