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Parent control of agency problems Parent should clearly communicate the goals for each subsidiary to ensure managers focus on maximizing the value of the subsidiary. Corporate control of agency problems Entire management of the MNC must be focused on maximizing shareholder wealth. Sarbanes-Oxley Act (SOX) Ensures a more transparent process fo...

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Property and casualty reinsurance: Effectively allocates a portion of insurance companies’ return and risk to other insurance companies Is similar to a commercial bank’s acting as a lending agent by allowing other banks to participate in the loan Allows a company to write larger policies because a portion of the risk involves will be assumed by ...

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Income allocation among securities firms The proportion of income derived from each source varies among securities firms in any particular year e.g., when IPOs are hot, income from underwriting fees will be high Some securities firms emphasize investment banking and therefore generate a high proportion of income from underwriting and advising fe...

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A CFS: Can be used to finance distributor or dealer inventories until a sale occurs Can serve as an effective marketing tool by providing retail financing Advantages of captive finance subsidiaries A CFS allows a corporation to clearly separate its manufacturing and retailing activities from its financing activities A CFS has no reserve requir...

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Factors that affect cash flows (cont’d) Change in the risk-free interest rate SIs’ cash flows are inversely related to interest rate movements SIs rely heavily on short-term deposits SIs’ assets commonly have fixed rates Change in industry conditions SIs are exposed to regulatory constraints, technology, and competition

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No consensus measurement of risk exists that allows for comparison of various types of risk among all banks Beta is the degree of sensitivity of stock returns to the returns of the stock market as a whole: The regression model is applied to quarterly historical data The coefficient is an estimate of beta because it measures the sensitivity o...

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Measuring credit risk Banks employ credit analysts who review the financial information of corporations applying for loans and evaluate their creditworthiness Determining the collateral The bank must decide whether to require collateral than can back the loan Determining the loan rate Ratings are used to determine the premium to be added to th...

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Regulation of securities services (cont’d) Deregulation of underwriting services In 1989, the Fed approved debt underwriting applications for banks based on the requirements that: Banks had sufficient capital to support the subsidiary that would perform the underwriting Banks had to be audited to ensure that their management was capable of unde...

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Bank loans (cont’d) Loans supporting leveraged buyouts The loan amount provided by a single bank to support an LBO is usually between $15 million and $40 million LBO financing is attractive to banks because of the high loan rate Firms request LBO financing because they perceive that the market value of certain publicly held shares is too low S...

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Forward contracts Forward contracts are contracts typically negotiated with a commercial bank that allow the purchase or sale of a specified amount of a particular foreign currency at a specified exchange rate on a specified future date The forward market facilitates the trading of forward contracts Commercial banks profit from the difference be...

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