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Than political risk varies from country to country

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Unformatted text preview: analysis. Another aspect of political risk is terrorism against U.S. Another firms or executives. For example, U.S. and Japanese executives have been kidnapped and held for ransom in several South American countries. several 20 MNCs vs Domestic Financial Mgt These six factors complicate financial management, and These they increase the risks faced by multinational firms. However, the prospects for high returns, diversification However, 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 Although apply to both foreign and domestic operations, there are some key differences. 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 cash dividends and royalties paid by the subsidiaries to the parent. dividends Second, these cash flows must be converted into the parent Second, 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? dollars 22 Multinational Capital Budgeting Dividends and royalties are normally taxed by both foreign Dividends taxed 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 For 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 Such multinational firms to reinvest earnings in the foreign country, although restrictions are sometimes imposed to prevent large currency outflows, which might disrupt the exchange rate. exchange 23 Multinational Capital Budgeting Whatever the host country’s motivation for blocking Whatever repatria...
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