Global corporate finance 6th ed suk kim and seung

SIXTH E DI TI ON

G L OBAL
CORP ORATE
FI NANCE
Suk Kim and Seung H. Kim


Global Corporate Finance


World Value of the Dollar
The table below, based on foreign-exchange quotations from Reuters, gives the rates of exchange for the US dollar against various currencies as of Friday,
July 9, 2004. Unless otherwise noted, all rates listed are middle rates of interbank bid and asked quotes, and are expressed in foreign currency units per one
US dollar.
Country (Currency)
Albania (Lek)
Algeria (Dinar)
Angola (New Kwanza)
Angola
(Readj Kwanza)
Antigua
(East Caribbean $)
Argentina (Peso)
Armenia (Dram)
Aruba (Florin)
Australia (Dollar)
Azerbaijan (Manat)
Bahamas (Dollar)
Bahrain (Dinar)
Bangladesh (Taka)

Barbados (Dollar)
Belarus (Ruble)
Belize (Dollar)
Benin (CFA Franc)
Bermuda (Dollar)
Bhutan (Ngultrum)
Bolivia
(Boliviano) f
Bosnia & Herzeg.
(Convertible Mark)
Botswana (Pula)
Bouvet Island
(Krone)
Brazil (Real)
Brunei (Dollar)
Bulgaria (Lev)
Burkina Faso
(CFA Franc)
Burundi (Franc)
Cambodia (Riel)
Cameroon (CFA Franc)
Canada (Dollar)
Cape Verde Isl
(Escudo)
Cayman Islands
(Dollar)
Central African Rep.
(CFA Franc)
Chad (CFA Franc)
Chile (Peso)

China (Yuan)
Colombia (Peso) o
Comoros (Franc)
Congo Dem. Rep.
(CFA Franc)
Congo, People Rep.
(CFA Franc)
Costa Rica (Colon)
Croatia (Kuna)
Cuba (Peso)
Cyprus (Pound)
Czech. Republic
(Koruna)
Denmark (Krone)
Djibouti (Franc)
Dominica
(East Caribbean $)
Dominican Rep. (Peso)
Ecuador (US $) g
Egypt (Pound)
El Salvador
(Colon) d
Equatorial Guinea
(CFA Franc)
Estonia (Kroon)
Ethiopia (Birr) o
European Union
(Euro)
Faeroe Islands
(Danish Krone)

Falkland Islands
(Pound)
Fiji (Dollar)
French Guiana
(Franc)
Gabon (CFA Franc)

Value
07/09

Value
07/02

100.850
71.0100
83.9911

100.300
71.0100
83.7239

83.9911

83.7239

2.6700
2.9499
531.25
1.7900
1.3835

4,920.0
1.0000
0.3770
59.1500
1.9900
2,165.5
1.9700
528.63
1.0000
47.6250

2.6700
2.9464
533.25
1.7900
1.4021
4,915.0
1.0000
0.3770
59.2500
1.9900
2,163.0
1.9700
532.93
1.0000
47.6250

7.9298

7.9385

1.5828
4.5403

1.6113
4.5883

6.8192
3.0423
1.7040
1.5755

6.9052
3.0386
1.7155
1.5874

528.63
1,075.3
3,990.0
528.63
1.3184

532.93
1,075.5
3,990.0
532.93
1.3242

108.950

108.950

0.8200

0.8200

528.63
528.63
634.92
8.2781
2,668.8
454.327

532.93
532.93
630.12
8.2781
2,670.2
454.327

528.63

532.93

528.63
438.770
5.9379
1.0000
0.4688

532.93
438.000
5.9805
1.0000
0.4718

25.3743
5.9916
175.000

25.8131
6.0350
175.000

2.6700
43.5000
1.0000
6.2364

2.6700
45.0940
1.0000
6.2201

8.7520

8.7520

528.63

12.6050
8.5800

532.93
12.7063
8.6795

0.8057

0.8116

5.9905

6.0347

0.6269
1.7449

0.6269
1.7715

7.4330
528.63

7.4330
532.93

Country (Currency)
Gambia (Dalasi)
Ghana (Cedi)

Gibraltar (Pound)
Greenland
(Danish Krone)
Grenada
(East Caribbean $)
Guadeloupe (Franc)
Guam (US $)
Guatemala (Quetzal)
Guinea Bissau
(CFA Franc)
Guinea Rep. (Franc)
Guyana (Dollar)
Halti (Gourde)
Honduras Rep.
(Lempira)
Hong Kong (Dollar)
Hungary (Forint)
Iceland (Krona)
India (Rupee) m
Indonesia (Rupiah)
Iran (Rial) o
Israel (Shekel)
Ivory Coast
(CFA Franc)
Jamaica (Dollar) o
Japan (Yen)
Jordan (Dinar)
Kazakhstan (Tenge)
Kenya (Shilling)
Kiribati

(Australia $)
Korea, North (Won)
Korea, South (Won)
Kuwait (Dinar)
Laos, People DR
(Kip)
Latvia (Lat)
Lebanon (Pound)
Lesotho (Maloti)
Liberia (US $)
Libya (Dinar)
Liechtenstein
(Swiss Franc)
Lithuania (Lita)
Macau (Pataca)
Macedonia (Denar)
Madagascar DR
(Malagasy Franc)
Malawi (Kwacha)
Malaysia (Ringgit) e
Maldives (Rufiyaa)
Mali Rep. (CFA Franc)
Malta (Lira)
Martinique (Franc)
Mauritania (Ouguiya)
Mauritius (Rupee)
Mexico (Peso)
Moldova (Leu)
Mongolia (Tugrik) m
Montserrat

(East Caribbean $)
Morocco (Dirham)
Mozambique (Metical)
Myanmar (Kyat)
Namibia (Dollar)
Nauru Island
(Australia $)
Nepal (Rupee)
Netherlands Antilles
(Guilder)
New Zealand (Dollar)
Nicaragua
(Cordoba Oro)
Nigeria (Naira) m
Norway (Krone)
Oman (Sul Rial)
Pakistan (Rupee)
Panama (Balboa)
Papua New Guinea

