Wharton
UNIVERSITY OF PENNSYLVANIA
International Finance/Multinational Corporate Finance
Professor Bernard Dumas/ Lewis Office Hours
Professor Karen Lewis Tuesday: 1:30-3:00
Finance 248/748 2446 SH-DH
Spring 2004 Dumas Office Hours
Tuesday: 1:30-3:00
Course Syllabus
Important Notice: There will be one in-class exam on the following date:
Wednesday, February 25th
Please make a note of this date.
Goal of Course:
This course combines into one semester the essential aspects of two current semester-long courses: International Finance (FNCE 719) and Multinational Corporate Finance (FNCE 731).
The goal of the course is to address the special problems encountered by the international financial officer. They are:
· The multiplicity of currencies, and the attendant problems related to nominal contracts;
· The misalignment of exchange rates vis-à-vis local costs and the attendant problems of competitiveness;
· The partial segmentation of capital markets producing potential differences in costs of capital across the world.
· The multiplicity of tax jurisdictions
These four issues will be addressed in this course with the objective of preparing the student for careers in corporations with large operations abroad or for careers in the investment banks or consulting firms that advise these corporations.
Course mechanics: The course will be in lecture format but business cases will also be emphasized. There are nine cases and sets of exercises that will be discussed in class.
Workload: Intensive. The readings and cases that you will study and submit are complex and require a lot of work. You will also have some exercises in the second part of the course.
Grading:
· First part: You must submit all four of the first four cases.
· Second part: You must submit the two problem sets, two of three group cases and the final case (GM part 2) which is a capstone case which must be handed in individually.
The final grade will be awarded as follows:
· First part: 50% divided thus
o Four group cases: 20%
o Exam: 30%
· Second part: 50% divided thus
o Two problem sets: 10%
o Two of three group cases: 20%
o Individual case: 20%
A numerical weighted average will be computed. The numerical grade distribution will dictate the final grade, according to the faculty’s recommended grade distribution.
Groups for cases:
For each of the cases and exercises, the students will form groups of maximum size four. Each group will submit a write-up for the cases or exercises. Every student in the group must retain a copy of the write-up and bring it to the class where the case is discussed.
As with actual practice in business, all of the cases are written to focus on issues, not answers, and as such are ambiguous. There are often no “right answers” to cases, only good arguments and bad arguments for taking particular actions or decisions. Unlike other finance courses, there is sometimes a limited amount of quantitative information on which to make a decision and thus it is often impossible to compute a precise numerical answer, as might be done in other finance courses.
Prerequisites: A thorough knowledge of FNCE 601/102 is assumed. A working knowledge of a spreadsheet package is also assumed.
Reading material: The following optional textbook can be purchased at the bookstore: Sercu and Uppal, International Financial Markets and the Firm (South Western Publishing, 1995). The bulkpack covering the first half of the semester (including cases and readings) is available at Wharton Reprographics. The second bulkpack will become available before the second half of the semester begins.
Exam policy:
In the exam, students will be allowed to bring in a one-page “formula sheet”. Calculators will also be needed. Makeup exams will be given only for serious medical reasons. Unexcused absences from exams or failure to submit cases will result in zero grade in the calculation of numerical averages. There will be a review session before the exam.
Class participation:
Class participation is required.
Re-grade procedure:
- Please write a brief explanation of why you believe a question on your exam or an assignment was improperly graded. Send an email to the professor with this explanation. The exam or assignment will be reviewed by either the professor or the TA, and you will be informed about whether the grade is changed and the reason why.
- Requests for regrades may be submitted only up to two weeks after the graded assignment or exam has been returned to your mailfolder.
- The professors reserve the right to regrade the entire assignment or exam, which can result in a lower grade.
Course Topics
Notes: For dates of each class and due dates for assignments, see the course schedule.
