INBU 4200 -- INTERNATIONAL FINANCIAL MANAGEMENT



INBU 4200 -- INTERNATIONAL FINANCIAL MANAGEMENT

SPRING SEMESTER 2006 – LEEDS SCHOOL OF BUSINESS

SECTION 001 TTR 3:30 – 4:45 ROOM 125

Professor Michael Palmer

Office Phone: (303) 492-4241

E-Mail: Michael.Palmer@Colorado.EDU

COURSE DESCRIPTION:

INBU 4200 (International Financial Management) will explore many of the financial issues confronting managers of today’s global firms. The course will focus on the unique “international” financial environments and associated risks that confront global firms and the strategies managers use for dealing with these environments and risks.

COURSE TOPICS:

1) Globalization Process and Relationship to the International Finance Function

The globalization of consumption, production and finance (including financial markets)

The implications of globalization for financial managers

The International Monetary System (Gold Standard to post Bretton Woods)

Borrowing and investing funds and moving funds cross border

Exchange rates regimes (impact on the determination of exchange rates)

2) International Money and Capital Markets

The international money markets

Global commercial banking markets (offshore Eurocurrency markets)

Foreign exchange markets (including forecasting exchange rates)

Types of quotes and types of contracts

International debt markets (foreign debt markets and euro-debt markets)

International equity markets (cross listings of corporate equity)

3) Foreign Exchange Exposure: Risk, Measurement and Management

The types of foreign exchange exposure and resulting risk

Foreign exchange risk management

Operational strategies of the global firm

Using financial market contracts to manage risks

Forward and options contracts

4) Foreign Market Entry Modes for Global Firms

Exporting, Importing, and Licensing

Foreign Direct Investment (FDI)

Wholly owned subsidiaries

Joint Ventures

Cross Border Mergers and Acquisitions

Capital structure issues

Country differences in capital structures (i.e., the use of debt and equity)

Cost of capital implications for the global firm

REQUIRED TEXT:

International Financial Management, by Eun and Resnick, Irwin, 3rd edition, 2004

REQUIRED READINGS: FINANCIAL PRESS:

You are required to read either the Wall Street Journal or the Financial Times on a regular basis. You may subscribe to either (I have subscription forms). Either of these will help to keep you current on international financial market and international business issues.

OFFICE INFORMATION:

Office:   453 (in the Business School)

Phone:  303-492-4241 (please leave message if I’m not there)

E-Mail: Michael.Palmer@Colorado.Edu

Office hours: Tuesday and Thursday 12:30 – 2:00 and by appointment.  

COURSE SCHEDULE:

Week 1: Chapter 1: The Globalization Process.

Week 2: Chapter 2: The International Monetary System

Week 3: Chapters 2 and (3): (The Balance of Payments; read on your own)

Week 4: Tuesday, February 7th: Quiz 1 (Chapters 1-3, handouts, and lectures).

Week 4: Chapter 4: The Foreign Exchange Market

Week 5: Chapter 5: International Parity Relationships and Forecasting Foreign Exchange Rates

Week 6: Chapter 5: International Parity Relationships and Forecasting Foreign Exchange Rates

Week 6: Thursday, February 23rd, Project 1 due

Week 7: Chapter 6: International Banking and Money Markets

Week 7: Tuesday, February 28th, Exam 1 (Chapters 1-6 and lectures).

Week 8: Chapter 7: International Bond Markets

Week 9: Chapter 8: International Equity Markets

Week 10: Chapter 11: International Portfolio Investment

Week 10: Thursday, March 23rd, Quiz 2 (Chapters 4 – 8, & 11, handouts, and lectures)

Week 11: Spring Break: No Classes

Week 12: Chapters 12, 13 and 14: Management of Foreign Exchange Exposure

Week 13: Chapters 12, 13 and 14: Management of Foreign Exchange Exposure

Week 13: Thursday, April 13th, Project 2 due.