Value
07/09

Value
07/02

29.7500
9,027.5
0.6269

29.7500
9,025.0
0.6269

5.9905

6.0347

2.6700
7.4330
1.0000
7.8950

2.6700
7.4330
1.0000
7.8850

528.63
2,055.0
179.000
33.1070

532.93
2,055.0
179.000
32.5000

18.2200
7.8003

203.335
70.9900
45.6204
8,896.8
8,656.0
4.4823

18.2100
7.8003
203.542
72.1000
45.7038
9,132.4
8,645.0
4.4723

528.63
60.8100
108.331
0.7090
135.300
79.7000

532.93
60.7200
108.366
0.7090
135.850
79.4500

1.3836
2.2000
1,149.4
0.2948

1.4022
2.2000
1,154.5
0.2948

7,882.0
0.5341
1,509.0
6.1000
1.0000
1.3233

7,882.0
0.5371
1,514.0
6.1510
1.0000
1.3233

1.2234
2.7815
8.0066
49.8200

1.2327

2.8027
8.0066
51.5400

9,508.0
108.750
3.8000
12.8000
528.63
0.3437
7.4330
254.250
28.2400
11.4903
11.8500
1,180.0

9,305.0
108.550
3.8000
12.8000
532.93
0.3465
7.4330
254.400
28.2100
11.4482
11.8550
1,174.0

2.6700
8.8756
22,650.0
6.4200
6.0500

2.6700
8.9315
22,628.5
6.4200
6.1900

1.3836
72.0000

1.4022
72.0000

1.7800
1.5200

1.7800
1.5444

15.8400
134.550
6.8213
0.3850
58.2072
1.0000

15.8300
133.300
6.9061
0.3850
58.3431
1.0000

Country (Currency)
(Kina)
Paraguay (Guarani) d
Peru (Nuevo Sol) d
Philippines (Peso)
Pitcairn Island
(NZ $)
Poland (Zloty) o
Puerto Rico (US $)
Qatar (Rial)
Réunion, Ile de la
(Franc)
Romania (Leu)
Russia (Ruble) m, b
Rwanda (Franc)
Saint Christopher
(East Caribbean $)
Saint Helena (Pound)
Saint Lucia
(East Caribbean $)
Saint Pierre (Franc)
Saint Vincent

(East Caribbean $)
Samoa, American
(US $)
Samoa, Western
(Tala)
Sã Tomé and Principe
(Dobra)
Saudi Arabia (Riyal)
Senegal (CFA Franc)
Seychelles (Rupee)
Sierra Leone (Leone)
Singapore (Dollar)
Slovakia (Koruna)
Slovenia (Tolar)
Solomon Islands
(Dollar)
Somalia (Shilling) d
South Africa
(Rand) c
Sri Lanka (Rupee)
Sudan (Dinar) c
Sudan Rep. (Pound)
Suriname (Guilder)
Swaziland
(Lilangeni)
Sweden (Krona)
Switzerland (Franc)
Syria (Pound)
Taiwan (Dollar) o
Tanzania (Shilling)

Thailand (Baht)
Togo, Rep.
(CFA Franc)
Tonga Islands
(Pa’anga)
Trinidad & Tobago
(Dollar)
Tunisia (Dinar)
Turkey (Lira) h
Turks & Cakos
(US $)
Uganda (Shilling)
Ukraine (Hryvnia)
United Arab Emir.
(Dirham)
United Kingdom
(Pound Sterling)
Uruguay (Peso) m
Vanuatu (Vatu)
Venezuela
(Bolivar) d
Vietnam (Dong) o
Virgin Islands
(US $)
Yemen (Rial) a
Yugoslavia
(New Dinar)
Zambia (Kwacha)
Zimbabwe (Dollar)

Value
07/09

Value
07/02

3.1109
5,920.0
3.4507
55.8036

3.1090
5,920.0
3.4686
55.8659

1.5200
3.6460
1.0000
3.6398

1.5444
3.6750
1.0000
3.6399

7.4330
32,943.0
29.1121
563.25

7.4330
32,964.0
29.0107
562.75

2.6700
0.6269

2.6700
0.6269

2.6700
7.4330

2.6700
7.4330

2.6700

2.6700

1.0000

1.0000

2.8063

2.7540

8,700.0
3.7509
528.63
5.1800
2,455.0
1.7021
32.1440
193.230

8,700.0
3.7495
532.93
5.1800
2,455.0
1.7114
32.2997
194.690

7.2697
2,620.0

7.4375
2,620.0

6.0864
102.780
259.540
2,595.4
2,515.0

6.1162
102.350
259.540
2,595.4
2,515.0

6.1510
7.4074
1.2235
48.5200
33.5345
1,100.0
40.7332

6.1510
7.4571
1.2326
50.2170
33.5458
1,107.0
40.6669

528.63

532.93

1.9608

1.9863

6.1500
1.2432
1,449,275.4

6.1500
1.2473
1,449,275.4

1.0000
1,741.5
5.3183

1.0000
1,761.5
5.3190

3.6730

3.6730

0.5378
29.4118
113.220

0.5454
29.5858
115.000

1,919.4
15,721.0

1,919.4
15,734.0

1.0000
184.520

1.0000
184.520

58.6293
4,780.0
5,350.9

58.9989
4,763.0
5,338.8

*US $ per national currency unit. a, Parallel; b, Russian Central Bank rate; c, commercial; d, free market; e, government rate; f, financial; h, floating rate as
of 2/22/01; m, market; o, official.
Source: The Wall Street Journal, July 12, 2004, p. C13.


