Question

Decision making in finance is rarely black and white and one decision can be appropriate for one situation and not appropriate for another. Point and counter-point discussions should highlight this as well as expand upon the ability to support a decision that may not be supported by others in the same department. Initial Post Instructions Consider the following point and counter-point arguments then use the Internet to learn more about the issue. Which argument to you support? Explain why and offer your own opinion on the issue. Point: MNCs increase their risk when borrowing foreign currencies. MNCs should borrow the currency that matches their cash inflows. If they borrow a foreign currency to finance business in a different currency, they are essentially speculating on the future exchange rate movements. The results of this strategy are uncertain, which represents risk to the MNC and its shareholders. Counter-Point: MNCs do not increase their risk when borrowing foreign currencies. If MNCs expect that they can reduce the effective financing rate by borrowing a foreign cu rrency, they should consider borrowing that currency. This enables them to achieve lower costs, and improves their ability to compete. If they take the most conservative approach by borrowing whatever currency matches their inflows, they may incur higher costs, and have a greater chance of failure. Initial Post Length: minimum of 350 words

Answer 1

• Point: Investors should not care about an MNC’s translation exposure. The present value of an MNC’s cash flows is based on the cash flows that the parent receives. Any impact of the exchange rates on the financial statements is not important unless cash flows are affected. MNCs should focus their energy on assessing the exposure of their cash flows to exchange rate movements and should not be concerned with the exposure of their financial statements to exchange rate movements. Value is about cash flows, and investors focus on value.
• Counter-Point: Investors should care about an MNC’s translation exposure. Investors do not have sufficient financial data to derive cash flows. They commonly use earnings as a base, and if earnings are distorted, so will be their estimates of cash flows. If they underestimate cash flows because of how exchange rates affected the reported earnings, they may underestimate the value of the MNC. Even if the value is corrected in the future once the market realizes how the earnings were distorted, some investors may have sold their stock by the time the correction occurs. Investors should be concerned about an MNC’s translation exposure. They should recognize that the earnings of MNCs with large translation exposure might be more distorted than the earnings of MNCs with low translation exposure.