EXERCISES AACSB Reflective Thinking Analytical Skills 1 Why do most developed

Exercises aacsb reflective thinking analytical skills

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EXERCISES (AACSB: Reflective Thinking, Analytical Skills) 1 Why do most developed nations require consolidated financial statements? 2 What does currency risk mean? 3 What are some ways that companies can reduce the currency risk they face? 4 Compare the current-rate method of currency translation with the temporal method. 5 Explain the difference between the foreign exchange rate and the internal forward rate. [1] “Historical Exchange Rates,” OANDA, accessed October 28, 2010,-rates?date_fmt=us&date=10/26/09&date1=02/25/09&exch=EUR&exch2=EUR&expr=USD&expr2=USD&format=HTML&margin_fixed=0. Kate O’Sullivan, “Freeing the Yuan,” CFO , June 23, 2010, accessed October 28, 2010, . Saylor URL: Saylor.org 766
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15.3 Fundamentals of Finance LEARNING OBJECTIVES 1 Know the various financing options available to international firms. 2 Explain the value of capital budgeting. 3 Understand the role of governments in affecting investment decisions. Financial Structure and Sources of Financing As demonstrated in the opening case study, governments, banks, and individuals all play a role in international financing. Businesses get external capital from these sources—capital that lets them build, expand, and grow. Financial structure refers to the ways in which a multinational firm’s assets are financed— from short-term borrowing to long-term debt and equity. Managing a multinational firm’s financial structure involves asking: What is the ideal mix of debt versus equity to finance international operations? Where should these funds be invested? Multinational firms engage in both transnational financing (i.e., seeking capital from a foreign sources) and transnational investment (i.e., investing capital in foreign markets). Sources of financing available to firms include foreign stock exchanges, foreign bond markets, foreign banks, venture-capital firms, and funding from the parent company. Although global equity and debt markets offer firms a new way to get funding—often at lower cost than US markets—they are also complicated by foreign currency and exchange rates. Equity financing refers to raising capital by selling shares of stock. The stock market refers to the organized trading of securities through exchanges. An individual or entity can purchase partial ownership in a corporation, buying shares of stock in the company. The global equity market refers to all stock exchanges worldwide where firms can buy and sell stock for financing an investment. Saylor URL: Saylor.org 767
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The largest exchanges in the world include the New York Stock Exchange (NYSE) Euronext, the Tokyo Stock Exchange, NASDAQ (National Association of Securities Dealers Automated Quotations) stock exchange, and the London Stock Exchange. The advantage of raising capital in equity markets is that the firm doesn’t have to repay the money at a specific time or at a specific interest rate, as it does with bank loans. The disadvantage is
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