SIXTH EDITION

GLOBAL
C O R P O R AT E
FINANCE
text and cases
Suk H. Kim

University of Detroit Mercy

and
Seung H. Kim
St. Louis University


© 2006 by Suk H. Kim and Seung H. Kim
BLACKWELL PUBLISHING

350 Main Street, Malden, MA 02148-5020, USA
9600 Garsington Road, Oxford OX4 2DQ, UK
550 Swanston Street, Carlton, Victoria 3053, Australia
The right of Suk H. Kim and Seung H. Kim to be identified as the Authors of this Work has been asserted in
accordance with the UK Copyright, Designs, and Patents Act 1988.
All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any
form or by any means, electronic, mechanical, photocopying, recording or otherwise, except as permitted by the UK
Copyright, Designs, and Patents Act 1988, without the prior permission of the publisher.
This edition published 2006 by Blackwell Publishing Ltd
1

2006

Library of Congress Cataloging-in-Publication Data
Kim, Suk H.
Global corporate finance : text and cases / Suk H. Kim, Seung H. Kim.—6th ed.
p. cm.
Includes bibliographical references and index.
ISBN-13: 978-1-4051-1990-0 (hardcover : alk. paper)
ISBN-10: 1-4051-1990-X (hardcover : alk. paper) 1. International business enterprises—Finance.

2. International finance. 3. International business enterprises—Finance—Case studies. I. Kim, Seung Hee.
II. Title.
HG4027.5.K557 2006
658.15¢99—dc22
2005022069
A catalogue record for this title is available from the British Library.
Set in 10 on 12 pt Adobe Garamond
by SNP Best-set Typesetter Ltd, Hong Kong
Printed and bound in the United Kindom
by TJ International, Padstow, Cornwall
The publisher’s policy is to use permanent paper from mills that operate a sustainable forestry policy, and which has
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publisher ensures that the text paper and cover board used have met acceptable environmental accreditation standards.
For further information on
Blackwell Publishing, visit our website:
www.blackwellpublishing.com


Contents

List of Figures
List of Tables
Preface and Acknowledgments
About the Authors

Part I: The Global Financial Environment
Chapter 1: Introduction

xii
xv

xviii
xxvii
1

Opening Case 1: TIAA-CREF Goes Global with Corporate Governance
1.1 Reasons to Study International Finance
1.2 Company Goals and Functions of Financial Management
1.3 Multinational Companies and their Performance
1.4 Principles of Global Finance
1.5 Agency Theory and Corporate Governance
1.6 Environmental Differences
1.7 The Structure of this Book

3
3
5
8
10
14
18
21
23

Summary
Questions
References
Case Problem 1: What Is a National Company?

23
24

24
25

Chapter 2: Motives for World Trade and Foreign Investment
Opening Case 2: The Effect of Foreign Investment on Exports
2.1 Motives for Foreign Trade
2.2 Economic Integration

28
28
29
38


vi

CONTENTS

2.3 Motives for Foreign Investment
2.4 A Synthesis of Foreign Trade and Investment Theories

43
46

Summary
Questions
Problems
References
Case Problem 2: The Fruits of Free Trade Under the World Trade Organization

47
47
48
49
49

Chapter 3: The Balance of Payments
Opening Case 3: Opportunity Cost and Comparative Advantage
3.1 An Overview of the Balance of Payments
3.2 Balance-of-Payments Accounts
3.3 The Actual Balance of Payments
3.4 How to Reduce a Trade Deficit

54
54
55
57
63
70

Summary
Questions
Problems
References
Case Problem 3: USA–China Trade Relations

72
72
73
73

74

Chapter 4: The International Monetary System
Opening Case 4: The Euro – A Story of Change
4.1 A Successful Foreign-Exchange System
4.2 A Brief History of the International Monetary System
4.3 The International Monetary Fund
4.4 The European Monetary Union
4.5 Proposals for Further International Monetary Reform

78
78
81
87
94
98
102

Summary
Questions
References
Case Problem 4: The Mexican Peso Crisis of December 1994

104
105
105
106

Part II: Corporate Foreign-Exchange Risk Management

111

Chapter 5: The Foreign-Exchange Market and Parity Conditions

113
113
115
120
125
128
136

Opening Case 5: The Volume of Foreign-Exchange Trading
5.1 Major Participants in the Exchange Market
5.2 Spot Exchange Quotation: The Spot Exchange Rate
5.3 Forward Exchange Quotation: The Forward Exchange Rate
5.4 International Parity Conditions
5.5 Arbitrages


CONTENTS

Summary
Questions
Problems
References
Case Problem 5: The Big Mac Hamburger Standard: February 2003

Chapter 6: Currency Futures and Options

vii
142
142
143
145
146

Opening Case 6: Derivatives Risks
6.1 The Currency Futures Market
6.2 The Currency Options Market
6.3 Futures Options

148
148
150
157
169

Summary
Questions
Problems
References
Case Problem 6: Merck’s Use of Currency Options

170
171
171
173
174

Chapter 7: Financial Swaps
Opening Case 7: Why have Gillette and GE Chosen a Higher Cost of Funding?
7.1 The Emergence of the Swap Market
7.2 Plain Vanilla Swaps
7.3 Motivations for Swaps

177
177
179
183
187

Summary
Questions
Problems
References
Case Problem 7: Regulations of Derivatives Markets

191
192
192
193
193

Chapter 8: Exchange Rate Forecasting
Opening Case 8: Mundell Wins Nobel Prize in Economics
8.1 Measuring Exchange Rate Changes
8.2 The Forecasting Needs of the Multinational Company
8.3 Forecasting Floating Exchange Rates
8.4 Forecasting Fixed Exchange Rates

196
196
197
199
201
210

Summary
Questions
Problems
References
Case Problem 8: General Motors Operations in Mexico, and the Peso Crisis

216
216
217
218
218

Chapter 9: Managing Transaction Exposure and Economic Exposure
Opening Case 9: Avon’s Actions to Protect Against Volatile Currencies
9.1 The Basic Nature of Foreign-Exchange Exposures

221
221
222


viii

CONTENTS

9.2 Transaction Exposure Management
9.3 Economic Exposure Management
9.4 Currency Exposure Management Practices

226
233
235

Summary
Questions
Problems
References
Case Problem 9: Western Mining’s Economic Exposure Management

