Global corporate finance

599 Pages·4.86 MB·English

by  Sixth Edition.

SIX TH ED ITION
G L O B A L
C O R P O R A T E
F I N A N C E
Suk Kim and Seung H. Kim
Global Corporate Finance
World Value of the Dollar
The table below, based on foreign-exchange quotations from Reuters, gives the rates of exchange for the US dollar against various currencies as of Friday,
July 9, 2004. Unless otherwise noted, all rates listed are middle rates of interbank bid and asked quotes, and are expressed in foreign currency units per one
US dollar.
Value Value Value Value Value Value
Country (Currency) 07/09 07/02 Country (Currency) 07/09 07/02 Country (Currency) 07/09 07/02
Albania(Lek) 100.850 100.300 Gambia (Dalasi) 29.7500 29.7500 (Kina) 3.1109 3.1090
Algeria(Dinar) 71.0100 71.0100 Ghana(Cedi) 9,027.5 9,025.0 Paraguay(Guarani) d 5,920.0 5,920.0
Angola(New Kwanza) 83.9911 83.7239 Gibraltar(Pound) 0.6269 0.6269 Peru(Nuevo Sol) d 3.4507 3.4686
Angola Greenland Philippines(Peso) 55.8036 55.8659
(Readj Kwanza) 83.9911 83.7239 (Danish Krone) 5.9905 6.0347 Pitcairn Island
Antigua Grenada (NZ $) 1.5200 1.5444
(East Caribbean $) 2.6700 2.6700 (East Caribbean $) 2.6700 2.6700 Poland(Zloty) o 3.6460 3.6750
Argentina(Peso) 2.9499 2.9464 Guadeloupe(Franc) 7.4330 7.4330 Puerto Rico(US $) 1.0000 1.0000
Armenia(Dram) 531.25 533.25 Guam(US $) 1.0000 1.0000 Qatar(Rial) 3.6398 3.6399
Aruba(Florin) 1.7900 1.7900 Guatemala(Quetzal) 7.8950 7.8850 Réunion, Ile de la
Australia(Dollar) 1.3835 1.4021 Guinea Bissau (Franc) 7.4330 7.4330
Azerbaijan(Manat) 4,920.0 4,915.0 (CFA Franc) 528.63 532.93 Romania(Leu) 32,943.0 32,964.0
Bahamas(Dollar) 1.0000 1.0000 Guinea Rep.(Franc) 2,055.0 2,055.0 Russia(Ruble) m, b 29.1121 29.0107
Bahrain(Dinar) 0.3770 0.3770 Guyana(Dollar) 179.000 179.000 Rwanda(Franc) 563.25 562.75
Bangladesh(Taka) 59.1500 59.2500 Halti(Gourde) 33.1070 32.5000 Saint Christopher
Barbados(Dollar) 1.9900 1.9900 Honduras Rep. (East Caribbean $) 2.6700 2.6700
Belarus(Ruble) 2,165.5 2,163.0 (Lempira) 18.2200 18.2100 Saint Helena(Pound) 0.6269 0.6269
Belize(Dollar) 1.9700 1.9700 Hong Kong(Dollar) 7.8003 7.8003 Saint Lucia
Benin(CFA Franc) 528.63 532.93 Hungary(Forint) 203.335 203.542 (East Caribbean $) 2.6700 2.6700
Bermuda(Dollar) 1.0000 1.0000 Iceland(Krona) 70.9900 72.1000 Saint Pierre(Franc) 7.4330 7.4330
Bhutan(Ngultrum) 47.6250 47.6250 India(Rupee) m 45.6204 45.7038 Saint Vincent
Bolivia Indonesia(Rupiah) 8,896.8 9,132.4 (East Caribbean $) 2.6700 2.6700
