Introduction to Corporate Finance

(avery) #1
Ross et al.: Fundamentals
of Corporate Finance, Sixth
Edition, Alternate Edition

VIII. Topics in Corporate
Finance


  1. International Corporate
    Finance


© The McGraw−Hill^775
Companies, 2002

CHAPTER


22


International Corporate


Finance


On January 1, 1999,a new currency was born: the euro. The euro (€) became
the common currency for the 11 European nations that make up the European
Economic and Monetary Union (EMU). In an extraordinary turn of events, these
11 countries effectively turned their sovereign currencies, and control of their
monetary policies, over to the new European Central Bank. Some of the major
proponents of the new system were businesses in the 11 countries, many of
which believed the union was necessary to enhance competitiveness with
countries like the United States. In early 2002, currencies such as the German
mark and the French franc became footnotes in history, which will make it easier
for consumers to compare the prices of goods of all types across national
borders. In this chapter, we explore the role played by currencies and exchange
rates, along with a number of other key topics in international finance.

orporations with significant foreign operations are often called international cor-
porationsor multinationals. Such corporations must consider many financial fac-
tors that do not directly affect purely domestic firms. These include foreign
exchange rates, differing interest rates from country to country, complex ac-
counting methods for foreign operations, foreign tax rates, and foreign government
intervention.
The basic principles of corporate finance still apply to international corporations; like
domestic companies, these firms seek to invest in projects that create more value for the
shareholders than they cost and to arrange financing that raises cash at the lowest possi-
ble cost. In other words, the net present value principle holds for both foreign and do-
mestic operations, although it is usually more complicated to apply the NPV rule to
foreign investments.
One of the most significant complications of international finance is foreign ex-
change. The foreign exchange markets provide important information and opportunities
for an international corporation when it undertakes capital budgeting and financing de-
cisions. As we will discuss, international exchange rates, interest rates, and inflation
rates are closely related. We will spend much of this chapter exploring the connection
between these financial variables.

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