238
238
239
241
241

Chapter 10: Translation Exposure Management
Opening Case 10: Main Features of Accounting Exposure
10.1 Translation Rules
10.2 FASBs 8 and 52
10.3 Hedging Translation Exposure

243

243
244
247
251

Summary
Questions
Problems
References
Case Problem 10: Dell Mercosur

252
253
254
256
256

Part III: The Global Financing Strategy

261

Chapter 11: International Financial Markets
Opening Case 11: Foreign Investors Load Up with Asia’s Shares
11.1 Eurocurrency Markets
11.2 The Eurocurrency Interbank Market
11.3 The Asian Currency Market
11.4 The International Bond Market
11.5 The International Equity Market
11.6 Long-Term Capital Flows to Developing Countries

263
263
264
269
274
276
281
285

Summary
Questions
Problems
References
Case Problem 11: The Rise and Fall of the US Stock Market

286
287
288
289
290

Chapter 12: International Banking Issues and Country Risk Analysis
Opening Case 12: Argentina’s Currency Crisis
12.1 International Banking Operations
12.2 International Loans
12.3 Country Risk Analysis

293
293
295

298
309


CONTENTS

ix

Summary
Questions
Problems
References
Case Problem 12: The World Bank

314
314
314
315
316

Chapter 13: Financing Foreign Trade
Opening Case 13: US Export–Import Bank Seeks Private Investors
13.1 Basic Documents in Foreign Trade
13.2 The Payment Terms of Export Transactions
13.3 Sources of Financing Foreign Trade

319
319
320
326

333

Summary
Questions
Problems
References
Case Problem 13: Arms Dealers Get Creative with Offsets

339
340
341
342
342

Chapter 14: Financing Foreign Investment
Opening Case 14: Failed US–Vietnamese Joint Ventures
14.1 Internal Sources of Funds
14.2 External Sources of Funds
14.3 Development Banks

345
345
346
349
357

Summary
Questions
Problems
References

Case Problem 14: IBM’s Strategic Alliances

362
363
363
364
364

Part IV: Global Investment Strategy

367

Chapter 15: International Working Capital Management
Opening Case 15: An Efficient Global Treasury Structure
15.1 The Basic Concepts of Working Capital Management
15.2 Cash Management
15.3 Accounts Receivable Management
15.4 Inventory Management

369
369
370
382
388
389

Summary
Questions
Problems
References

Case Problem 15: Navistar International’s Netting System

392
393
393
395
395

Chapter 16: International Portfolio Investment
Opening Case 16: LE Group Shows how Korea Inc. Might Restructure
16.1 Key Terminology

398
398
400


x

CONTENTS

16.2 The Benefits of International Diversification
16.3 Methods of International Diversification

407
413

Summary
Questions
Problems

References
Case Problem 16: Investing in DaimlerChrysler in the USA

419
419
420
421
421

Chapter 17: Corporate Strategy and Foreign Direct Investment

425

Opening Case 17: How Can Companies Get the Most Out of Their Foreign
Investment?
17.1 An Overview of Foreign Direct Investment
17.2 Foreign Direct Investment in Developing Countries
17.3 Cross-Border Mergers and Acquisitions

425
426
429
433

Summary
Questions
Problems
References
Case Problem 17: BP’s Acquisition of Amoco

441
441
442
443
443

Chapter 18: International Capital Budgeting Decisions
Opening Case 18: External Factors Affecting Foreign Project Analysis
18.1 The Foreign Investment Decision-Making Process
18.2 Portfolio Theory
18.3 Capital Budgeting Theory and Practice
18.4 Political Risk Management

447
447
448
458
460
462

Summary
Questions
Problems
References
Case Problem 18: Multinational Capital Budgeting Practices

468
468
469
471

472

Chapter 19: The Cost of Capital for Foreign Projects

474
474
476
480
482
484

Opening Case 19: GM’s Target Debt Ratio in its Overseas Expansion
19.1 The Weighted Average Cost of Capital
19.2 The Optimum Capital Structure
19.3 The Marginal Cost of Capital and Investment Decisions
19.4 Cultural Values and Capital Structure
Summary
Questions
Problems
References
Case Problem 19: Do Multinational Firms Have Lower Debt Ratios than
Domestic Firms?

486
486
487
488
488

CONTENTS

Chapter 20: Corporate Performance of Foreign Operations

xi

Opening Case 20: Offshore Workers Increase IBM’s Profits
20.1 The Global Control System and Performance Evaluation
20.2 International Taxation
20.3 Transfer Pricing and Tax Planning

490
490
491
499
506

Summary
Questions
Problems
References
Case Problem 20 : Advanced Technology’s Ethical Dilemma

509
510
510
513
514

Web Resources and Internet Exercises

Answers to Selected End-of-Chapter Problems
Glossary
Index

518
538
545
564


Figures

1.1
1.2
2.1
2.2
2.3
2.4
2.5
3.1
3.2
3.3
4.1
4.2
4.3
4.4
4.5
4.6
4.7
4.8

5.1
5.2
5.3
5.4
5.5
6.1
6.2

An integrated decision-making model in global finance
Expanded opportunity set for international business
Economic freedom and consumption
The Mercosur trade group
Progress on tariffs
The tax on trade
An organizational chart of the World Trade Organization
Global capital flows: sources and uses of global capital in 2001
The J-curve effect
US trade balances with Mexico and China
Argentine pesos per US dollar (inverted scale)
Market determination of exchange rates
How an increase in demand for pounds affects the equilibrium
How an increase in supply of pounds affects the equilibrium
The US dollar under floating exchange rates
The US dollar’s doldrums fuel the euro’s rise
Mexican international reserves in 1994
Mexican pesos per US dollar (inverted scale)
Shares of the reported foreign-exchange trading volume, 2001
A map of major foreign-exchange markets with time zones
Bank of Japan intervention
Relationships among various financial rates

Covered-interest arbitrage
The number of currency futures contracts traded on the Chicago
Mercantile Exchange
The market share for currency futures, 2001

15
16
35
40
50
51
52
69
71
75
83
84
85
86
90
101
107
108
114
117
119
136
139
158
158