(Boliviano) f 7.9298 7.9385 Iran(Rial) o 8,656.0 8,645.0 Samoa, American
Bosnia & Herzeg. Israel(Shekel) 4.4823 4.4723 (US $) 1.0000 1.0000
(Convertible Mark) 1.5828 1.6113 Ivory Coast Samoa, Western
Botswana(Pula) 4.5403 4.5883 (CFA Franc) 528.63 532.93 (Tala) 2.8063 2.7540
Bouvet Island Jamaica(Dollar) o 60.8100 60.7200 Sã Tomé and Principe
(Krone) 6.8192 6.9052 Japan(Yen) 108.331 108.366 (Dobra) 8,700.0 8,700.0
Brazil(Real) 3.0423 3.0386 Jordan(Dinar) 0.7090 0.7090 Saudi Arabia(Riyal) 3.7509 3.7495
Brunei(Dollar) 1.7040 1.7155 Kazakhstan(Tenge) 135.300 135.850 Senegal(CFA Franc) 528.63 532.93
Bulgaria(Lev) 1.5755 1.5874 Kenya(Shilling) 79.7000 79.4500 Seychelles(Rupee) 5.1800 5.1800
Burkina Faso Kiribati Sierra Leone(Leone) 2,455.0 2,455.0
(CFA Franc) 528.63 532.93 (Australia $) 1.3836 1.4022 Singapore(Dollar) 1.7021 1.7114
Burundi(Franc) 1,075.3 1,075.5 Korea, North(Won) 2.2000 2.2000 Slovakia(Koruna) 32.1440 32.2997
Cambodia(Riel) 3,990.0 3,990.0 Korea, South(Won) 1,149.4 1,154.5 Slovenia(Tolar) 193.230 194.690
Cameroon(CFA Franc) 528.63 532.93 Kuwait(Dinar) 0.2948 0.2948 Solomon Islands
Canada(Dollar) 1.3184 1.3242 Laos, People DR (Dollar) 7.2697 7.4375
Cape Verde Isl (Kip) 7,882.0 7,882.0 Somalia(Shilling) d 2,620.0 2,620.0
(Escudo) 108.950 108.950 Latvia(Lat) 0.5341 0.5371 South Africa
Cayman Islands Lebanon(Pound) 1,509.0 1,514.0 (Rand) c 6.0864 6.1162
(Dollar) 0.8200 0.8200 Lesotho(Maloti) 6.1000 6.1510 Sri Lanka(Rupee) 102.780 102.350
Central African Rep. Liberia (US $) 1.0000 1.0000 Sudan(Dinar) c 259.540 259.540
(CFA Franc) 528.63 532.93 Libya(Dinar) 1.3233 1.3233 Sudan Rep.(Pound) 2,595.4 2,595.4
Chad(CFA Franc) 528.63 532.93 Liechtenstein Suriname(Guilder) 2,515.0 2,515.0
Chile(Peso) 634.92 630.12 (Swiss Franc) 1.2234 1.2327 Swaziland
China(Yuan) 8.2781 8.2781 Lithuania (Lita) 2.7815 2.8027 (Lilangeni) 6.1510 6.1510
Colombia(Peso) o 2,668.8 2,670.2 Macau(Pataca) 8.0066 8.0066 Sweden(Krona) 7.4074 7.4571
Comoros(Franc) 454.327 454.327 Macedonia(Denar) 49.8200 51.5400 Switzerland(Franc) 1.2235 1.2326
Congo Dem. Rep. Madagascar DR Syria(Pound) 48.5200 50.2170
(CFA Franc) 528.63 532.93 (Malagasy Franc) 9,508.0 9,305.0 Taiwan(Dollar) o 33.5345 33.5458
Congo, People Rep. Malawi(Kwacha) 108.750 108.550 Tanzania(Shilling) 1,100.0 1,107.0
(CFA Franc) 528.63 532.93 Malaysia(Ringgit) e 3.8000 3.8000 Thailand(Baht) 40.7332 40.6669
Costa Rica(Colon) 438.770 438.000 Maldives(Rufiyaa) 12.8000 12.8000 Togo, Rep.
