Multinational Finance – by Kirt C. Butler
Learning objectives
 Foreign exchange & Eurocurrency markets
 Financial risk management
– Derivative instruments (futures, options, & swaps)
– Management of exposures to financial price risk
 International corporate finance
– Country risk, capital budgeting, cost of capital, taxation,
real options, corporate governance, & cross-border M&A
 International portfolio investment
– Capital markets, portfolio investment, and asset pricing
Butler / Multinational Finance
Chapter
5e (2012)
1 AnJohn
Introduction
Wiley &to
Sons
Multinational
Ltd.
Finance
1-1
Everything should be made
as simple as possible,
but not simpler.
Albert Einstein
Butler / Multinational Finance
Chapter 1 An Introduction to Multinational Finance
1-2
Chapter 1
An Introduction to Multinational Finance
Learning objectives
 Corporate governance and the goals of the
multinational corporation
 The challenges of multinational operations
– Cultural differences and country risks
 The opportunities of multinational operations
– Investment opportunities
– Financial opportunities
 Financial management of the MNC
Butler / Multinational Finance
Chapter 1 An Introduction to Multinational Finance
1-3
✓ Goals of the MNC
Challenges of the MNC
Opportunities of the MNC
Financial management of the MNC
A definition of the MNC ✓
Governance of the MNC
Claims on corporate revenues
A starting point…
 Multinational
financial management is
financial management conducted in more
than one cultural, social, economic, or
political environment
 We’ll
develop a framework for evaluating the
opportunities, costs and risks of operating in
the world’s markets for goods, services, and
financial assets and liabilities
Butler / Multinational Finance
Chapter 1 An Introduction to Multinational Finance
1-4
✓ Goals of the MNC
Challenges of the MNC
Opportunities of the MNC
Financial management of the MNC
A definition of the MNC
Governance of the MNC ✓
Claims on corporate revenues
Governance of the MNC
Supervisory board
Management
Shareholders
Debt
Assets
Equity
Butler / Multinational Finance
Chapter 1 An Introduction to Multinational Finance
1-5
✓ Goals of the MNC
Challenges of the MNC
Opportunities of the MNC
Financial management of the MNC
A definition of the MNC
Governance of the MNC
Claims on corporate revenues ✓
Claims on corporate revenues
REVENUES
EXPENSES
GOVT
OTHER
DEBT
EQUITY
VREVENUES
= VEXPENSES + VGOVT + VOTHER + VDEBT + VEQUITY
Butler / Multinational Finance
Chapter 1 An Introduction to Multinational Finance
1-6
Goals of the MNC
✓ Challenges of the MNC
Opportunities of the MNC
Financial management of the MNC
Cultural challenges ✓
Additional risks
Risk versus exposure to risk
The gentle reader will never,
never know what a consummate
ass he can become,
until he goes abroad.
Mark Twain
Butler / Multinational Finance
Chapter 1 An Introduction to Multinational Finance
1-7
Goals of the MNC
✓ Challenges of the MNC
Opportunities of the MNC
Financial management of the MNC
Cultural challenges
Additional risks ✓
Risk versus exposure to risk
The MNC’s additional risks

Country risk - the risk that the business
environment in a host country will
unexpectedly change
- Political risk - the risk that the business
environment in a host country will change
unexpectedly due to political events
- Financial risk - the risk of unexpected change
in the financial or economic environment of a
host country
Butler / Multinational Finance
Chapter 1 An Introduction to Multinational Finance
1-8
Goals of the MNC
✓ Challenges of the MNC
Opportunities of the MNC
Financial management of the MNC
Cultural challenges
Additional risks
Risk versus exposure to risk ✓
Risk versus risk exposure

Risk exists whenever actual outcomes
can differ from expectations

A company has an exposure to risk when
its value can change with unexpected
changes in business conditions
Butler / Multinational Finance
Chapter 1 An Introduction to Multinational Finance
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Goals of the MNC
Challenges of the MNC
✓ Opportunities of the MNC
Financial management of the MNC
The MNC’s opportunities ✓
Imperfect financial markets
Market inefficiencies
The MNC’s opportunities
Value = St [E[CFt] / (1+it)t]