FIGURES

6.3
6.4
6.5
7.1
7.2
7.3
7.4
7.5
7.6
8.1

The market value of a call option
The market value of a put option
Profit–loss profiles for an option holder
The structure of a parallel loan
An interest rate swap
A currency swap
Motivation for the interest rate swap
Motivation for the currency swap
The size of the over-the-counter derivatives market
Technical analysis: charting and the filter rule; peaks, troughs, trends,
resistance, and support levels illustrated for the $/DM
8.2
Technical analysis: moving-average rule (5- and 20-day moving averages)
9.1
Survey results of 110 chief financial officers

10.1
Exchange rates for the Brazilian real and the US dollar
11.1
Asian markets boom as foreigners pile in
11.2
International interest rate linkages
11.3
Major stock exchanges as a share of world stock market capitalization
11.4
Developing countries’ privatization revenues
11.5
(a) Net financial flows to developing countries, 1995–2002; (b) net
financial flows to developing countries from the private sector, 1995–2002
11.6
Stock prices and gross domestic product
11.7
The boom and bust of the US and Japanese stock markets
12.1
The real exchange rate between Argentina and Brazil
12.2
Currency devaluations for five crisis countries
12.3
Stock market drops for five crisis countries
13.1
The process of a typical trade transaction
13.2
US arms exports and offset obligations
15.1
Corporate paradise
15.2

The recent financial performance of Navistar International
16.1
All for one, and one for all
16.2
The security market line
16.3
An efficient frontier
16.4
An optimal portfolio
16.5
Gains from international diversification
16.6
Risk–return trade-offs of international portfolios, 1926–97
16.7
Efficient international portfolios
16.8
Total American investment in foreign securities
16.9
Hedge funds: the number of funds and the net new assets
16.10 Key financial statistics of DaimlerChrysler
16.11 DaimlerChrysler’s revenues and profits
17.1
Net inward FDI flows to developing countries, 1995–2003
17.2
FDI as the share of GDP in developing countries, 1995–2003
17.3
Privatization and M&A in developing countries, 1995–2003
17.4
Incentives for foreign direct investment
17.5

Corporate ownership in five major countries
17.6
A pickup in merger activity

xiii
166
167
168
179
184
186
188
190
194
205
206
237
257
264
272
283
284
285
290
292
294
303
303
326
343

379
396
399
403
407
408
409
411
413
415
416
423
423
430
431
431
432
434
437


xiv

FIGURES

17.7
18.1
18.2
19.1
19.2

19.3

Major oil companies: their reserves and market capitalization
The risk–return trade-off and company goals
Expropriation acts, by year
GM’s Asia-Pacific forays
Debt ratio and the cost of capital
Optimum capital budget: domestic firm versus multinational

444
461
465
475
482
483


Tables

2.1
2.2
2.3
3.1
3.2
3.3
3.4
3.5
3.6
3.7
4.1

4.2
4.3
5.1
5.2
6.1
6.2
6.3
6.4
6.5
6.6
6.7
6.8
7.1
8.1
8.2

Production alternatives of wheat and cameras
Gains to both nations from specialization and trade
The cost of protectionism
The US balance of payments (billions of US dollars)
The US dollar as a fraction of government reserves around the world
Major-country balances on current account (billions of US dollars)
Major-country balances on financial account (billions of US dollars)
World merchandise trade
The international investment position of the USA (billions of US dollars)
The international investment position of Japan (billions of US dollars)
The history of the international monetary system
The composition of the special drawing rights
How the EU and the USA stack up as of December 2002
Currency cross rates and exchange rates

The hamburger standard
Currencies traded on the Chicago Mercantile Exchange
Currency futures quotations in the CME: the Australian dollar
Buying two franc futures contracts on February 1
Reversing the earlier futures contracts on March 1
Currency options prices traded on the Philadelphia Exchange
Swiss franc option quotations
Option: in the money, out of the money, or at the money?
Futures positions after an option exercise
The value of outstanding swaps (billions of US dollars)
A summary of intervention survey responses
Selected economic indicators for the USA and Mexico

31
31
37
60
62
64
64
65
66
66
95
97
100
121
147
151
153

156
156
159
160
161
169
182
214
219


xvi

TABLES

8.3
9.1
9.2
10.1
10.2
10.3
11.1
11.2
11.3
11.4
11.5
11.6
11.7
12.1
12.2

12.3
12.4
12.5
12.6
12.7
12.8
12.9
13.1
13.2
15.1
15.2
15.3
15.4
15.5
15.6
15.7
15.8
16.1
16.2
16.3
16.4
17.1
17.2
18.1
18.2
18.3
18.4

Mexico’s balance of payments (millions of US dollars)
Major differences among three types of exposure

The relative importance of different exchange exposures
Exchange rates used to translate balance-sheet items
A comparison of the four translation methods
Translation of foreign-currency operations under FASBs 8 and 52
Money market instruments
Euronote issue facilities (billions of US dollars)
Selected indicators on the size of the capital markets, 2001
(billions of US dollars)
Outstanding amounts of international debt securities (billions of US dollars)
The percentage breakdown of the total bond market by instrument
(billions of US dollars)
Developing countries’ debt-to-equity ratios, 1997 and 2002
The performance of the major US stock indexes
The world’s 10 largest financial companies and the world’s 10 largest
economies (billions of US dollars as of December 31, 2002)
Characteristics of US foreign banking offices
International syndicated loans (billions of US dollars)
The total external debt of 138 developing countries (billions of US dollars)
Classification of developing countries by debt ratios
Country risk rankings
Bond ratings by Moody’s and Standard & Poor’s
Sovereign ratings by Moody’s and Standard & Poor’s
The organization of the World Bank Group
Differences between factoring and forfaiting
The usage of export-financing methods
Days working capital for selected US and European technology hardware and
equipment companies
The international payments matrix
The multilateral netting schedule
The effects of low versus high transfer price on the flow of funds

