Ch 17

In: Business and Management

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Chapter 27

Multinational Financial Management
ANSWERS TO BEGINNING-OF-CHAPTER QUESTIONS

Most of the questions are illustrated in the BOC spreadsheet model.

27-1 A purely domestic firm does not have to deal with exchange rates, different laws in different countries, transferring funds between subsidiaries in different countries, having to communicate in different languages, and so forth. All of these factors create complications and challenges for multinational firms. In spite of these challenges, there is a strong trend among corporations to “go global.” The primary motivation is profit—many firms can increase their rates of return on investment, and their stock prices, by going global. Some do it primarily to get raw materials; oil companies are an example. Others go global to expand their markets, which helps them cover huge development costs; this is true for producers of movies like Lord of the Rings. Others go global because production costs are lower overseas; this is true for most electronics firms. Still others buy from foreign suppliers; Wal-Mart and Nike are examples. Finally, banks, accounting firms, and other service companies are going global because their customers are doing so, and they must follow their customers or lose them.

27-2 (See the BOC model for data and examples of exchange rates.) From a U.S. perspective, an exchange rate tells us:

a. Direct quotation: Number of dollars required to buy one unit of a foreign currency.

b. Indirect quotation: Number of units of the foreign currency that can be bought with one dollar.

Thus, the direct quotation for the euro in December 2005 (see the BOC model) was 1.18740, meaning that it took $1.19 to buy a euro, and the indirect quote was 0.8422, meaning that a dollar would buy 0.8422 euros. The direct and indirect quotes are the…...

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