Week 14: Chapter 15: Foreign Direct Investment and Cross-Border Acquisitions

Week 15: Tuesday, April 25th, Quiz 3 (Chapters 12 – 15, handouts, and lectures)

Week 15: Chapter 16: International Capital Structure and Cost of Capital

Week 15: Thursday, April 27th, Group Presentations

Week 16: Tuesday, May 2nd, and Thursday, May 4th, Group Presentations

Final Exam: Tuesday, May 9th, 10:30 – 1:00

Note: Above chapter and lecture schedule is subject to change based on semester work.

OTHER IMPORTANT DATES:

Wednesday, February 1: Deadline for dropping course without my signature

Wednesday, March 1: Deadline for dropping course without petitioning Dean

For more information on these deadlines and others please see:



QUIZZES AND EXAMINATIONS:

INBU 4000 test schedule will consist of the following:

1) Three short quizzes given approximately every fourth week on dates noted. These quizzes will cover daily lectures, text chapters, assigned readings, and any class handouts and will not be cumulative. Quizzes may include true/false, multiple choice, definitions, calculations, and short essay questions. These quizzes are designed to keep you current with the course material. Make up quizzes will not be offered. Therefore, please make every effort to meet this quiz schedule (if you have a conflict or problem with this quiz schedule please see me as soon as possible).

2) A mid term and a final exam: (consisting of true/false, multiple choice questions, calculation questions, and short essay questions from the lecture material and the text. Mid-term and final exams will be cumulative with regards to lecture material but not with regard to text material. Mid-term and final exams will be given only on the days indicate. Make up exams will not be offered. Therefore, please make every effort to meet this exam schedule (if you have a conflict or problem with this exam schedule please see me as soon as possible).

3) Note: Absences from quizzes or major exams due to documented medical reasons will be handled on an individual basis.

4) Pop quizzes (for extra credit) will also be given during the semester. The number of pop quizzes will vary depending upon course circumstances. In the past, they have ranged between 2 and 4. Under no circumstances can a missed pop quiz be made up.

ASSIGNED READINGS:

Throughout the semester, articles will be posted on my University of Colorado home page under this course. I will normally announce these shortly after posting (generally the day of), but please be aware that you are responsible for checking my course home page on a regular basis to see if new material has been posted.

HOME PAGE LECTURE NOTES AND ASSIGNED READINGS:

Power point lecture slides and assigned reading will be available on my CU home page:



Link to “Current Courses,” and then to Power Point Lecture Slides (Spring 2006).

I will also post other information on this site, such as answer keys to exams.

PROJECTS:

You will be assigned two projects during the term. These two projects will be done on an individual basis. Projects will be due at the beginning of the class on the due date (see course schedule above). Please Note: Late projects will not be accepted; however late projects due to documented medical reasons will be addressed on an individual basis.

GROUP PRESENTATIONS:

Near the end of the semester, the class will be divided up into 9 to 10 groups (depending upon class size). Each group will be assigned a foreign currency and will be asked to do a detailed forecast of that currency. The required forecasting techniques will be developed earlier in class lectures. Groups will be required to submit a written report in advance of a formal class presentation (as these reports will be posted on the class web site). Presentations to the class will be done in power point format on dates assigned. This requirement will be graded on: (1) the quality of the written report and (2) the professionalism of the class presentation.

Depending upon the number of groups, presentations of from 20 to 25 minutes each will be required over a three class day period (please see class schedule). Each member of the group is required to be in attendance for the formal class presentation. Missing this requirement will result in a loss of 25 points for the student (see Course Grades below).

