What are Financial Securities?
Claims on the borrowers future income
What are borrowers also called?
What do borrowers do?
Issuers
They are selling a financial asset
What are Lenders called as well?
What do Lenders do?
Investor
They buy a financial asset
What are primary markets?
Corporation itself issues new shares of stock and sells them to investors, they do so on the primary market
Example: IPOs = Initial Public Offering
What are Secondary Financial Markets?
After initial transaction the shares continue to trade in a secondary markets between investors. Can be organised into 2 Ways:
Organized exchange
Over- the-counter
What is an organized exchange?
Buyers and Sellers meet at a central location to conduct trades and standardize contracts
What is an Over-the-counter exchange?
OTC
Dealers from different locations stand ready to trade shares to anyone who. An accept the prizes, more flexible
What is Cross Listing?
A company lists its shares in one or more Foreign stock exchange in addition to its domestic exchange.
Benefits of Cross Listing?
Diversifying sour shareholder base
Enhances visibility
Costs of Cross Listing?
Companies must abide by and follow listing regulations for each stock exchange.
What does long a stock mean?
Hold a stock -> If the price of the stock increases in the future , you benefit
What does short a stock mean?
Gold analogy
A borrows 1kg gold (shares of stock) from B (for 5000€) ; A believes value will decrease
A sells gold for 5000€ (at a potentially higher price)
IF prices decline in the future as predicted (in this analogy it does)
You can buy back the gold (shares of stock) at a lower price (1kg = 4500€)
Return the Shares
A made 500€ profit
What is the Law of one price?
Identical goods sold in different locations must sell for the same price
At exchange rate
1.2EUR/GDP
a burger that is sold at 1£ in the UK should cost 1€ in Germany
What is Arbitrage?
Exists when identical goods are sold at different prices
practice of simultaneously buying and selling the same or equivalent asset in different markets to profit from prices differences
Buy at a lower price and sell them at a higher price
Will drive the distinct price to a single price
What are the 4 types of companies?
Sole Proprietorship
Partnership
Limited Liability Company
Corporation (AG) - Separation of ownership and control
What can happen in a Corporation?
Managers (Agent) may act in their own interest rather than in the best interest of the shareholders (Principle)
How do you calculate the Value for Domestic Corporations?
How do you evaluate an MNC? (Domestic Model)
E(CF) = expected Cashflow to be received by the end of period t
n = the number of periods into the future in which cash flows are received
k = the required rate of return by investors
How do you evaluate an MNC? (Valuing international cash flows)
E(CF) = expected cash flows denominated in currency j to be received by the US parent at the end of period t
E (ER) = expected exchange rate at which currency j can be converted to dollars at the end of period t
k = the weighted average cost of capital of the US parent company
What is the biggest goals for an MNC?
Maximize Shareholders Wealth
What is the Agency Problem?
When Shareholders Goals and the Managers Goals are in conflict
Why are Agency Costs larger for MNCs?
Size of an MNC
Scattering of distant subidiaries
Culture of foreign managers
How does the Parent control the Agency Problem?
clearly communicate the goals for each subsidiary to ensure that all subsidiaries focus on maximizing the value of the MNC
oversee subsidiary decisions and reward subsidiary mangers for complying with MNCs goals
How can Corporate Control address Agency Problems?
Stock compensation for executives
Threat of hostile takeover
Monitoring by institutional shareholders
What are the 2 Management Structures of an MNC?
centralized
decentralized
What is a centralized management style?
(+) reduces agency cost
(-) the parent’s managers may make poor decisions for the subsidiary if they are not informed
What is a decentralized management style?
(+) gives more control to the mangers who are closer to the subsidiary’s operations
(-) higher agency cost
Describe The International Product Life Cycle?
What are the behavioural thories behind choosing a target market?
Behavioral Approach
International Network Thory
How does the behavioral approach explain a firm’s selection of a target market?
Economists in Sweden have discovered firms tnded to invest ifrst in countries that weren’t too far distant in psychic terms.
As the swedish learnt from their initial investments they became willing to take more risks
How does the international network theory explain a firm’s selection of a target market?
Networks consist of nodes and linkages between them
Control is decentralized, so foreign subsidiaries have influence. Their knowledge and relationships help identify attractive markets the headquarters might not see
A market is chosen if adding a subsidiary there improves the overall network efficiency, connectivity, and knowledge flow.
nodes = subsidiaries
linkage = coordination, relationships, product flows, communication
What is a Centralised Hub and what are it’s features?
tight-control via centralized decision making
What is a Decentralized Federation and what are it’s features?
multinational model with great autonomy of the subsidiaries but only weak linkage within the MNC
What is an Integrated Network and what are it’s features?
Management regards each of the worldwide units as a potential source for ideas, skills and knowledge that can be used to benefit the entire organisation
How do you choose an entry structure?
The greater the deoth if market penetration desired with the greater expected returns -> the greater the investment required with higher potential risks
What are the advantages of exporting?
None of the unique risks facing FDI even though foreign exchange risk remains
Agency costs are avoided
front-end investment is lower
What are the disadvantages of Exporting?
Risk of losing markets to global competitors
unability to internalize and exploit R&D to full extend
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