跨国公司财务管理培训课程课件

跨国公司财务管理艾伦.C.夏皮罗(AlanC.Shapiro)

著赵锡军

编审顾苏秦

译校PARTIENVIRONMENTOFINTERNATIONALFINANCIALMANAGEMENTCHAPTER1INTRODUCTION:MULTINATIONALENTERPRISEANDMULTINATIONALFINANCIALMANAGEMENTLearningObjectives●

Tounderstandthenatureandbenefitsofglobalization●

Toexplainwhymultinationalcorporationsarethekeyplayersininternationaleconomiccompetitiontoday●

Toclassifythethreehistoricaltypesofmultinationalcorporation(MNC)andexplaintheirmotivationsforinternationalexpansion●

ToexplainwhymanagersofMNCsneedtoexploitrapidlychangingglobaleconomicconditionsandwhypoliticalpolicymakersmustalsobeconcernedwiththesamechangingconditionsLearningObjectives●

Toidentifytheadvantagesofbeingmultinational,includingthebenefitsofinternationaldiversification●

Todescribethegeneralimportanceoffinancialeconomicstomultinationalfinancialmanagementandtheparticularimportanceoftheconceptsofarbitrage,marketefficiency,capitalassetpricing,andtotalrisk●

TocharacterizetheglobalfinancialmarketplaceandexplainwhyMNCmanagersmustbealerttocapitalmarketimperfectionsandasymmetriesintaxregulations1.1THERISEOFTHEMULTINATIONALCORPORATIONnAmultinationalcorporation(MNC)isacompanyengagedinproducingandsellinggoodsorservicesinmorethanonecountry.nAbrieftaxonomyoftheMNCanditsevolutionnnRaw-MaterialsSeekers.Raw-materialsseekersweretheearliestmultinationals,thevillainsofinternationalbusiness.MarketSeekers.Themarketseekeristhearchetypeofthemodernmultinationalfirmthatgoesoverseastoproduceandsellinforeignmarkets.nCostMinimizers.Thesefirmsseekoutandinvestinlowercostproductionsitesoverseas(forexample,HongKong,Taiwan,andIreland)toremaincost-competitivebothathomeandabroad.1.1THERISEOFTHEMULTINATIONALCORPORATIONnthetruemultinationalcorporationischaracterizedmorebyitsstateofmindthanbythesizeandworldwidedispersionofitsassets.ntheessentialelementthatdistinguishesthetruemultinationalisitscommitmenttoseekingout,undertaking,andintegratingmanufacturing,marketing,R&D,andfinancingopportunitiesonaglobal,notdomestic,basis.nnInaworldinwhichchangeistheruleandnottheexception,thekeytointernationalcompetitivenessistheabilityofmanagementtoadjusttochangeandvolatilityataneverfasterrate.Newglobalmanagerisneeded.1.2THEINTERNATIONALIZATIONOFBUSINESSANDFINANCEnTheexistenceofglobalcompetitionandglobalmarketsforgoods,services,andcapitalisafundamentaleconomicrealitythathasalteredthebehaviorofcompaniesandgovernmentsworldwide.nnnPoliticiansandlaborleaders,unlikecorporateleaders,usuallytakeamoreparochialviewofglobalization.Internationaleconomicintegrationreducesthefreedomofgovernmentstodeterminetheirowneconomicpolicy.Thestressescausedbyglobalcompetitionhavestirredupprotectionistsandgivenrisetonewconcernsabouttheconsequencesoffreetrade.nnTheU.S.–Canadatradeagreement;theNorthAmericanFreeTradeAgreement(NAFTA),1.3MULTINATIONALFINANCIALMANAGEMENT:THEORYANDPRACTICEnnnThemainobjectiveofmultinationalfinancialmanagementistomaximizeshareholderwealthasmeasuredbyshareprice.Shareholdersarethelegalownersofthefirmandmanagementhasafiduciaryobligationtoactintheirbestinterests.Financialmanagementistraditionallyseparatedintotwobasicfunctions:theacquisitionoffunds(financingdecision)andtheinvestmentofthosefunds(investmentdecision).nnTherisksofmultinationalmanagementincludeexchangeandinflationrisks;internationaldifferencesintaxrates;multiplemoneymarkets,oftenwithlimitedaccess;currencycontrols;andpoliticalrisks,suchassuddenorcreepingexpropriation.ThemostadvantageofMNCistheinternationaldiversificationofmarketsandproductionsites.1.3MULTINATIONALFINANCIALMANAGEMENT:THEORYANDPRACTICEnSomeconceptsoffinancialeconomics:nnnnArbitrageMarketefficiencyCapitalAssetPricingRiskclassification1.4OUTLINEOFTHEBOOKnThisbookisdividedintofiveparts.nPartI:EnvironmentofInternationalFinancialManagementnnnnPartII:ForeignExchangeRiskManagementPartIII:FinancingtheMultinationalCorporationPartIV:ForeignInvestmentAnalysisPartV:MultinationalWorkingCapitalManagementPARTIENVIRONMENTOFINTERNATIONALFINANCIALMANAGEMENTCHAPTER2THEFUNDAMENTALOFINTERNATIONALFINANCELearningObjectives●