Multinational investment policy
- Higher returns from existing investments
- New investment opportunities

Multinational financial policy
- Reduced capital costs through access to
international capital markets
Butler / Multinational Finance
Chapter 1 An Introduction to Multinational Finance
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Goals of the MNC
Challenges of the MNC
✓ Opportunities of the MNC
Financial management of the MNC
Return
25%
The MNC’s opportunities ✓
Imperfect financial markets
Market inefficiencies
The optimal capital budget
Domestic firm’s
cost of capital
20%
15%
10%
Domestic firm’s
investment
opportunity set
5%
0%
0
100
200
300
400
500
Domestic firm
Capital budget ($ millions)
Butler / Multinational Finance
Chapter 1 An Introduction to Multinational Finance
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Goals of the MNC
Challenges of the MNC
✓ Opportunities of the MNC
Financial management of the MNC
Return
25%
The MNC’s opportunities ✓
Imperfect financial markets
Market inefficiencies
The value of multinationality
Domestic firm’s
cost of capital
MNC’s investment
opportunity set
20%
15%
10%
Domestic firm’s
investment
opportunity set
MNC’s cost
of capital
5%
0%
0
100
200
Domestic firm
300
400
Multinational corporation (MNC)
500
Capital budget ($ millions)
Butler / Multinational Finance
Chapter 1 An Introduction to Multinational Finance
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Goals of the MNC
Challenges of the MNC
✓ Opportunities of the MNC
Financial management of the MNC
The MNC’s opportunities
Imperfect financial markets ✓
Market inefficiencies
Perfect financial market assumptions

Frictionless markets
- No government intervention or taxes
- No transactions, agency, or bankruptcy costs
Rational investors
 Equal access to costless information
 Equal access to market prices

Financial opportunities often involve a
violation of one of these assumptions
Butler / Multinational Finance
Chapter 1 An Introduction to Multinational Finance
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Goals of the MNC
Challenges of the MNC
✓ Opportunities of the MNC
Financial management of the MNC
The MNC’s opportunities
Imperfect financial markets
Market inefficiencies ✓
Characteristics of financial markets

Types of market efficiency
- Operational efficiency refers to the influence of
transactions costs
- Informational efficiency refers to whether
prices reflect information
- Allocational efficiency refers to the whether
capital moves to productive uses
Each of these is promoted by market liquidity
(that is, the ease with which you can capture
an asset’s value)
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Chapter 1 An Introduction to Multinational Finance
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Goals of the MNC
Challenges of the MNC
Opportunities of the MNC
✓ Financial management of the MNC
International business ✓
Multinational finance
Where the art resides
Vivé la difference
Cross-border differences can affect all areas of
business, particularly through differences in
- Language & culture
- Human resource management
- Accounting
- Marketing
- Distribution
- Logistics
- Financial markets
- Corporate governance
- Other business conventions
(legal, accounting, taxation, regulation, etc.)
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Goals of the MNC
Challenges of the MNC
Opportunities of the MNC
✓ Financial management of the MNC
International business
Multinational finance ✓
Where the art resides
Multinational financial management

Multinational finance is interdisciplinary within
the field of finance
Multinational financial managers must know…
-
Foreign exchange and Eurocurrency markets
Derivatives (futures, options, & swaps)
International financial markets (debt & equity)
International markets for real assets
(e.g., land or labor)
- International portfolio investment
Butler / Multinational Finance
Chapter 1 An Introduction to Multinational Finance
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Goals of the MNC
Challenges of the MNC
Opportunities of the MNC
✓ Financial management of the MNC
International business
Multinational finance
…where the art resides ✓
The notes I handle no better than
many pianists, but the pauses
between the notes –
ah, that is where the art resides.
Arthur Schnabel
Butler / Multinational Finance
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