Multinational Enterprise: International Finance Paper

Multinational Enterprise
Multinational Enterprise

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Multinational Enterprise

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Please comment/answer the following two questions:

1. What are the main reasons that the cost of capital for a MNE tend to be lower than a domestic counterpart domiciled in the same country?
2. Describe a situation/reasons where the cost of capital for a purely domestic firm might be actually lower than for a MNE that is headquartered in the same country.

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Multinational Enterprise

Reasons why the cost of capital for an MNE tend to be lower than a domestic counterpart domiciled in the same country

A multinational enterprise operating in the global and international markets will tend to have a lower cost of capital. There are a number of scenarios and reasons for this phenomenon. A first is that the MNE has access to a wide array of capital markets, and hence a choice of more sources of funding (Moffett, Stonehill, & Eiteman, 2015, p. 292). Within these sources, there is a high probability of finding capital at a lower cost than is available in their home country.

A second reason is that the portfolio of securities available to a firm with operations in one country is only appealing to a small circle of investors within that state. On the other hand, an MNE has a portfolio of securities that appeal to both local and international investors (2015, p. 293).

A situation and/or reasons where the cost of capital for a purely domestic firm might be actually lower than for an MNE that is headquartered in the same country.

In some countries, the capital markets are well developed. Such scenarios are primarily in the economies where there is a high dependence on manufacturing……

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Greece Budget Crisis: International Finance

Greece Budget Crisis
Greece Budget Crisis

Greece Budget Crisis

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Answer the following questions:

What are the major factors leading to the budget crisis in Greece?

How did the Euro play a role in the budget crisis?

What’s the current status of Greece’s budgets?

Greece Budget Crisis

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Greece Budget Crisis

Factors leading to the budget crisis in Greece

Greece, among other European countries, suffered among the worst debt crises in about a century. While measures are slowly being put in place to reverse the effects of the debt crises, various lessons ought to be learned from the experience. In line with this agenda, the following is a description of some of the major factors that led to the occurrence of the debt crisis in Greece.

A widening budgetary deficit

Towards the close of the 20th century, Greece ranked among the highly developing nations. During this period, the debt levels of the country were fairly constant and manageable. However, at the start of the 21st century, the nation’s debt levels were steadily rising at alarming levels. This led to rising levels of deficit such that the country’s GDP could not cope up. This kept growing, with a reported figure of the debt level comprising 15.4% of the Greece’s domestic product (Kouretas & Vlamis, 2010, p. 394). This continuous increase in the deficit of the country is among the major factors that led to the crisis in Greece.

Absence of consolidated financial and economic reporting

The strengthening of economies and trade relations were the reasons for the formation of the Eurozone and the EU. As such, one would expect a strict level of standards with respect to reporting of economic and financial issues. However, the case on the ground was different, as each country carried on with individual standards. Therefore, when there were rising issues over the economic performance of some member states, there was nobody warranted to control the reporting of the issues nor provide fiscal discipline measures (Manessiotis, 2011, pp. 12 – 14). This led to lack of augmented reports between regimes, as well as the widespread misreporting of figures in Greece to cover up the real situation.

Disagreements among EU countries

During the period when Greece needed help and intervention from other EU member states, there were rampant political differences. The attempts by some nations to raise concern over the deteriorating issue found more criticism as to the legality of bailouts by the European Union (Kouretas & Vlamis, 2010, p. 396). The time taken to solve such disputed was crucial and could have saved the looming crisis. In addition, once the debt and economic crises spread to other nations in the Eurozone and the Balkans, there was more disagreement on which regions to aid first.

Deflation of the worsening situation

As observed, a major factor behind the Greek debt crises was the lack of swift action to mitigate the impending crisis. As an internal measure, Greece decided to deflate the figures in various reports of the situation. As an example, the debt levels had to be revised upwards from estimates of 6.5% and reported figures of 12.7% to 15.4% of the GDP in 2009 (Kouretas & Vlamis, 2010, p. 394). The attempted cover-up of the situation only made matter worse as it did not provide the need to fast-track an attempt at a solution.

The role of the Euro in the budget crisis

In an attempt to bail itself out of an impending crisis, Greece sought to acquire private and public debt to stabilize the economy. The increasing private debt within the Eurozone escalated the issue, with the dismal performance of the Euro owing to the global economic crisis in 2008 (New York Times, 2016)…..

Greece Budget Crisis

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International Finance Discussion

International Finance
International Finance

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International Finance

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Recently, Marriott International opened the Al Jadaff hotel in Dubai. Discuss qualitatively (no need to use any numbers) how Marriott International should adjust the estimated cash flow for the project and the discount rate when evaluating this project. Which adjustment (cash flow or discount rate) do you believe would be most effective in reflecting the risk of this foreign project?

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International Finance

Qualitative discussion on the adjustment of cash flows for Marriott International

Through the investment in the Al Jadaff hotel in Dubai, Marriott International exposes themselves to country risk. The firm may choose to use cash flow adjustment methods to determine the present value of the project – which would drive further operational, investment and financing decisions. The use of cash flow adjustments would primarily involve identification of prominent risk factors in each year (Damodaran, 2008). Each risk factor is used to discount the estimated cash flow for each year. The result is a net present value of the hotel determined from adjusted cash flows to various risk factors.

Discount Rate Adjustment

Alternatively, Marriott International may choose to use the discount rate as an adjustment method. In this case, when evaluating the Al Jadaff hotel project, the firm should use the prevailing discount rate as a measure to estimate the country’s risk rating. This done owing to the correlation between the discount rate and the project’s rate of return. As such, the adjustment to the rate of return or the discount rate in the capital budgeting approach may be useful in the determination of country risk (Madura, 2008, pp. 459 – 460).

Most effective approach in reflecting risk of the foreign project

The better method that provides an effective approach is the use of estimated cash flows. The effectiveness of this approach stems from the use of each individual cash flow and the specific form of risk affecting that particular cash flow….

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