Croatia(Kuna) 5.9379 5.9805 Mali Rep.(CFA Franc) 528.63 532.93 (CFA Franc) 528.63 532.93
Cuba(Peso) 1.0000 1.0000 Malta(Lira) 0.3437 0.3465 TongaIslands
Cyprus(Pound) 0.4688 0.4718 Martinique(Franc) 7.4330 7.4330 (Pa’anga) 1.9608 1.9863
Czech. Republic Mauritania(Ouguiya) 254.250 254.400 Trinidad & Tobago
(Koruna) 25.3743 25.8131 Mauritius(Rupee) 28.2400 28.2100 (Dollar) 6.1500 6.1500
Denmark(Krone) 5.9916 6.0350 Mexico(Peso) 11.4903 11.4482 Tunisia(Dinar) 1.2432 1.2473
Djibouti(Franc) 175.000 175.000 Moldova(Leu) 11.8500 11.8550 Turkey(Lira) h 1,449,275.4 1,449,275.4
Dominica Mongolia(Tugrik) m 1,180.0 1,174.0 Turks & Cakos
(East Caribbean $) 2.6700 2.6700 Montserrat (US $) 1.0000 1.0000
Dominican Rep.(Peso) 43.5000 45.0940 (East Caribbean $) 2.6700 2.6700 Uganda(Shilling) 1,741.5 1,761.5
Ecuador(US $) g 1.0000 1.0000 Morocco(Dirham) 8.8756 8.9315 Ukraine(Hryvnia) 5.3183 5.3190
Egypt(Pound) 6.2364 6.2201 Mozambique(Metical) 22,650.0 22,628.5 United Arab Emir.
El Salvador Myanmar(Kyat) 6.4200 6.4200 (Dirham) 3.6730 3.6730
(Colon) d 8.7520 8.7520 Namibia(Dollar) 6.0500 6.1900 United Kingdom
Equatorial Guinea Nauru Island (Pound Sterling) 0.5378 0.5454
(CFA Franc) 528.63 532.93 (Australia $) 1.3836 1.4022 Uruguay(Peso) m 29.4118 29.5858
Estonia(Kroon) 12.6050 12.7063 Nepal(Rupee) 72.0000 72.0000 Vanuatu(Vatu) 113.220 115.000
Ethiopia(Birr) o 8.5800 8.6795 Netherlands Antilles Venezuela
European Union (Guilder) 1.7800 1.7800 (Bolivar) d 1,919.4 1,919.4
(Euro) 0.8057 0.8116 New Zealand(Dollar) 1.5200 1.5444 Vietnam(Dong) o 15,721.0 15,734.0
Faeroe Islands Nicaragua Virgin Islands
(Danish Krone) 5.9905 6.0347 (Cordoba Oro) 15.8400 15.8300 (US $) 1.0000 1.0000
Falkland Islands Nigeria (Naira) m 134.550 133.300 Yemen(Rial) a 184.520 184.520
(Pound) 0.6269 0.6269 Norway(Krone) 6.8213 6.9061 Yugoslavia
Fiji(Dollar) 1.7449 1.7715 Oman(Sul Rial) 0.3850 0.3850 (New Dinar) 58.6293 58.9989
French Guiana Pakistan(Rupee) 58.2072 58.3431 Zambia(Kwacha) 4,780.0 4,763.0
(Franc) 7.4330 7.4330 Panama(Balboa) 1.0000 1.0000 Zimbabwe(Dollar) 5,350.9 5,338.8
Gabon(CFA Franc) 528.63 532.93 Papua New Guinea
*US $ per national currency unit. a, Parallel; b, Russian Central Bank rate; c, commercial; d, free market; e, government rate; f, financial; h, floating rate as
of 2/22/01; m, market; o, official.
Source:The Wall Street Journal, July 12, 2004, p. C13.
S I X T H E D I T I O N
G L O B A L
C O R P O R A T E
F I N A N C E
t e x t a n d c a s e s
Suk H. Kim
University of Detroit Mercy
and
Seung H. Kim
St. Louis University
© 2006 by Suk H. Kim and Seung H. Kim
BLACKWELLPUBLISHING
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9600 Garsington Road, Oxford OX4 2DQ, UK
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The right of Suk H. Kim and Seung H. Kim to be identified as the Authors of this Work has been asserted in
accordance with the UK Copyright, Designs, and Patents Act 1988.