Toexplaintheconceptofanequilibriumexchangerate●

Toidentifythebasicfactorsaffectingexchangeratesinafloatingexchangeratesystem●

Tocalculatetheamountofcurrencyappreciationordepreciationassociatedwithagivenexchangeratechange●

Todistinguishbetweenafreefloat,amanagedfloat,atarget-zonearrangement,andafixed-ratesystemofexchangeratedetermination●

Todistinguishbetweenthecurrentaccount,thefinancialaccount,andtheofficialreservesaccountanddescribethelinksamongtheseaccounts2.1SETTINGTHEEQUILIBRIUMSPOTEXCHANGERATEnnExchangeratescanbeforspotorforwarddelivery.Aspotrateisthepriceatwhichcurrenciesaretradedforimmediatedelivery,orintwodaysintheinterbankmarket.nnAforwardrateisthepriceatwhichforeignexchangeisquotedfordeliveryataspecifiedfuturedate.Theexchangeratesaremarket-clearingpricesthatequilibratesuppliesanddemandsintheforeignexchangemarket.2.1SETTINGTHEEQUILIBRIUMSPOTEXCHANGERATEnFactorsthatAffecttheEquilibriumExchangeRate:nAsthesupplyanddemandschedulesforacurrencychangeovertime,theequilibriumexchangewillalsochange.nnnnnRelativeInflationRatesRelativeInterestRatesRelativeEconomicGrowthRatesPoliticalandEconomicRiskExpectationandAssetMarketmodelnCalculatingExchangeRateChange2.2

ALTERNATIVEEXCHANGERATESYSTEMSnTheinternationalmonetarysystemrefersprimarilytothesetofpolicies,institutions,practices,regulations,andmechanismsthatdeterminetherateatwhichonecurrencyisexchangedforanother.nThissectionconsidersfivemarketmechanismsforestablishingexchangerates:nnnnnfreefloatmanagedfloattarget-zonearrangementfixed-ratesystemthecurrenthybridsystem.2.3BALANCE-OF-PAYMENTCATEGORIESnThebalanceofpaymentisanaccountingstatementthatsummarizesalltheeconomictransactionsbetweenresidentsofthehomecountryandtheresidentsofallothercountries.nnCurrencyinflowsarerecordedascredits,andoutflowsarerecordedasdebits.Therearethreeprincipalbalance-of-paymentscategories:nnn1.Currentaccount2.Capitalaccount3.FinancialaccountnFormostcountries,onlythecurrentandfinancialaccountsaresignificant.PARTIENVIRONMENTOFINTERNATIONALFINANCIALMANAGEMENTCHAPTER3COUNTRYRISKANALYSISLearningObjectives●

TodefinewhatcountryriskmeansfromthestandpointofanMNC●

Todescribethesocial,cultural,political,andeconomicfactorsthataffectthegenerallevelofriskinacountryandidentifykeyindicatorsofcountryriskandeconomichealth●

Todescribewhatwecanlearnabouteconomicdevelopmentfromthecontrastingexperiencesofavarietyofcountries●

