IB0010–International Financial Management

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Master of Business Administration- MBA Semester 3

IB0010–International Financial Management -4 Credits

(Book ID:B1759)

Assignment (60 marks)

Note: Assignment Set -1 must be written within 6-8 pages. Answer all questions.

Q1. How International Financial Management does help in maximizing the wealth of the shareholders?

Answer. Effective financial management is not limited to the application of the latest business techniques or functioning more efficiently but includes maximization of wealth meaning that it aims to offer profit tithe shareholder, the owners of the businesses and to ensure that they gain benefits from the business decisions that have been made. So, the goal of international financial management is to increase the wealth of shareholders just like in domestic financial management. The goals are not only limited to just the shareholders, but also to the suppliers, customers and employees. It is also understood that any goal cannot be achieved without achieving the welfare of the shareholders. Increasing the price of the share would mean maximizing shareholders wealth.

Though in many countries such as Canada, the United Kingdom, Australia and the United States, it has been accepted that the primary goal of financial management is to maximize the wealth of the shareholders; in other countries it is not as widely embraced. In countries such as Germany and France, the shareholders are generally viewed as a part of the ‘stakeholders’ along with the customers, banks, suppliers and so on. In European countries, the managers consider the most important goal to be the overall welfare of the stakeholders of the firm.

Q2. Explain the major accounts and sub categories of the balance of payments statement.

Answer. The economic transactions of a country’s residents in relation to the rest of the world are summarized by the balance of payments statement. It also presents the transactions of movements in official reserves, the net income that has been generated abroad and the transactions that take place in the physical and financial assets.

The BOP consists of current account, capital account and reserve account. The current account records flow of goods, services and unilateral transfers. The capital account shows the transactions that involve changes in the foreign financial assets and liabilities of a country.

BOP is neither an income statement nor a balance sheet. It is a statement of sources and uses of funds that reflects changes in assets, liabilities and net worth during a specified period of time.

Q3. Define what you mean by Forward Markets. Discuss the differences between futures options and spot options.

Answer. Forward Market

In the forward market, contracts are made to buy and sell currencies for future delivery, say, after a fortnight, one month two months, or three months. The rate of exchange for the transaction is agreed upon on the very day the deal is finalized. The forward rates with varying maturity are quoted in the newspapers and those rates form the basis of the contract. Both the parties have to abide by the exchange rate mentioned in the contract irrespective of whether the spot rate on the maturity date is more or less than that of the forward rate. In other words, no party can back out of the deal, even if changes in the future spot rate are not in his or her favour.

The value date in case of a forward contract lies definitely beyond the value date applicable to a spot contract.

If it is a one-month forward contract, the value date will be the date in the next month corresponding to the spot value date. Suppose a currency is purchased on 1 August, if it is a spot transaction, the currency will be delivered on 3 August.

Q4. Define cost of capital. Discuss the approaches that are employed to calculate the cost of equity capital.

Answer. The cost of capital is a term used in the field of financial investment to refer to the cost of a company's funds (both debt and equity), or, from an investor's point of view "the shareholder's required return on a portfolio company's existing securities".[1] It is used to evaluate new projects of a company as it is the minimum return that investors expect for providing capital to the company, thus setting a benchmark that a new project has to meet.

In cost of capital, calculating of cost of equity capital is not so easy like calculation of cost of debt because there are many approaches in cost of equity capital. These are just like different methods of cost equity methods which have been developed after developing the outlook of company.

1. Dividend price approach

According to dividend price approach, we can calculate cost of capital just dividing dividend per share with market value of per share. This cost shows direct relationship between price of equity shares and price of dividend. Its % value shows what amount, we are giving per $ 100 share.

Q5. Explain the techniques adopted by MNCs to reduce country risk.

Answer. Political risk is the likelihood that political forces will cause great changes in a country’s business environment that will lower the profits of a business enterprise or prevents it from reaching other goals.  Examples of political risk include political changes that result in increased tax rates, the imposition of exchange controls that limit or block a subsidiary's ability to repatriate profits, the imposition of price controls, and government interference in existing contracts.  In extreme cases, a foreign firm’ assets can be expropriated or social unrest may result in economic collapse, which can render a firm’s assets worthless.   When political risk is high, there is a strong likelihood that a change will occur in the country’s political environment that will harm the MNC.

Q6. Define the benefits of FDI. State the cost of FDI to the home country.

Answer. The Benefits and Costs of FDI to Home Countries

FDI also produces costs and benefits to the home (or source) country. Does the US economy benefit or lose from investments by its firms in foreign markets? Does the Japanese economy lose or gain from Toyota's investment in France? Some argue that FDI is not always in the home country's national interest and should be restricted. Others argue that the benefits far outweigh the costs and any restrictions would be contrary to national interests.

Benefits of FDI to the Home Country

The benefits of FDI to the home country arise from three sources. First, and perhaps most important, the capital account of the home country's balance of payments benefits from the inward flow of foreign earnings. Thus, one benefit to Japan from Toyota's investment in France are the earnings that are subsequently repatriated to Japan from France. FDI can also benefit the current

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