The tax effect of low versus high transfer price
Bundled versus unbundled contribution to consolidated income
The use of international cash management techniques
The effect of pricing on profits
Betas for selected firms in two industries
Average returns for US stock funds from July 17, 1998, to August 31, 1998
Correlations of major stock market returns from 1980 to 2001
Dollar-adjusted rates of return and standard deviations
Foreign direct investment (billions of US dollars)
The effects of a tax loss carryforward
Projected earnings after taxes for the proposed project
Depreciation cash flows
The parent’s net present value
Net cash flows under different weather conditions

219
227
236
246
247
250
268
269
276
279
281
286
291
296
298

307
307
311
312
312
313
317
337
338
372
375
375
377
378
382
388
392
402
403
409
412
430
439
456
457
457
459


TABLES

18.5
18.6
19.1
19.2
20.1
20.2
20.3
20.4

Types of political risk and their importance
The use of primary project evaluation techniques
Three different financial plans
Debt ratios for seven regions
The impact of inflation on financial statements
The impact of currency fluctuations on profits
The tax effects of low versus high transfer prices
Key statistics for Computer Engineering and High Tech

xvii
463
472
481
485
493
494
507
516

Preface and
Acknowledgments

The Intended Market
The sixth edition of Global Corporate Finance is suitable for both undergraduate- and graduatelevel courses in international finance, no matter where in the world it is taught, because it does
not adopt any specific national viewpoint. Moreover, it is self-contained, and it combines theory
and applications. The earlier editions of Global Corporate Finance have been adopted by teachers in over 200 colleges, universities, and management development programs worldwide, particularly because the book stresses practical applications in a user-friendly format. As evidence of
its wide-ranging appeal, a translation of the fourth edition into Chinese Complex Characters was
published in 2001 by a major Chinese publishing company in Taiwan.

A Highly Competitive Set of Supplements
The following textbook-related items are available: a Study Guide, transparency masters of lecture
notes in Microsoft® Word and PowerPoint, prepared by the authors, and currency symbols and
codes. The Study Guide is provided at www.blackwellpublishing.com/kim. Each chapter in the
Study Guide includes a list of chapter objectives, detailed chapter outlines, a list of key terms
and concepts with definitions, multiple-choice questions, and review problems with solutions for
key chapters. The transparency masters of lecture notes, and the currency symbols and codes are
also provided on the website.
A comprehensive Instructor’s Manual is also available on the website. The manual contains a
complete set of ancillary materials, including chapter outlines, chapter objectives, key terms and
concepts with definitions, answers to end-of-chapter questions, solutions to end-of-chapter problems, answers to end-of-case questions, a test bank of 500 multiple-choice questions, and transparency masters of key tables and figures from the book.


PREFACE AND ACKNOWLEDGMENTS

xix

Adopters of this book can also request a complimentary subscription to Multinational Business Review (MBR). MBR publishes application-oriented articles and cases dealing with international aspects of accounting, finance, and economics. Some MBR articles may be used as
supplemental materials for international finance courses.

The Underlying Philosophy
CORPORATE PERFORMANCE OF FOREIGN OPERATIONS Overall, this book explores two questions: Why do companies increase profits as they boost their foreign presence? Why are they far
more successful than domestic firms? By extending the exploration of these questions into detailed
operations and strategies, students learn the successful concepts and techniques of multinational
firms. For example, students are introduced to seven key principles of global finance. Only then
can they grasp the platform on which multinational firms build their strategic plans and, at the
same time, sharply define the limited outlook of domestic companies that operate without these
seven principles. The sixth edition relentlessly pursues the techniques and concepts that boost
the performance of global companies until, almost as if by second nature, students can pinpoint
the formula for growth in foreign markets. We then conclude the book by discussing how multinational companies can use international accounting, taxation, and transfer pricing to improve
their overall performance even further. This is why we are confident that this book will enable
students to develop the requisite skills in international finance, which are essential to improve
corporate performance through foreign operations.
SHAREHOLDER VALUE AND CORPORATE GOVERNANCE Global Corporate Finance treats shareholder value and effective corporate governance as its foundation. Why? The maximization of
shareholder value through effective corporate governance is the best way to strengthen the welfare
of all corporate constituents. The stockholders are the owners of the company, and they supply
the risk capital that protects the welfare of other constituents. Thanks to them, a higher stock
price makes it easier for a company to attract additional equity capital. Effective corporate governance is especially crucial to the success of multinational companies with operations all over
the world.
GLOBAL STRATEGY To be competitive in the new economy, which is characterized by information and global competition, companies need to think globally. Thus, this book emphasizes
global strategy in order to equip readers with fresh ideas and concepts for successful business
operations on a global basis.
AN EMPHASIS ON THE BASICS We believe that students learn most effectively when they first
achieve a firm grasp of basics. To stress the basics, we have initially devoted several chapters to
the fundamental concepts of international finance. Once the basics have been learned, the
advanced material flows naturally. As more advanced topics are developed in later chapters, we
tie this material back into the fundamentals, in order to facilitate the learning process and to
provide students with the big picture.
USER-FRIENDLINESS This book builds on knowledge derived from basic courses in economics
and corporate finance. All traditional areas of corporate finance are explored, but from the view-

xx

PREFACE AND ACKNOWLEDGMENTS

point of global financial managers. Tables, figures, and numerical examples clarify discussions of
financial concepts and techniques. All end-of-chapter questions and problems are tied or keyed to
major topics presented in the chapter. Solutions to most end-of-chapter problems can be found at
the end of the text. Additionally, we have made an extra effort to clearly define every key term, which
we highlight in bold type. This book also provides a quick reference glossary with 400 key terms.
COMPLETE REVISION Since the first edition of this book, we have applied the same principle
in consequent revisions; that is, planning anew rather than simply adding on to what we had
already written. This approach has undoubtedly helped us avoid two problems: we have not overlooked important changes in international finance, and we have not unnecessarily increased the
length of the book. This sixth edition contains many new cases, new sections, and new practical examples, but it is shorter in length than the previous edition.
A SUMMARY OF THE UNDERLYING PHILOSOPHY Instructors who want students to possess practical, job-oriented skills in international finance will find that Global Corporate Finance speaks to
their needs. Corporate recruiters often criticize business schools for turning out graduates who
cannot contribute immediately. At the core of this criticism is the belief that, while students are
educated in various theories, little emphasis is placed on developing practical skills. For that
reason, we have been especially careful to ensure that such criticism will not apply to those who
adopt a book that aims at developing students’ skills in international finance. In fact, we expect
that many students will keep this book as a useful reference work after they have completed their
courses.