All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any
form or by any means, electronic, mechanical, photocopying, recording or otherwise, except as permitted by the UK
Copyright, Designs, and Patents Act 1988, without the prior permission of the publisher.
This edition published 2006 by Blackwell Publishing Ltd
1 2006
Library of Congress Cataloging-in-Publication Data
Kim, Suk H.
Global corporate finance : text and cases / Suk H. Kim, Seung H. Kim.—6th ed.
p. cm.
Includes bibliographical references and index.
ISBN-13: 978-1-4051-1990-0 (hardcover : alk. paper)
ISBN-10: 1-4051-1990-X (hardcover : alk. paper) 1. International business enterprises—Finance.
2. International finance. 3. International business enterprises—Finance—Case studies. I. Kim, Seung Hee.
II. Title.
HG4027.5.K557 2006
658.15¢99—dc22
2005022069
A catalogue record for this title is available from the British Library.
Set in 10 on 12 pt Adobe Garamond
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Contents
List of Figures xii
List of Tables xv
Preface and Acknowledgments xviii
About the Authors xxvii
Part I: The Global Financial Environment 1
Chapter 1: Introduction 3
Opening Case 1: TIAA-CREF Goes Global with Corporate Governance 3
1.1 Reasons to Study International Finance 5
1.2 Company Goals and Functions of Financial Management 8
1.3 Multinational Companies and their Performance 10
1.4 Principles of Global Finance 14
1.5 Agency Theory and Corporate Governance 18
1.6 Environmental Differences 21
1.7 The Structure of this Book 23
Summary 23
Questions 24
References 24
Case Problem 1: What Is a National Company? 25
Chapter 2: Motives for World Trade and Foreign Investment 28
Opening Case 2: The Effect of Foreign Investment on Exports 28
2.1 Motives for Foreign Trade 29
2.2 Economic Integration 38
vi CONTENTS
2.3 Motives for Foreign Investment 43
2.4 A Synthesis of Foreign Trade and Investment Theories 46
Summary 47
Questions 47
Problems 48
References 49
Case Problem 2: The Fruits of Free Trade Under the World Trade Organization 49
Chapter 3: The Balance of Payments 54
Opening Case 3: Opportunity Cost and Comparative Advantage 54
3.1 An Overview of the Balance of Payments 55
3.2 Balance-of-Payments Accounts 57
3.3 The Actual Balance of Payments 63
3.4 How to Reduce a Trade Deficit 70
Summary 72
Questions 72
Problems 73
References 73
Case Problem 3: USA–China Trade Relations 74
Chapter 4: The International Monetary System 78
Opening Case 4: The Euro – A Story of Change 78
4.1 A Successful Foreign-Exchange System 81
4.2 A Brief History of the International Monetary System 87
4.3 The International Monetary Fund 94
4.4 The European Monetary Union 98
4.5 Proposals for Further International Monetary Reform 102
Summary 104
Questions 105
References 105
Case Problem 4: The Mexican Peso Crisis of December 1994 106
Part II: Corporate Foreign-Exchange Risk Management 111
Chapter 5: The Foreign-Exchange Market and Parity Conditions 113
Opening Case 5: The Volume of Foreign-Exchange Trading 113
5.1 Major Participants in the Exchange Market 115
5.2 Spot Exchange Quotation: The Spot Exchange Rate 120
5.3 Forward Exchange Quotation: The Forward Exchange Rate 125
5.4 International Parity Conditions 128
5.5 Arbitrages 136
CONTENTS vii
Summary 142
Questions 142
Problems 143
References 145
Case Problem 5: The Big Mac Hamburger Standard: February 2003 146
Chapter 6: Currency Futures and Options 148
Opening Case 6: Derivatives Risks 148
6.1 The Currency Futures Market 150
6.2 The Currency Options Market 157
6.3 Futures Options 169
Summary 170
Questions 171
Problems 171
References 173
