EECS 1520 Lecture Notes - Lecture 4: Comparative Advantage, International Business, Weighted Arithmetic Mean
21 Jun 2018
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EECS 1520 Lecture 4 Notes
Introduction
Cost of capital
The uncertainty surrounding cash flows also declines and results in a lower required rate
of return and cost of capital for MNCs.
Consequently, the valuations of MNCs increase.
Although financial managers cannot control such forces, they can control the extent of
their firm’s exposure to them.
These macro economically oriented chapters provide the background necessary to make
financial decisions.
A microeconomic perspective and focus on how the financial management of an MNC
can affect its value.
Financial decisions by MNCs are commonly classified as either investing decisions or
financing decisions.
In general, investing decisions by an MNC tend to affect the numerator of the valuation
model because such decisions affect expected cash flows.
In addition, investing decisions by the MNC that alter the firm’s weighted average cost
of capital may also affect the denominator of the valuation model.
Long-term financing decisions by an MNC tend to affect the denominator of the
valuation model because they affect its cost of capital.
The main goal of an MNC is to maximize shareholder wealth.
When managers are tempted to serve their own interests instead of those of
shareholders, an agency problem exists.
Multinational corporations tend to experience greater agency problems than do
domestic firms because managers of foreign subsidiaries might be tempted to make
decisions that serve their subsidiaries instead of the overall MNC.
Proper incentives and communication from the parent may help to ensure that
subsidiary managers focus on serving the overall MNC.
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Document Summary
The uncertainty surrounding cash flows also declines and results in a lower required rate of return and cost of capital for mncs. Long-term financing decisions by an mnc tend to affect the denominator of the valuation model because they affect its cost of capital. Proper incentives and communication from the parent may help to ensure that subsidiary managers focus on serving the overall mnc. International business is justified by three key theories. The theory of comparative advantage suggests that each country should use its comparative advantage to specialize in its production and rely on other countries to meet other needs. Although financial managers cannot control such forces, they can control the extent of their firm"s exposure to them. These macro economically oriented chapters provide the background necessary to make financial decisions. A microeconomic perspective and focus on how the financial management of an mnc can affect its value.