COURSE GRADES:

INBU 4200 final course grades will be based on the following:

Points Percent of Total

1) Three quizzes (25 points each) 75 points 15%

2) Two projects (35 points each) 70 points 14%

3) Group Presentation 10%

Written report 25 points

Presentation 25 points

2) Mid term Exam 100 points 20%

3) Final Exam 139 points 28%

4) On time attendance (22 days @ 3 points each) 66 points 13%

Total Possible Course Points 500 points

FINAL LETTER GRADES:

Based upon 500 possible points for the course, final letter grades will be determined as follows:

A = 87% and above (435 points)

B = 86.9% to 77% (385 points)

C = 76.9% to 67% (335 points)

D = 66.9% to 57% (285 points)

F = 56.9% and below (284 points)

At the beginning of the semester, each student starts with 500 points. During the semester, points are deducted from this amount according to your quizzes, projects, mid term exam, group presentation, final exam, and attendance scores. This way, you will know what your letter grade is throughout the semester and what the break is for the letter grade below (note: everyone starts off with an A; if you lose 66 points you drop into the B range; if you lose 116 you drop into the C range; if you lose 166 you drop into the D range, and if you lose 216 you will get an F).

At any time during the semester, you can email me a request for your score to date. I will email you back that information.

POP QUIZZES AND THE GRADING SCALE:

Pop quiz scores, after recorded, will simply be added to your cumulative score.

ATTENDANCE POLICY AND ATTENDANCE GRADE:

Attendance will be taken on other than quiz and mid-term exam days; there are 24 of these days during the semester (beginning Tuesday, January 24th and ending Thursday, May 4th). You are entitled to 2 unexcused absences during the semester, bringing the total non-quiz and non-major exam attendance days to 22. Sign in sheets will be used to take attendance. Note: Late attendance counts as non-attendance. Note: Attending all 24 classes, will result in 6 extra credit points, attending 23 of the 24 class days will result in 3 extra credit points. If you have either, they will be added to your cumulative score.

ATTENDANCE EXPECTATION FOR THIS CLASS:

I require that you do not leave the classroom in the middle of a lecture. Please prepare yourself for this expectation. Leaving in the middle of a class, will count as being absent.

NAME CARDS:

All students will be provided with name cards by the beginning of the second week of class. Please be responsible for these and bring them to class with you on a daily basis.

COURSE LEARNING OBJECTIVES:

1. To develop an understanding and appreciation of the critical financial issues facing managers of international firms along with appropriate techniques for assessing and managing these financial issues.

2. To develop a practical framework for the analysis of exchange rates including an understanding of forces affecting exchange rates and possible models and approaches for forecasting exchange rates.

3. To develop students’ research, observation, and writing and presentation skills in the area of international finance.

WRITTEN REPORT; ASSIGNMENT #1:

In this report, you are required to research any U.S. company (except McDonald’s, Nike, or Starbucks) with identifiable global activities and (1) discuss the globalization of that company and (2) the impact of foreign currency exposure on the firm’s financial performance.

Your report must include the follow sections:

1. A discussion of the company (what it does) and the extent of its global operations; for example, the company’s percent of sales or revenues from outside the United States. You need to present some quantitative data for the last three years . Discuss any trends you see here.

2. A discussion of the major foreign markets (countries) it is operating in (selling and/or manufacturing) and the currencies associated with these foreign markets. Again, you need data for the last three years. Discuss any trends you see here.

3. A discussion of the reported impact of the exchange rate changes on the company’s financial performance (as noted in their most recent annual report). Indicate the year of the most recent financial statement. If the statement includes information about prior years, indicate that as well.

4. Note specific strategies which the company uses to manage their foreign currency exposure (again, as noted in their most recent report).

5. Discuss what happened to the relevant exchange rate(s) for this company in 2005 (Janurary through Dec)? Relevant exchange rates would pertain to those foreign countries (i.e., major markets as noted in point 2 above) in which the company is operating in. Discuss what impact you think this exposure would have had on the company’s performance in 2005 (e.g., on U.S. dollar earnings, costs, etc.).

Written report is due at the beginning of class, Thursday February 23rd. The written report will be graded on the basis of (1) the quality of the written document itself and (2) the coverage of the material (see all 5 points noted above). The company which you intend to investigate must also be approved by me in advance.

