Unformatted text preview: analysis.
Another aspect of political risk is terrorism against U.S.
firms or executives. For example, U.S. and Japanese
executives have been kidnapped and held for ransom in
several South American countries.
20 MNCs vs Domestic Financial Mgt These six factors complicate financial management, and
they increase the risks faced by multinational firms.
However, the prospects for high returns, diversification
benefits, and other factors make it worthwhile for firms to
accept these risks and learn how to manage them.
accept 21 Multinational Capital Budgeting Although the same basic principles of capital budgeting analysis
apply to both foreign and domestic operations, there are some
First, cash flow estimation is more complex for overseas
investments. Most multinational firms set up separate
subsidiaries in each foreign country in which they operate, and
the relevant cash flows for the parent company are the
dividends and royalties paid by the subsidiaries to the parent.
Second, these cash flows must be converted into the parent
company’s currency, hence they are subject to exchange rate
risk. For example, General Motors’ German subsidiary may
make a profit of 100 million marks in 2013, but the value of this
profit to GM will depend on the dollar/mark exchange rate: How
many dollars will 100 million marks buy?
22 Multinational Capital Budgeting Dividends and royalties are normally taxed by both foreign
and home-country governments. Furthermore, a foreign
government may restrict the amount of the cash that may be
repatriated to the parent company.
For example, some governments place a ceiling, stated as a
percentage of the company’s net worth, on the amount of
cash dividends that a subsidiary can pay to its parent.
Such restrictions are normally intended to force
multinational firms to reinvest earnings in the foreign
country, although restrictions are sometimes imposed to
prevent large currency outflows, which might disrupt the
23 Multinational Capital Budgeting Whatever the host country’s motivation for blocking
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