Multinational Financial Management 11th Edition by Alan C. Shapiro Solution manual
Answer. Although multinational corporations are confronted with many added risks when venturing overseas, they can also take advantage of international diversification to reduce their overall riskiness. We will also see in Chapter 16 that foreign operations enable MNCs to retaliate against foreign competitive intrusions in the domestic market and to more closely track their foreign competitors, reducing the risk of being blind sided by new developments overseas.
b. What data would you need to address this question?
Answer. You would need to take relatively comparable firms in the same industry, but with different percentages of earnings from abroad, and compare the variability of their earnings.
9. Is there any reason to believe that MNCs may be less risky than purely domestic firms? Explain.
Answer. Yes. International diversification may actually allow firms to reduce the total risk they face. Much of the general market risk facing a company is related to the cyclical nature of the domestic economy of the home country. Operating in a number of nations whose economic cycles are not perfectly in phase may, therefore, reduce the overall variability of the firm's earnings. Thus, even though the riskiness of operating in any one country may exceed the risk of operating in the United States (or other home country), much of that risk is eliminated through diversification. In fact, as shown in Chapter 15, the variability of earnings appears to decline as firms become more internationally oriented.
10. In what ways do financial markets grade government economic policies?
Answer. Traders and their customers receive a continuing flow of news from around the world. The announcement of a new policy leads traders to buy or sell currency, stocks or bonds based on their evaluation of the effect of that policy on the market. A desirable policy leads them to buy more of the assets favorably affected by the policy, while a policy that is judged to be harmful leads to sell orders of those assets that will be hurt by the policy. The result is a continuing global referendum on a nation's economic policies, even before they are implemented.
Politicians who pursue particular economic policies that they perceive to be beneficial to them (e.g., by improving their re‑election odds), even if these policies harm the national economy, usually don't appreciate the grades they receive. But the market's judgments are clear‑eyed and hard-nosed and will respond negatively to unsound fiscal and monetary policies. Politicians will not admit that it was their own policies that led to higher interest rates or lower currency values or stock prices; that would be political suicide. It is much easier to blame greedy speculators rather than their policies for the market's response.
ADDITIONAL CHAPTER 1 QUESTIONS AND ANSWERS
1. In seeking to predict tomorrow's exchange rate, are you better off knowing today's exchange rate or the exchange rates for the past 100 days?
Answer. In an efficient market, which the foreign exchange market certainly appears to be, the current price of an asset such as a currency fully reflects all available information, including the complete price history. Thus knowing today's price is as informative from a forecasting standpoint as knowing all past prices. Past prices add nothing to the current price in terms of forecasting ability.
2. Why might setting up production facilities abroad lead to expanded sales in the local market?
Answer. By producing abroad, a company can more easily keep abreast of market developments, adapting its products and production schedules to changing local tastes and conditions while, simultaneously, providing more comprehensive after‑sales service. Establishing local production facilities also demonstrates a greater commitment to the local market and an increased assurance of supply stability. This is particularly important for firms that produce intermediate goods for sale to other companies.
3a. How might total risk affect a firm's production costs and its ability to sell? Give some examples of firms in financial distress that saw their sales drop.
Answer. Higher total risk can lead to lower sales and higher production costs. 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. Examples include Chrysler and Texaco, which saw their sales fall and costs of doing business rise when they were in financial distress.