Learning Features
A CASE-STUDY APPROACH Students find different ways to master a subject, but we believe that
the case-study approach is the most effective. Although this book is not a casebook, it centers
on a series of real-life, current, and decision-oriented cases. We provide actual cases from the real
world to begin and end each chapter. In other words, all 40 cases are bona fide real cases.
GLOBAL FINANCE IN ACTION In this edition, students will find 50 discussions under the

heading of “Global Finance in Action.” We further catch the readers’ attention by setting these
topics apart on the page. These boxes include real-life examples, contemporary issues, and important research findings, as well as new financial instruments and techniques. Among the topics
covered in these boxes are the impact of the September 11, 2001 attacks on the world economy,
the high cost of protectionism, and the US accounting scandal of 2002 and its impact on corporate governance.
INTERNET RESOURCES We have added a list of appropriate website addresses and a set of Internet questions for every chapter: these are located at the end of the book to help students find
specific online sources of information about current company, market, and business events. In
addition, we have designed the questions to help students use real-time resources in preparing
executive briefings and in solving global finance problems.
REAL-WORLD EXAMPLES Global Corporate Finance focuses primarily on corporate finance practice. Throughout, numerous real-world examples present actual applications of financial theories


PREFACE AND ACKNOWLEDGMENTS

xxi

and techniques. These discussions center on how managerial decision-makers work within a
global business with specific areas of responsibility for corporate finance. Specifically, this book
is solidly grounded in the theory of modern corporate finance and yet has strong ties to the real
world of international finance. We discuss and illustrate just about every theory and concept with
actual data and/or practical examples.
READABILITY This book is readable and easy to understand because it discusses the basic tools
and techniques of global finance without a complex treatment of theoretical concepts. Students
become frustrated when they have to study mathematical formulas without corresponding
numerical examples. Practically all of the formulas used in this book are accompanied by practical, but straightforward, numerical examples. We emphasize readability because we believe that
it will motivate readers to pursue further knowledge in international finance.

Pedagogical Features
For ease of learning, each chapter of Global Corporate Finance follows a common format:
• At the beginning of each chapter, a mini-case is provided to achieve two objectives: (1) to
build student interest with regard to the upcoming chapter and (2) to introduce a real-world

example that will be explained further by theories and research findings presented in the
chapter.
• The introductory mini-case is followed by a chapter overview, which describes the chapter
themes and the content of the major sections.
• Real-world illustrations, numerical examples, figures, tables, and special boxes are integrated
throughout the text to clarify discussions of financial concepts and techniques.
• Key terms and concepts are presented in bold type when they are first introduced. We have
also concentrated on clearly defining key terms.
• A short summary provides students with a handy overview of key concepts for review.
• Those references used in each chapter are listed to allow readers to find sources that provide
additional information about specific topics discussed in the chapter.
• A generous number of questions and problems support text discussions; they reemphasize
definitions, concepts, and the application of theory.
• An analytic mini-case concludes each chapter. The closing case problems serve a different
purpose from the opening ones. They present situations for which students must analyze possible actions on the basis of what they have learned in the chapter. In other words, the opening
cases enhance interest and recall essential facts; the closing case problems enhance the development of critical reasoning skills. Moreover, Internet exercises have been added at the end
of each case problem, to explain how the Internet may be used to access international financial data and obtain information on the case concepts.

To the Student
While you may use this book in whatever way you find most comfortable, the following tips may
give your learning experience added value. In each chapter:


xxii

PREFACE AND ACKNOWLEDGMENTS

•
•
•

•

Read the opening case, to view the upcoming material through a real-world example.
Read the chapter text.
Read the chapter summary.
Study the key terms and concepts that are highlighted in bold type. The website consolidates
all of the key terms and concepts, with end-of-chapter definitions.
• Rework any numerical examples provided in the chapter.
• Read our lecture notes for the chapter.
• Prepare notes using your professor’s lectures, lecture notes, and the textbook. Make those
notes your own.

Changes to the Sixth Edition
We have carefully revised the sixth edition to reflect changes in global finance. In response
to reader suggestions, we have eliminated four chapters, added two new chapters, added 16
new cases, developed 20 Internet resources, and discussed many new practical examples in
special boxes under the heading “Global Finance in Action.” We have also revised 40
Internet exercises for students who take international finance courses. We have expanded our
coverage on shareholder value and corporate governance. We have discussed the introduction of
the euro and its impact in several chapters. We have also discussed several new topics in many
chapters – the impact of the September 11, 2001, attacks on the world economy, the growing
economic power of China, and the 2002 corporate scandal in the United States and its impact
on corporate governance. To enhance the international focus of the sixth edition, we have
dropped those topics that took specifically American viewpoints while increasing our coverage of
emerging markets. Finally, we have replaced the currencies of 12 eurozone countries with other
currencies throughout the text, the Instructor’s Manual, and the Study Guide. These and other
changes are designed to place the focus of the book on managerial finance for multinational
companies.
Chapter 1, “Introduction,” has been extensively rewritten to eliminate a few existing topics
and to discuss three new topics: the corporate governance of a major pension fund as an opening

case; the impact of the September 11, 2001, attacks on the world economy; and the orientation
of globalization. Chapter 2, “Motives for World Trade and Foreign Investment,” examines the
impact of economic freedom on consumption, the cost of protectionism, and the fruits of free
trade under the World Trade Organization. Chapter 3, “The Balance of Payments,” considers
the implications of the huge US trade deficit and the trade friction between the USA and China.
Chapter 4, “The International Monetary System,” discusses the euro as an opening case, compresses the history of the international monetary system, and expands the coverage of the euro.
In chapter 5, “The Foreign-Exchange Market and Parity Conditions,” we have replaced both
the opening case and the ending cases with new ones, shortened our discussion on the overview
of the foreign-exchange market, and, in a box, examined the effectiveness of official exchange
intervention. Chapter 6, “Currency Futures and Options,” discusses the risk of financial derivatives more explicitly and analyzes the reasons for the decline in the importance of currency
futures. We have substantially revised chapter 7, “Financial Swaps,” to reflect new information
in the opening case, to describe the US accounting scandal of 2002, and to explain the motives
for the use of financial swaps. Chapter 8, “Exchange Rate Forecasting,” tracks the fluctuation of
the US dollar in a box and discusses the reasons for central bank intervention in currency markets.