This report needs to be typed, single-spaced, and no more than three pages in length. You must include all references used. Use tables and charts where appropriate. Include name at top of first page. See McDonald’s Corporation 2004 which follows as an example.

PROJECT 1 EXAMPLE: MCDONALD’S CORPORATION, 2004

Background on the Company

The Company primarily operates and franchises McDonald’s fast food restaurants. As of 2004, McDonald’s had 31,561 restaurants in about 120 countries worldwide. Of the total, 9,212 were Company operated (i.e., company owned), 18,248 were operated by franchisees and licensees and 4,101 were operated by affiliates.

Global Operations by Region and Restaurant Distribution

McDonald’s is managed along distinct geographic segments. These segments are the (1) United States, (2) Europe, (3) Asia/Pacific, Middle East and Africa, (4) Latin America and (5) Canada. A geographic breakdown of McDonalds 31,561 restaurants for 2004 shows that 57% of these restaurants were located outside of the United States.

Restaurants Number % of total

Total 31,561 100%

United States 13,673 43%

Europe 6,287 20%

Asia/Pacific, Middle East/Africa 7,567 24%

Latin America 1,607 5%

Canada 1,362 4%

Other 1,065 3%

Global Distribution of Revenues

For 2004, 66% of McDonald's revenues were from outside the U.S. Major foreign markets included Europe (France, Germany and the U.K.) and Asia (Australia, Japan and China).

Revenues (Millions of U.S. $s) 2004 % of Total

Total $19,065 100%

U.S. $ 6,525 34%

Europe* $ 6,737 35%

Asia/Pacific, Middle East/Africa** $ 2,721 14%

Latin America*** $ 1,008 5%

Canada $ 898 5%

Other $ 1,176 6%

*France, Germany and the United Kingdom account for 65% of Europe’s revenues

**Australia, China and Japan account for 45% of the region’s revenues

***Brazil accounts for 40% of Latin America’s revenues.

Foreign Currency Impacts on Company

Given the company’s global presence and the distribution of its restaurants and revenues, McDonald’s overall dollar earnings are likely to be affected by changes in exchange rates.

Strong foreign currencies can increase dollar earnings while weak foreign currencies can be expected to lessen dollar earnings. Given the reported 2004 distribution of earnings, changes in the Euro, the British Pound, and Japanese yen are especially important to McDonald’s revenues.

2004 Foreign Exchange Impacts on McDonalds

In 2004, the strengthening of key foreign currencies, especially the Euro and the British pound had a positive effect on the company’s reported revenues. In 2004, the U.S. dollar earnings of McDonald’s benefited by 6 cents per common share due primarily to the strong Euro and Pound.

Reported Strategies for Dealing with Foreign Currency Exposures

According to the company’s 2004 financial report, McDonald’s manages its foreign currency exposures though a combination of local currency financing, natural hedges consisting of local currency purchases of goods and services, and derivative contracts, specifically, forward contracts and foreign currency options, to hedge foreign currency denominated cash flows.

Potential Impact of 2005 Exchange Rate Changes on McDonalds

From January 2005 through July 2005, both the Euro and the British pound weakened against the U.S. dollar (the euro 8.8% and the pound 6.6%: See Charts). These exchange rate changes, through July, would be expected to have a negative affect on McDonald’s global (consolidated) earnings, by reducing the U.S. dollar equivalent of any euro and pound earnings.

Sources of Information for Report

Company 2004 financial statements were found at

Exchange Rate Data from:

Supporting Charts: The Euro and Pound, January 2005 Through July 2005

[pic]

Note: Euro January 1, 2005 = $1.3293, July 29, 2005 = $1.2128; -8.76%

[pic]

Note: Pound January 1, 2005 = $1.8833, July 29, 2005 = $1.7593; -6.58%

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