Todescribetheeconomicandpoliticalfactorsthatdetermineacountry’sabilityandwillingnesstorepayitsforeigndebts3.1MEASURINGPOLITICALRISKnnExpropriationisthemostobviousandextremeformofpoliticalrisk,.Thereareothersignificantpoliticalrisks,includingcurrencyortradecontrols,changesintaxorlaborlaws,regulatoryrestrictions,andrequirementsforadditionallocalproduction.nFactorsinpoliticalriskforecastingmodelnnnnPoliticalStabilityEconomicFactorsSubjectiveFactorsPoliticalRiskandUncertainPropertyRightsnAusefulindicatorofthedegreeofpoliticalriskistheseriousnessofcapitalflight.3.2ECONOMICANDPOLITICALFACTORSUNDERLYINGCOUNTRYRISKnkeyfactorsthatdeterminetheeconomicperformanceofacountryanditsdegreeofrisknnnnnnFiscalIrresponsibilityMonetaryInstabilityControlledExchangeRateSystemWastefulGovernmentSpendingResourceBaseCountryRiskandAdjustmenttoExternalShocksnKeyIndicatorsofCountryRiskandEconomicHealth3.3COUNTRYRISKANALYSISININTERNATIONALBANKINGnFromabank’sstandpoint,countryriskisthepossibilitythatborrowersinacountrywillbeunableorunwillingtoserviceorrepaytheirdebtstoforeignlendersinatimelymanner.nWhatultimatelydeterminesanation’sabilitytorepayforeignloansisthatnation’sabilitytogenerateU.S.dollarsandotherhardcurrencies.nnTheGovernment’sCost/BenefitCalculusLessonsfromtheInternationalDebtCrisisPARTIIFOREIGNEXCHANGERISKMANAGEMENTCHAPTER4MEASURINGANDMANAGINGTRANSLATIONANDTRANSACTIONEXPOSURELearningObjectives●

Todefinetranslationandtransactionexposureandoperatingexposure,distinguishthem.●

Todescribethefourprincipalcurrencytranslationmethodsavailableandtocalculatetranslationexposureusingthesedifferentmethods●

Toidentifythebasichedgingstrategyandtechniquesusedbyfirmstomanagetheircurrencytransactionandtranslationrisks●

