Multinational Financial Management 11th Edition by Alan C. Shapiro Solution manual
Answer. In an efficient market, attempts to increase the value of a firm by purely financial measures or accounting manipulations are unlikely to succeed unless there are capital market imperfections or asymmetries in tax regulations. The net result of these research findings has been to focus attention on those areas and circumstances in which financial decisions and financial managers can have a measurable impact. The key areas are capital budgeting, working capital management, and tax management. The circumstances to be aware of include capital market imperfections, caused primarily by government regulations, and asymmetries in the tax treatment of different types and sources of revenues and costs. As such, the role of the financial manager is to search for and take advantage of capital market imperfections and tax asymmetries to increase after-tax profits and lower the cost of capital. As noted in the chapter, the value of good financial management is enhanced in the international arena because of the much greater likelihood of market imperfections and multiple tax rates. In addition, the greater complexity of international operations is likely to increase the payoffs from a knowledgeable and sophisticated approach to internationalizing the traditional areas of financial management.
5.a. What is the capital asset pricing model?
Answer. The CAPM quantifies the relevant risk of an investment and establishes the trade‑off between risk and return; i.e., the price of risk. It posits a specific relationship between diversification, risk, and required asset returns. In effect, the CAPM says that the required return on an asset equals the risk‑free return plus a risk premium based on the asset's systematic or nondiversifiable risk. The latter is based on market‑wide influences that affect all assets to some extent, such as unpredictable changes in the state of the economy or in some macroeconomic policy variable, such as the money supply or the government deficit.
b. What is the basic message of the CAPM?
Answer. The CAPM's basic message is that risk is priced in a portfolio context. From this it follows that only systematic risk is priced; unsystematic risk, which by definition can be diversified away, is not priced and hence doesn't affect the required return on a project.
c. How might a multinational firm use the CAPM?
Answer. The CAPM can be used to estimate the required return on foreign projects. It also can help a company raise the right questions about risk when considering the desirability of a foreign project, the most important being which elements of risk are diversifiable and which are not.
6. Why might total risk be relevant for a multinational corporation?
Answer. Higher total risk is relevant for an MNC because it could have a negative impact on the firm’s expected cash flows The inverse relation between risk and expected cash flows arises because financial distress, which is more likely to occur for firms with high total risk, can impose costs on customers, suppliers, and employees and thereby affect their willingness to commit themselves to relationships with the firm. In summary, total risk is likely to affect a firm's value adversely by leading to lower sales and higher costs. Consequently, any action taken by a firm that decreases its total risk will improve its sales and cost outlooks, thereby increasing its expected cash flows
7. A memorandum by Labor Secretary Robert Reich to President Clinton suggests that the government penalize U.S. companies that invest overseas rather than at home. According to Reich, this kind of investment hurts exports and destroys well-paying jobs. Comment on this argument.
Answer. The assumption underlying Secretary Reich's memo is inconsistent with the empirical evidence. According to this evidence, U.S. companies that invest abroad tend to expand their exports from the United States. The jump in exports stems from the fact that by investing abroad, companies are able to expand their presence in foreign markets as well as protect foreign markets that would otherwise be lost to competitors. This enables them to sell more product, most of which is made in the United States. In addition, the foreign plants tend to use components and capital equipment that are mostly made in and exported from U.S. plants. Penalizing U.S. companies that invest abroad as Secretary Reich suggests would most likely lead to the loss of foreign markets as well as the additional exports that such markets generate. Such penalties would also reduce the efficiency of the world economy. After all, there is usually a reason, rooted in sound economic logic, why MNCs invest abroad.
8.a. Are multinational firms riskier than purely domestic firms?