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International Finance

by: Precious Notetaker

International Finance

Marketplace > University of Memphis > Finance > > International Finance
Precious Notetaker
University of Memphis
GPA 3.16
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About this Document

These notes are a brief overview of the material from chapter 14.
Business Analytic Tools
Dr. Amini
Class Notes
International, MNC, Capital Budgeting




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This 2 page Class Notes was uploaded by Precious Notetaker on Tuesday April 12, 2016. The Class Notes belongs to at University of Memphis taught by Dr. Amini in Spring 2016. Since its upload, it has received 16 views. For similar materials see Business Analytic Tools in Finance at University of Memphis.


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Date Created: 04/12/16
International Finance Chapter 14: Multinational Capital Budgeting It is important to know that the earnings that the subsidiary makes are taxed by the host government, so if a project is profitable for the subsidiary, it may not be for the parent. There alos might be restrictions on remitted earnings and the existing exchange rateplay a pretty big part. In order to determine how profitable a project might be, the parent company uses forecasting. The usual forecast characteristics that are considered are:1.) Initial Investment 2.) Price and consumer demand 3.) Costs 4.) Tax Laws 5.) Remitted Funds 6.) Exchange Rates 7.) Salvage value 8.) Required Rate of Return Capital Budgeting is often conducted from the parent's perspective and is based on the assumption that the subsidiary would be wholly owned by the parent and created to enhance the parent's value. So, subsidiaries are not in business just for themselves. Increased investment by the parent increases its exchange rate exposure. 1.) No foreign forecasting is required 2.) Subsidiary makes no interest payments and therefore remits larger cash flows 3.) Salvage value to be remitted to the parent is larger The exchange rate of highly inflation countries tend to weaken over time. Even if subsidiary earnings are inflated, they will be deflated when converted into the parent's home currency should the child's currency weaken because of its high inflation, as suggested by purchasing power parity. Terminology From Previous Chapters Translation Exposure – risk that a company's equities, assets, liabilities, or income will change in value as result of exchange rate changes Transaction Exposure – risk faced by MNCs that currency exchange rates will change after it already has entered into a financial obligation Economic Exposure – caused by te effect of unexpected currency currency fluctuations on a company's future cash flow Fisher Effect – describes the realtionship between inflation and both real and nominal interest rates Real interest rate = nominal – expected inflation rate International Fisher Effect – expected change in exchange rate between 2 currencies is roughly the same as the difference between nominal interest rates Purchasing Power Parity – estimates amount of adjustment needed on the echange to be equivalent to each currency's purchasing power Call Option – When a country knows that it will be making a purchase in the future for a particular item, it should take a long position.


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