Todescribethecostsandbenefitassociatedwithusingthedifferenthedgingtechniques●

Todescribeandassesstheeconomicsoundnessofthevariouscorporatehedgingobjectives4.1ALTERNATIVEMEASURESOFFOREIGNEXCHANGEEXPOSUREnnThethreebasictypesofexposurearetranslationexposure,transactionexposure,andoperatingexposure.Transactionexposureandoperatingexposurecombinetoformeconomicexposure.nTranslationexposure,alsoknownasaccountingexposure,arisesfromtheneed,forpurposesofreportingandconsolidation,toconvertthefinancialstatementsofforeignoperationsfromthelocalcurrencies(LC)involvedtothehomecurrency(HC).nnTransactionexposureresultsfromtransactionsthatgiverisetoknown,contractuallybindingfutureforeign-currency-denominatedcashinflowsoroutflows.Operatingexposuremeasurestheextenttowhichcurrencyfluctuationscanalteracompany’sfutureoperatingcashflows,thatis,itsfuturerevenuesandcosts.4.2ALTERNATIVECURRENCYTRANSLATIONMETHODSnCompanieswithinternationaloperationswillhaveforeign-currency-denominatedassetsandliabilities,revenues,andexpenses.ThefinancialstatementsofanMNC’soverseassubsidiariesmustbetranslatedfromlocalcurrencytohomecurrencybeforeconsolidationwiththeparent’sfinancialstatements.nFourprincipaltranslationmethodsareavailable:nnnnthecurrent/noncurrentmethod,themonetary/nonmonetarymethod,thetemporalmethod,andthecurrentratemethod.nInpractice,therearealsovariationsofeachmethod.4.2ALTERNATIVECURRENCYTRANSLATIONMETHODSnCurrent/Noncurrentmethodnalltheforeignsubsidiary’scurrentassetsandliabilitiesaretranslatedintohomecurrencyatthecurrentexchangerate.Eachnoncurrentassetorliabilityistranslatedatitshistoricalexchangerate—thatis,attherateineffectatthetimetheassetwasacquiredortheliabilitywasincurred.nTheincomestatementistranslatedattheaverageexchangerateoftheperiod,exceptforthoserevenuesandexpenseitemsassociatedwithnoncurrentassetsorlibilities.4.2ALTERNATIVECURRENCYTRANSLATIONMETHODSnMonetary/NonmonetaryMethodnMonetaryitems(forexample,cash,accountspayableandreceivable,andlong-termdebt)aretranslatedatthecurrentrate;nonmonetaryitems(forexample,inventory,fixedassets,andlong-terminvestments)aretranslatedathistoricalrates.nIncomestatementitemsaretranslatedattheaverageexchangerateduringtheperiod,exceptforrevenueandexpenseitemsrelatedtononmonetaryassetsandliabilities.4.2ALTERNATIVECURRENCYTRANSLATIONMETHODSnTemporalMethodnUnderthetemporalmethod,inventoryisnormallytranslatedatthehistoricalrate,butitcanbetranslatedatthecurrentrateiftheinventoryisshownonthebalancesheetatmarketvalues.nninthetemporalmethod,itisbasedontheunderlyingapproachtoevaluatingcost(historicalversusmarket).Incomestatementitemsnormallyaretranslatedatanaveragerateforthereportingperiod.nCurrentRateMethodnThecurrentratemethodisthesimplest:Allbalancesheetandincomeitemsaretranslatedatthecurrentrate.4.4DESIGNINGAHEDGINGSTRATEGYnHedgingaparticularcurrencyexposuremeansestablishinganoffsettingcurrencypositionsoastolockinadollar(homecurrency)valueforthecurrencyexposureandtherebyeliminatetheriskposedbycurrencyfluctuations.nnTheusefulnessofaparticularhedgingstrategydependsonbothacceptabilityandquality.TheobjectivesinmanagementbahaviornMinimizetranslationexposure;Minimizeearningsfluctuationsowingtoexchangeratechanges;Minimizetransactionexposure;Minimizeeconomicexposure;Minimizeforeignexchangeriskmanagementcosts;Avoidsurprises4.4DESIGNINGAHEDGINGSTRATEGYnnCostsandBenefitsofStandardHedgingTechniquesExposureNettingnExposurenettinginvolvesoffsettingexposuresinonecurrencywithexposuresinthesameoranothercurrency,whereexchangeratesareexpectedtomoveinawaysuchthatlosses(gains)onthefirstexposedpositionwillbeoffsetbygains(losses)onthesecondcurrencyexposure.nAccountingforHedgingandFASB1334.5MANAGINGTRANSLATIONEXPOSUREnFirmshavethreeavailablemethodsformanagingtheirtranslationexposure:(1)adjustingfundflows,(2)enteringintoforwardcontracts,and(3)exposurenetting.nFundsadjustmentinvolvesalteringeithertheamountsorthecurrencies(orboth)oftheplannedcashflowsoftheparentoritssubsidiariestoreducethefirm’slocalcurrencyaccountingexposure.nnEvaluatingAlternativeHedgingMechanismsOrdinarily,theselectionofafunds-adjustmentstrategycannotproceedbyevaluatingeachpossibletechniqueseparatelywithoutriskingsuboptimization.4.6MANAGINGTRANSACTIONEXPOSUREnVarioustechniquesformanagingtransactionexposurennnnnnnnnForwardMarketHedgeMoney-MarketHedgeRiskshiftingPricingDecisionExposurenettingCurrencyRiskSharingCurrencyCollarsCross-HedgingForeignCurrencyOptionsPARTIIFOREIGNEXCHANGERISKMANAGEMENTCHAPTER5MEASURINGANDMANAGINGECONOMICEXPOSURELearningObjectives●

Todefineeconomicexposureandexchangeriskanddistinguishbetweenthetwo●

Todefineoperatingexposureanddistinguishbetweenitandtransactionexposure●

Toidentifythebasicfactorsthatdeterminetheforeignexchangeriskfacedbyaparticularcompanyorproject●

Todescribethemarketing,production,andfinancialstrategiesthatareappropriateforcopingwiththeeconomicconsequencesofexchangeratechanges●

Toexplainhowcompaniescandevelopcontingencyplanstocopewithexchangeriskandtheconsequencesoftheirabilitytorapidlyrespondtocurrencychanges●

