1) What potential benefits do you think were most important in the decision of the Walt Disney Co. to build a theme park in France?
The decision of Walt Disney Co. to build a theme park in France based on the several potential benefits it hoped to receive. First of all, France could be considered as the fresh source of demand. The reason is that American tourists prefer to travel to California or Florida in order to visit the theme parks. To attract tourists, the destination must match the basics of tourist value, convenience and timeliness. Tourists as well as other consumers weigh the costs and benefits of destinations, as well as investment of time, effort and resources, and the possible profit of experience, fun, relaxation and memories. Another benefit is economies of scale. Sufficient funds spent for arrangement of a theme park have already been assumed. In addition, the sales of company’s toys will grow, leading to extra economies of scale in manufacture.
Despite the fact that French workforce could not essentially cost less than U.S. workforce, but a cost advantage related to the territory in France could appear (because of land subsidies offered by the French government). Considering the fact that Europe has different theme parks, Walt Disney Co. would use monopolistic advantages. Nevertheless, a number of travelers may experience that no other theme park is a satisfactory alternative for Disney. Therefore, the company can attract travelers who don’t want to visit the USA. Finally, the potential benefit seen by the company was the diversification. Walt Disney’s theme parks in the USA have faced decrease in sales. The reason is that the dollar was strong since overseas tourism in the U.S. lowered. Built theme park in France may demand to travelers who come to a decision not to visit the USA, when local currency (euro) is weak and dollar is strong. Actually, French Disney could be interesting for American tourists due to the currency position.
2) Explain how simulation can be used in multinational capital budgeting. What can it do that other risk adjustment techniques cannot?
Simulation allows finding a quantitative expression of the linkages between financial performance and factors determining them. It is a mathematical mapping of the financial process, the dependence of the factors which characterize the structure and patterns of financial process. They are expressed using mathematical symbols, equations, inequalities, tables, graphs, etc. The model includes only the basic (determining) factors. Simulation could be very functional as it causes an allocation of NPVs. Simulation is usually carried out using a computer applications.
1) Identify common political factors for an MNC to consider when assessing country risk. Briefly elaborate on how each factor can affect the risk to the MNC.
Country risk is the risk of change of current or future political and economic conditions in the country to the extent to which they can influence the ability of countries, companies and other borrowers to meet external debt obligations. The country political risk should is unstable internal political situation of the country, affecting the performance of entrepreneurial firms, and therefore the risk of deterioration in the financial condition of the company increases, up to its bankruptcy.
The political risks are caused by the impossibility of economic activity due to hostilities, revolution, aggravation of the political situation in the country, nationalization, confiscation of goods and enterprises embargo because of the failure of the new government to fulfill commitments; the introduction of a delay (moratorium) on the external payments for a certain period due to the occurrence of extraordinary circumstances (strike, war); adverse changes in tax laws; and prohibition or restriction of the conversion of local currency into the currency of payment (in this case, the commitment to exporting countries may be in the national currency, which has limited the application form).
Thus, common political factors excluding takeover of an affiliation by the domestic regime consist of the opportunity of blocked funds, modifying tax legislation, civic rebellion against the company, war and a modifying position of the domestic regime toward the MNC. Each factor of country risk can lead to the decrease in demand for the affiliation’s merchandise, increased taxes or limitations of fund transactions. Defined factors can cause the danger to the MNC.
2) Why might a firm use a “local” capital structure at a particular subsidiary that differs substantially from its “global” capital structure?
Multinational companies are the companies that carry out international business, placing their units in different countries in order to get best service markets, increasing the efficiency and competitiveness and efficient access to resources and factors of production, reduce risk. The parent company, serving the organizational and economic center of the management of the MNC, invests in subordinate companies through the acquisition of holdings of their shares. Possession of a controlling stake provides parent company with the right to control the activities of subordinate companies. Methods and the degree of control can be different and depends on many factors, among which the form of relationships and dependencies of related companies from the parent one is important.
A specific country’s features can lead to the condition that the MNC’s affiliation will use generally debt or generally equity, despite the fact that the MNC’s “global” capital structure is extra reasonable. For instance, in case the country’s stock market is under some pressure or face problems, the MNC could rather not to issue stock there, while a stationary derived market could make it complicated to position stock in that country. That’s why the affiliation could be invested generally with debt (including loans from local banks).
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Keown, A. J., Martin, J. W., Petty, W. D. and Scott, D. F. (2001). Financial Management: Principles and Applications, 9th ed. New Jersey: Prentice Hall.
Madura, J. (2012). International financial management, 11th ed. Mason, OH: South-Western/Cengage Learning.