Financial Planning for the Multinational corporation with Multiple Goals
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Abstract.This paperpresents a methodologyfor analyzingthe financingproblemsraised by uncertainexchangerates andthe variousbarriersto free capitalflows.Thestochastic modeldevelopedallows a way to improvethe efficiencywithwhichalgoal programming ternativecombinationsof corporatestrategies, variousenvironmentalassumptions and financingmechanismscan be evaluated. * Ina worldwhere there were uniformtaxation, fixed and stable exchange rates, INTRODUCTION perfect capital markets, and no barriers to the transfer of capital, the financial decisions for the multinational corporation (MNC)would be the same as those for a domestic corporation. Funds would be raised by the cheapest source and transferred to wherever they were needed. Such a world does not exist, however. The financial manager of the MNCis faced with different tax structures, changing exchange rates, barriersto capital flows, and segmented capital markets.1 Thus, he must be concerned not only with determining an optimal capital structure but also with the sources of the relevant funds. He must be concerned with operating under widely differing governmental philosophies. It is also important that the financial manager consider the impact of exchange rate changes. Decisions which may be optimal underone set of future exchange rates may be suboptimal underanother set of future rates. Recent work by Giddy and Dufey [1975] and Rogalski and Vinso [1977] demonstrates that forecasting these rates explicitly is not feasible, however. These concepts have been extended by others [see for example Cornell 1977; Amihud and Agmon 1981; and Bilson 1981] who have tested the joint hypotheses that the foreign exchange market is informationally efficient and that the forward exchange rate is unbiased. More recent studies support market efficiency, but they argue also that the forward rate is not a useful predictor of future spot rates. These results are consistent with the previous work which found that exchange rates are uncorrelated through time. Exchange rate changes have other implications as well. If forwardcover is available and financing costs are determined on a covered basis, currency risk should not be a factor; that is, if interest rate parity holds, then relative borrowing costs should be the only determinant of borrowing. It is by no means clear, however, that interest rate parity always holds; for example, interest rate parity does not hold if there is a risk of currency controls. Likewise, Shapiro [1982] shows that if tax asymmetry exists-such as, extensive tax credits and provisions of tax treaties-then interest rate parity cannot obtain on an after-tax basis even if it held on a before-tax basis. The resulting covered interest differential provides incentive to borrowin one currency ratherthan another. If forwardcontracts are not available, then the relevant question is whether there are deviations from the International Fisher Effect. Aliber and Stickney [1975] show that such deviations do exist, which means that expected borrowing costs will vary by currency, lea
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