Toidentifytheroleofthefinancialexecutiveinfacilitatingtheoperationofanintegratedexchangeriskmanagementprogram5.1FOREIGNEXCHANGERISKANDECONOMICEXPOSUREnThemostimportantaspectofforeignexchangeriskmanagementistoincorporatecurrencychangeexpectationsintoallbasiccorporatedecisions.nnEconomicexposurecanbeseparatedintotwocomponents:transactionexposureandoperatingexposure.Theexchangeratechangesthatgiverisetooperatingexposurearerealexchangeratechanges.Therealexchangerateisdefinedasthenominalexchangerateadjustedforchangesintherelativepurchasingpowerofeachcurrencysincesomebaseperiod.5.2THEECONOMICCONSEQUENCESOFEXCHANGERATECHANGESnnTransactionexposurearisesoutofthevarioustypesoftransactionsthatrequiresettlementinaforeigncurrency.Thegreateracompany’sflexibilitytosubstitutebetweenhome-countryandforeign-countryinputsorproduction,thelessexchangeriskthecompanywillface.nThemajorconclusionisthatthesectoroftheeconomyinwhichafirmoperates(export,import-competing,orpurelydomestic),thesourcesofthefirm’sinputs(imports,domestictradedornontradedgoods),andfluctuationsintherealexchangeratearefarmoreimportantindelineatingthefirm’strueeconomicexposurethanisanyaccountingdefinition.5.3

IDENTIFYINGECONOMICEXPOSUREnnnAspenSkiingCompanyPetróleosMexicanosToyotaMotorCompany5.4CALCULATINGECONOMICEXPOSUREnnnSpectrumManufacturingABexampleSpectrum’sAccountingExposureSpectrum’sEconomicExposurennScenario1:AllVariablesRemaintheSame.Scenario2:KronaSalesPricesandAllCostsRise;VolumeRemainstheSame.nScenario3:PartialIncreasesinPrices,Costs,andVolume.5.6MANAGINGOPERATINGEXPOSUREnnBecausecurrencyriskaffectsallfacetsofacompany’soperations,itshouldnotbetheconcernoffinancialmanagersalone.MarketingManagementofExchangeRisknnnMarketSelectionPricingStrategyProductStrategynProductionManagementofExchangeRisknnnnInputMixShiftingProductionAmongPlantsPlantLocationRaisingProductivitynnPlanningforExchangeRateChangesFinancialManagementofExchangeRiskPARTIIIFINANCINGTHEMULTINATIONALCORPORATIONCHAPTER

6INTERNATIONALFINANCINGANDNATIONALCAPITALMARKETSLearningObjectives●

Todescribetrendsanddifferencesincorporatefinancingpatternsaroundtheworld●

TodefinesecuritizationandexplaintheforcesthatunderlieitandhowithasaffectedthefinancingpoliciesofMNCs●

Toexplainwhybanklendingisonthedeclineworldwideandhowbankshaverespondedtotheirlossofmarketshare●

Toexplainwhatismeantbytheglobalizationoffinancialmarketsandidentifythefactorsthathaveaffectedtheprocessofglobalization●

Todescribetheexternalmediumandlong-termfinancingoptionsavailabletothemultinationalcorporation●