1. Introduction to the foreign exchange and Eurocurrency markets
Required: Notes, Section I,
Optional: Sercu and Uppal (SU), Chapter 1, “Spot Exchange Markets”
2. Understanding exchange rate behavior: Interest rate parity
Required: Notes, Section II
3. No Class: Martin Luther King’s Birthday
4. and 5. Hedging I: Standard Hedging with forward exchange and options
Required: Notes, Section III & IV
Optional:
SU: Chapter 2, "Forward Contracts in Perfect Markets"
SU: Chapter 3, "The Value of a Forward Contract and its Implications"
SU: Chapter 4, "Forward Contracts and Market Imperfections
6. Case 1: GE Toys (January 28) – due date
7. Hedging II. Multi-year cash flows and Hedge ratios
Required: Notes, Section V
8. Case 2: Metallgesellshaft (February 4) – due date
9. PPP and Real Exchange Rate Risk
Required: Notes, Section VI
Optional: SU: Chapter 11, "Purchasing Power Parity"
10. Case 3: Jaguar 84 (February 11) – due date
11. Foreign Exchange Exposure
Required: Notes, Section VII
Levi, M. D., International Finance: The Markets and Financial Management of Multinational Business, Chapter 14, "Operating Exposure".
12. Case 4: Tektronics Case (February 18) – due date
13. Exposure and Review
14. IN-CLASS EXAM (February 25) – FIRM DATE
15. International Financing and Acquisitions I
Required:
Karolyi, A., "Why do companies list shares abroad? A survey of the evidence and its managerial implications," New York University Salomon Brothers Center, 1998.
Froot, K. and E. Dabora, 1999, “How Are Stock Prices Affected by the Location of Trade?”, Journal of Financial Economics, 53, 182-216.
Weston, J. F., J. A. Siu and B. A. Johnson, Takeovers, Restructuring and Corporate Governance, chapter 17: "International Takeovers and Restructuring," 2001.
16. International portfolio investment
Required:
Jorion, P. and Goetzmann, W.N., Global stock markets in the Twentieth Century. Journal of Finance 54 (1999), 953-980.
Assignment: Problem set on the hedging of securities due beginning of Session 19
SPRING BREAK
17. Case 5: Petroleum Geo-Services (March 15) – due date
18. The tax dimension
Required:
Scholes, M. S. and M. A. Wolfson, Taxes and Business Strategy, Chapters 13 and 14.
Optional:
SU: Chapter 23, "International Taxation"
19. Tax planning and intra-corporate fund flows
Required:
Baker, J. C., International Finance, chapter 17: "Taxation of International Operations".
Reminder: Problem set due (March 22) – due date
21. Case 6: Hozho (A) (March 29) – due date
20 and 22. Capital budgeting
Required:
Dumas, B., "Capital Budgeting: an Analytical Framework," classnote, February 2002.
Optional:
SU: Chapters 21, "International Capital Budgeting".
23. Case 7: GM's Plant X Brazil (first submission) (April 5) – due date
24, 25 and 26. International Cost of Capital
Required:
Dumas, B., "Cross-border Valuation," classnote, February 2002.
O'Brien, T. J., "The Global CAPM and a Firm's Cost of Capital in Different Currencies," Journal of Applied Corporate Finance, 1999, 73-79.
Lessard, D. R., "Incorporating Country Risk in the Valuation of Offshore Projects," Journal of Applied Corporate Finance, 1996, 52-63.
Abuaf, N., "The International Cost of Capital - The Empirical Evidence," Salomon Brothers, 1997.
Abrams, Steve, 2002 “A Practical Approach to the International Valuation and Capital Allocation Puzzle,” Salomon Smith Barney.
Leuz, C. and L. Hail, 2003, “International Differences in Cost of Equity Capital: Do Legal Institutions and Securities Regulation Matter?”.working paper, Wharton School.
Optional:
SU: Chapters 22, "Exchange Risk and Capital Market Segmentation".
Assignment: Problem set on using the multifactor model due beginning of Session 25 (April 12) – due date
27. Case 7: GM's Plant X Brazil (second submission) (April 19) – due date
28. International Financing and Acquisitions II and recap.
Required:
Fan, J. P. H.; “An International Comparison of Capital Structure an Debt Maturity Choices”. Working paper, Hong Kong University of Science and Technology.
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