Page 12 - DMGT549_INTERNATIONAL_FINANCIAL_MANAGEMENT

Unit 1: Financial Management in Global Context

management’s actions to maximize stock price tend to provide long-term benefits to shareholders, Notes
employees, and consumers. These actions of management that maximize stock price also tend to
benefit society by allocating the resources in the best possible manner.

Example: If a company is able to produce high-quality goods and services at the lowest
possible cost, society also tends to benefit because its resources are optimally utilized.

Self Assessment

State whether the following statements are true or false:
4. Stock prices respond positively to the actions of management that enhance the value of the
company and improve the ability of a company to be successful in the long run.
5. profit maximization is considered to be a more appropriate objective than Shareholder-
wealth maximization because it considers the net benefits after taking into account the
compensation for time and risk.

6. The goal of maximization of shareholders’ wealth involves minimizing the NPV or wealth
of an investment decision to the shareholders.

7. A well diversified MNC can actually reduce risks and fluctuations in earnings and cash
flows by making the diversity in geography and currency work in its favour.

Caselet Emergence of MNCs

orporations invest abroad for a variety of reasons. Among them are to open new
markets or to hold onto existing ones; to avoid tariffs or other trade restrictions;
Cto tap new sources of raw materials and agricultural production; and to take
advantage of cheap foreign labour. Although the history of American MNCs goes back to
at least the mid-19th century and a significant number of MNCs had been established by
the turn of the 20th century, their emergence as a key factor in international commerce is
really a product of the post-World War II period.
Source: International Financial Management, Madhu Vij, Excel Books.

1.3 International Financial Management and Domestic Financial

Management

International Finance is a distinct field of study and certain features set it apart from domestic
financial management, MNC has got operations around the world and thus have to deal with
international, customers, shareholders and other suppliers. Financial Management for an MNC
is much more complex, as they have to deal with exchange rate fluctuations, foreign currency,
dual taxation, uncertain political and economic environment and a host of other uncertainties
and risks. The important distinguishing features of international finance are discussed below:

1. Foreign exchange risk: An understanding of foreign exchange risk is essential for managers
and investors in the modern day environment of unforeseen changes in foreign exchange
rates. In a domestic economy this risk is generally ignored because a single national
currency serves as the main medium of exchange within a country. When different national
currencies are exchanged for each other, there is a definite risk of volatility in foreign

LOVELY PROFESSIONAL UNIVERSITY 7