Toidentifythefunctionsandconsequencesoffinancialmarkets●

Todescribethelinksbetweennationalandinternationalcapitalmarkets●

Todescribethetypesandrolesofdevelopmentbanks6.1CORPORATESOURCESANDUSESOFFUNDSnFirmshavethreegeneralsourcesoffundsavailable:internallygeneratedcash,short-termexternalfunds,andlong-termexternalfunds.nnFinancialMarketsversusFinancialIntermediariesnBankborrowingvssellsecuritiesFinancialSystemsandCorporateGovernanceneffectivecorporategovernancerequiresthateveryoneinvolvedingoverningthecompanymustbeassignedacarefullychosenroleandtheymustbeprovidedwithresponsibility,authority,andaccountability,alltobedonewiththeparamountobjectiveofcreatingshareholdervalue.nThedifferenceinfinancialsystemshasrealconsequencesforfinancialstructures.nGlobalizationofFinancialMarkets6.2NATIONALCAPITALMARKETSASINTERNATIONALFINANCIALCENTERSnTheprincipalfunctionsofafinancialmarketanditsintermediariesaretomobilizesavingsandtoallocatethosefundsamongpotentialusersonthebasisofexpectedrisk-adjustedreturns.nnInternationalFinancialMarketsForeignaccesstodomesticMarketsnnnTheforeignbondmarketTheforeignbankmarketTheforeignequitymarketnGlobalizationoffinancialmarketshasitsdownside6.3DEVELOPMENTBANKnTohelpprovidethehugefinancialresourcesrequiredtopromotethedevelopmentofeconomicallybackwardareas,theUnitedStatesandothercountrieshaveestablishedavarietyofdevelopmentbanks,whoselendingisdirectedtoinvestmentsthatmightnototherwisebefundedbyprivatecapital.nnTherearethreetypesofdevelopmentbanks:nntheWorldBankGroup,regionaldevelopmentbanks,nandnationaldevelopmentbanks.Private-SectorAlternativesPARTIIIFINANCINGTHEMULTINATIONALCORPORATIONCHAPTER

7THEEUROMARKETSLearningObjectives●

TodescribetheEurocurrencyandEurobondmarketsandexplainwhytheyexist●

TodescribethecharacteristicsandpricingofEurocurrencyloans,Eurobonds,Euronotes,andEuro-commercialpaper●

ToexplainthelinksbetweentheEuromarketsandtheirdomesticcounterparts7.1THEEUROCURRENCYMARKETnAEurocurrencyisadollarorotherfreelyconvertiblecurrencydepositedinabankoutsideitscountryoforigin.nnU.S.dollarsondepositinLondonbecomeEurodollars.TheEurocurrencymarketthenconsistsofthosebanks—calledEurobanks—thatacceptdepositsandmakeloansinforeigncurrencies.nnnModernOriginsofEurocurrencyThecreationofEurodollarEurocurrencyLoans7.1THEEUROCURRENCYMARKETnRelationshipBetweenDomesticandEurocurrencyMoneyMarketsnThepresenceofarbitrageactivitiesensuresacloserelationshipbetweeninterestratesinnationalandinternational(Eurocurrency)moneymarkets.nnInterestDifferentialsEurocurrencySpreadsnEuromarketTrend7.2EUROBONDSnUnlikedomesticbondmarkets,however,theEurobondmarketisalmostentirelyfreeofofficialregulationandisinsteadself-regulatedbytheAssociationofInternationalBondDealers.nnBorrowersintheEurobondmarketaretypicallywellknownandhaveimpeccablecreditratings.LinksBetweentheDomesticandEurobondMarketsnnnnnPlacementCurrencyDenominationInterestratesEurobondRetirementRatings7.2EUROBONDSnnRationalforExistenceofEurobondMarketEurobondsversusEurocurrencyLoansnnnnnCostofborrowingMaturitySizeofissueFlexibilitySpeed7.3NOTEISSUANCEFACILITIESANDEURONOTESnThenoteissuancefacility(NIF)allowsborrowerstoissuetheirownshort-termEuronotes,whicharethenplacedordistributedbythefinancialinstitutionsprovidingtheNIF.nNoteIssuanceFacilitiesversusEurobondsnnnDrawdownflexibilityTimingflexibilityChoiceofmaturitiesnnnEuro-Medium-TermNotesEuro-CommercialPaperTheAsiacurrencyMarketPARTIIIFINANCINGTHEMULTINATIONALCORPORATIONCHAPTER

8THECOSTOFCAPITALFORFOREIGNINVESTMENTSLearningObjectives●

Todeterminethecostofcapitalforforeigninvestmentsandidentifythosecircumstancesunderwhichthatcostshouldbehigher,lower,orthesameasthatforcomparabledomesticprojects●

Toidentifyandaddressthekeyissuesinvolvedinapplyingthecapitalassetpricingmodeltoestimatethecostofcapitalforforeignprojects●

Toillustratetheimpactofglobalizationonthecostofcapital●

Tocalculatetheeffectivedollarcostsofforeigncurrencyborrowingtakingintoaccountinterestrates,exchangeratechanges,andtaxes●

Toidentifytherelevantfactorsandtradeoffsinestablishingacompany’sworldwidecapitalstructure●