PREFACE AND ACKNOWLEDGMENTS

xxiii

The fifth edition of this book had only one chapter about foreign-exchange risk management,
but the sixth edition discusses this important topic in two separate chapters: chapter 9, “Managing Transaction Exposure and Economic Exposure,” and chapter 10, “Translation Exposure
Management.” This means that we have covered foreign-exchange risk management in its
entirety.
Chapter 11, “International Financial Markets,” has been completely rewritten to shorten our
coverage of a few existing topics and to discuss four new topics: the attractiveness of Asian shares,
international interest rate linkages and corporate governance reform as a matter of global concern,
new trends in stock markets, and the rotation from debt to equity by developing countries.
Chapter 12, “International Banking Issues and Country Risk Analysis,” has undergone extensive
revision to discuss Argentina’s currency crisis, the World Bank, and the World’s largest financial

companies. Chapter 13, “Financing Foreign Trade,” evaluates countertrade in a new section and
explains how to collect overdue accounts in a new topic. Chapter 14, “Financing Foreign Investment,” examines motives for strategic alliances in a new topic. Chapter 15, “International
Working Capital Management,” has been shortened. Chapter 16, “International Portfolio Investment,” has a new opening case and discusses most topics with updated information. Chapter 17,
“Corporate Strategy and Foreign Direct Investment,” looks at the reasons for the recent growth
in new mergers and discusses the impact of reduced foreign direct investment in the USA.
Chapter 18, “International Capital Budgeting Decisions,” has been substantially revised to
include political risk analysis in a major new section. In chapter 19, “The Cost of Capital for
Foreign Projects,” a few topics have been dropped but we discuss cultural values and capital structure in a new section. Chapter 20, “Corporate Performance of Foreign Operations,” is a new
chapter that discusses those factors affecting the corporate performance of foreign operations.
Suk H. Kim and Seung H. Kim

Acknowledgments
Many colleagues have provided constructive advice critical to the successful development of the
sixth edition. We would like to express our thanks to Dean Bahman Mirshab (University of
Detroit Mercy) and Dean Ellen F. Harshman (St. Louis University) for their support and encouragement. Our special thanks go to a number of magnanimous reviewers, who provided detailed
written suggestions for this edition in a response to the publisher’s request for their review. We
are also grateful to Dan Baack (St. Louis University) and Stacey Banks (Cleary University) for
developing a Study Guide to complement this book. Several students deserve special acknowledgment for their contributions: Eun-Young Choi, Yalda Ghorashyzadeh, and Kala Raman.
We also wish to thank the staff of Blackwell Publishing who made many valuable contributions
to this edition: Seth Ditchik, Joanna Pyke, Rhonda Pearce, Laura Stearns, and Geoffrey D.
Palmer. Finally, and importantly, we thank the following reviewers for their recommendations
and insights:
Sadhana Alangar, Cleary University
Mazin Aljanabi, Al Akhawayn University Ifrane, Morocco
Stephen F. Borde, University of Central Florida
Bruce Brorby, University of Detroit Mercy


xxiv

PREFACE AND ACKNOWLEDGMENTS

Alva Wright Butcher, University of Puget Sound
Hai Yang Chen, Youngstown State University
John S. Cotner, Loyola College, Baltimore
Reid W. Click, George Washington University
Jay Choi, Temple University
Karen Craft Denning, West Virginia University
Rhonda DeLong, Eastern Michigan University
Anthony Diemo, Detroit College of Business
John H. Dunning, Rutgers University
Everton Dockery, Staffordshire University
Brian Fitzpatrick, Rockhurst University
Stanley Flax, St. Thomas University
Ramesh Garg, Eastern Michigan University
Claire Gilmore, Saint Joseph’s University
Gary A. Giamartino, University of Detroit Mercy
Gunita Grover, University of Delaware
Nell S. Gullett, University of Tennessee at Martin
Mahfuzul Haque, Indiana State University
Chi-Cheng Hsia, Portland State University
Chang Soo Huh, GS Holdings
Youn-Suk Kim, Kean University of New Jersey
Robert K. Kleiman, Oakland University
Richard Kowalczyk, University of Detroit Mercy
Charles O. Kroncke, University of Wisconsin–Milwaukee
John W. Lang, Cambridge University
Donald Lessard, Massachusetts Institute of Technology
Weiping Liu, University of Wisconsin–Green Bay
Jay R. Marchand, Westminster College

William T. Moore, University of South Carolina
Atsuyuki Naka, University of New Orleans
George Ogum, La Sierra University
Spencer Pack, Connecticut College
Chong S. Pyun, University of Memphis
Harri Ramcharran, Universtiy of Akron
Hongkeun Rim, Shippensburg University
Alan Robinson, Simmons College
Neil Seitz, St. Louis University
Kilman Shin, Ferris State University
Tai S. Shin, Virginia Commonwealth University
Robert Singer, St. Louis University
Martha Soleau, University of Detroit Mercy
Sankar Sundarrajan, Tarleton State University
Peter Tsirigotis, The Securities and Exchange Commission
Robert Uptegraff, Central Michigan University
David VanerLinden, Kent State University
Joseph K. Winsen, University of Newcastle