Global financial management.
Homework # 1
Question 7: If capital markets were perfect, that is, capital could move freely across national borders, would MNCs still exist? Why? Or, why not? .
Perfect capital market is a market in which there are never any arbitrage opportunities. Perfect capital markets enjoy an array of assumptions, including no cost to bankruptcy, infinitely divisible financial assets and liabilities, no transaction cost. Pursuing a selected optimal capital structure would allow minute adjustments, the issuance or redemption of small amounts. The perfect market has conditions: it must have a large number of sellers and buyers, standardized products where its prices are given, it can enter the market freely and can also exit it freely. When there is perfect capital markets, resources will be more mobile and therefore the inflation rates, interest rates, and wages among countries would be more similar under conditions of perfect market, thereby making it easier to move the resources to those countries that are willing to pay higher prices for them.
The concept of the multinational corporation is an enterprise that carries on business operations in more than one country. It extends its manufacturing and marketing operations through a network of branches and subsidiaries which are known as its foreign affiliates. Any corporation that is quoted on the world's many stock exchanges or seek to become publicly held need investors to buy their shares. In addition, investors only seek to hand over their money to firms that can help the money grow. Therefore, the main purpose of MNC executives and board members is to figure out how they can maximize the wealth of their shareholders. When managers make multinational finance decisions that maximize the overall present value of future cash flows, they maximize the firm’s value, and hence shareholder wealth. More specifically, it reflects the market's evaluation of the...