Tocalculatethevalueofbelow-marketfinancingopportunities8.1THECOSTOFEQUITYCAPITALnThecostofequitycapitalforafirmistheminimumrateofreturnnecessarytoinduceinvestorstobuyorholdthefirm’sstock.nnTheCapitalassetpricingmodelTheCAPMisbasedonthenotionthatintelligent,risk-averseshareholderswillseektodiversifytheirrisks,and,asaconsequence,theonlyriskthatwillberewardedwithariskpremiumwillbesystematicrisk.nWeightedaveragecostofcapital8.3DISCOUNTRATESFORFOREIGNINVESTMENTSnKeyIssuesinEstimatingForeignProjectDiscountRatesnn1.ShouldthecorporateproxiesbeU.S.orlocal(i.e.,foreign)companies?2.IstherelevantbaseportfolioagainstwhichtheproxybetasareestimatedtheU.S.marketportfolio,thelocalportfolio,ortheworldmarketportfolio?nn3.ShouldthemarketriskpremiumbebasedontheU.S.marketorthelocalmarket?4.How,ifatall,shouldcountryriskbeincorporatedinthecostofcapitalestimates?8.3DISCOUNTRATESFORFOREIGNINVESTMENTSnThreealternativesforestimatingproxybetasareproposedhere.nnnLocalCompaniesProxyIndustryAdjustedU.S.IndustryBetannInemployingtheCAPM,thebaseportfolioagainstwhichtheproxybetasareestimatedcanbethehomeportfolioortheglobalmarketportfolio.TheImpactofGlobalizationontheCostofCapitalnOtherthingsbeingequal,theuseofaglobalCAPMmeansalowercostofcapitalforthiscompany.nnEmpiricalEvidenceTheRelevantMarketRiskPremium8.5ESTABLISHINGAWORLDWIDECAPITALSTRUCTUREnTheCostofDebtCapitalnIngeneral,theafter-taxdollarcostofborrowinginthelocalcurrencyforaforeignaffiliateequalstheafter-taxinterestexpenseplusthechangeintheexchangerate.nnThecapitalstructureproblemforthemultinationalenterpriseistodeterminethemixofdebtandequityfortheparententityandforallconsolidatedandunconsolidatedsubsidiariesthatmaximizesshareholderwealth.ForeignSubsidiaryCapitalStructurennnConformtothecapitalstructureoftheparentcompanyReflectthecapitalizationnormsineachforeigncountryVarytotakeadvantageofopportunitiestominimizetheMNC’scostofcapital8.5ESTABLISHINGAWORLDWIDECAPITALSTRUCTUREnnnnnnPoliticalRiskManagementCurrencyRiskManagementLeverageandForeignTaxCreditLeasingandTaxesCost-MinimizingApproachtoGlobalCapitalStructureValuingLow-CostFinancingOpportunitiesnnnTaxesZero-CouponBondsDebtversusEquityFinancingnnGovernmentCreditandCapitalControlGovernmentSubsidiesandIncentivesPARTIVFOREIGNINVESTMENTANALYSISCHAPTER15INTERNATIONALPORTFOLIOINVESTMENTLearningObjectives●

Todescribetherisksandadvantagesofinternationalinvesting●

Toexplainhowinternationalinvestingcanallowinvestorstoachieveabetterrisk-returntrade-offthanbyinvestingsolelyinU.S.securities●

Toidentifythebarrierstoinvestingoverseas●

TodescribethevariouswaysinwhichU.S.investorscandiversifyintoforeignsecurities●

Tocalculatethecurrencyriskassociatedwithinvestinginsecuritiesissuedindifferentmarketsanddenominatedinvariouscurrencies●

Tocalculatethereturnassociatedwithinvestinginsecuritiesissuedindifferentmarketsanddenominatedinvariouscurrencies9.1THERISKSANDBENEFITSOFINTERNATIONALEQUITYINVESTINGnTherisksofinternationalinvestingnnnnnnn1.Changesincurrencyexchangerates2.Dramaticchangesinmarketvalue3.Political,economic,andsocialevents4.Lackofliquidity5.Lessinformation6.Relianceonforeignlegalremedies7.DifferentmarketoperationsnThisrelationfollowsfromthebasicruleofportfoliodiversification:Thebroaderthediversification,themorestablethereturnsand