Case Problem 6: Merck’s Use of Currency Options 174
Chapter 7: Financial Swaps 177
Opening Case 7: Why have Gillette and GE Chosen a Higher Cost of Funding? 177
7.1 The Emergence of the Swap Market 179
7.2 Plain Vanilla Swaps 183
7.3 Motivations for Swaps 187
Summary 191
Questions 192
Problems 192
References 193
Case Problem 7: Regulations of Derivatives Markets 193
Chapter 8: Exchange Rate Forecasting 196
Opening Case 8: Mundell Wins Nobel Prize in Economics 196
8.1 Measuring Exchange Rate Changes 197
8.2 The Forecasting Needs of the Multinational Company 199
8.3 Forecasting Floating Exchange Rates 201
8.4 Forecasting Fixed Exchange Rates 210
Summary 216
Questions 216
Problems 217
References 218
Case Problem 8: General Motors Operations in Mexico, and the Peso Crisis 218
Chapter 9: Managing Transaction Exposure and Economic Exposure 221
Opening Case 9: Avon’s Actions to Protect Against Volatile Currencies 221
9.1 The Basic Nature of Foreign-Exchange Exposures 222
viii CONTENTS
9.2 Transaction Exposure Management 226
9.3 Economic Exposure Management 233
9.4 Currency Exposure Management Practices 235
Summary 238
Questions 238
Problems 239
References 241
Case Problem 9: Western Mining’s Economic Exposure Management 241
Chapter 10: Translation Exposure Management 243
Opening Case 10: Main Features of Accounting Exposure 243
10.1 Translation Rules 244
10.2 FASBs 8 and 52 247
10.3 Hedging Translation Exposure 251
Summary 252
Questions 253
Problems 254
References 256
Case Problem 10: Dell Mercosur 256
Part III: The Global Financing Strategy 261
Chapter 11: International Financial Markets 263
Opening Case 11: Foreign Investors Load Up with Asia’s Shares 263
11.1 Eurocurrency Markets 264
11.2 The Eurocurrency Interbank Market 269
11.3 The Asian Currency Market 274
11.4 The International Bond Market 276
11.5 The International Equity Market 281
11.6 Long-Term Capital Flows to Developing Countries 285
Summary 286
Questions 287
Problems 288
References 289
Case Problem 11: The Rise and Fall of the US Stock Market 290
Chapter 12: International Banking Issues and Country Risk Analysis 293
Opening Case 12: Argentina’s Currency Crisis 293
12.1 International Banking Operations 295
12.2 International Loans 298
12.3 Country Risk Analysis 309
CONTENTS ix
Summary 314
Questions 314
Problems 314
References 315
Case Problem 12: The World Bank 316
Chapter 13: Financing Foreign Trade 319
Opening Case 13: US Export–Import Bank Seeks Private Investors 319
13.1 Basic Documents in Foreign Trade 320
13.2 The Payment Terms of Export Transactions 326
13.3 Sources of Financing Foreign Trade 333
Summary 339
Questions 340
Problems 341
References 342
Case Problem 13: Arms Dealers Get Creative with Offsets 342
Chapter 14: Financing Foreign Investment 345
Opening Case 14: Failed US–Vietnamese Joint Ventures 345
14.1 Internal Sources of Funds 346
14.2 External Sources of Funds 349
14.3 Development Banks 357
Summary 362
Questions 363
Problems 363
References 364
Case Problem 14: IBM’s Strategic Alliances 364
Part IV: Global Investment Strategy 367
Chapter 15: International Working Capital Management 369
Opening Case 15: An Efficient Global Treasury Structure 369
15.1 The Basic Concepts of Working Capital Management 370
15.2 Cash Management 382
15.3 Accounts Receivable Management 388
15.4 Inventory Management 389
Summary 392
Questions 393
Problems 393
References 395
Case Problem 15: Navistar International’s Netting System 395
Chapter 16: International Portfolio Investment 398
Opening Case 16: LE Group Shows how Korea Inc. Might Restructure 398
16.1 Key Terminology 400