Ross et al.: Fundamentals

of Corporate Finance, Sixth

Edition, Alternate Edition

VIII. Topics in Corporate

Finance

22. 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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