The document provides solutions to end-of-chapter questions and problems related to international capital structure and the cost of capital. It discusses how cross-listing a firm's stock on foreign exchanges can decrease its cost of capital by pricing the stock based on international risk rather than local risk. It also describes how pricing of local stocks can be affected through a "pricing spill-over effect" and how firms benefit from lower costs even if their securities remain untradable. Sample problems demonstrate calculating domestic and world betas and how a firm's cost of capital decreases when its shares become internationally tradable.
Algorithmic strategy with adoptable trading frequency, effectively works with relatively inefficient markets. To the attention of potential investors/partners.
Algorithmic strategy with adoptable trading frequency, effectively works with relatively inefficient markets. To the attention of potential investors/partners.
FAI-lT .1 Financing the Global FirmCost of Capital (d.docxmydrynan
FAI-lT .1 Financing the Global Firm
Cost of Capital ('/d
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24
20
1B
16
14
12
10
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4
2
The Cost of Capital and Financial Structure
ke = cost of equity
k'vncc = weighted
average after-tax
cost of capital
ka r x) = after-iax
cost of debt
Total Debt (D)
Debt Ratio (o/"\ =
-
Total Assets (V)
Partly offsetting the favorable effect of more debt is an increase in the cost of equity (k"),
because investors perceive greater financial risk. Nevertheless, the overall lveighted average
after-tax cost of capital (kwacc) continues to decline as the debt ratio increases, until finan-
cial risk becomes so serious that investors and management alike pierceive a real danger of
insoivency. This result causes a sharp increase in the cost of new debt and equity, thus increas-
ing the weighted average cost of capital. The lou,point on the resulting U-shaped cost of cap-
ital curve. which is at 14"/" in Exhibit 13.2. defines the debt ratio range in which the cost of
capital is minimized.
Most theorists believe that the low point is actually a rather broad flat area encompass-
ing a wide range of debt ratios, 30% to 60% In Exhibit 13.2, rvhere little difference exists in
the cost of capital. They also believe that, at least in the United States, the range of the flat
area and the location of a particular firm's debt ratio rvithin that range are determined by
such variables as 1) the industry in which it competes;2) volatility of its sales and operating
income; and 3) the collateral value of its assets.
*ptirt:;:l Finasreial Strer*t*r* and the MfdH
The domestic theory of optimal financial structures needs to be modified by four more vari-
ables in order to accommodate the case of the MNE. These variables, in order of appearance,
are 1) availability of capital; 2) diversification of cash flows; 3) foreign exchange risk; and
4) expectations of international portfoiio investors.
Availability of Capital. Chapter 12 demonstrated that access to capital in global markets allows
an MNE to lower its cost of equity and debt compared rvith most domestic firms. It also per-
mits an MNE to maintain its desired debt ratio, even when significant amounts of new funds
must be raised. In other wordq a multinational firm's marginal cost of capital is constant for
considerable ranges of its capital budget. This statement is not true for most small domestic
k").
1ge
an-
'of
ras-
ap-
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firms because they do not have access to the national
equity or debt markets' They must either
rely on internally generated funds or borrow for
the short and medium terms from commel-
cial banks. : r ^^-:+-r *^.lzatc are
Multinational firms domiciled in countries that have illiquid
capital markets ale rn
almost the same ,it,ruiion u, small domesri" tlt*t uniess they have
gained a global cost and
availability of capital. They must rely on l"t"t"u!V generated
funds and bank borrowing' If
they need to raise significant u*o,rrrt. of new iunO--t
to finance gr ...
Name ;- SECOND EXAM SPRING 20201. Mark Price the marketi.docxgemaherd
Name ;
- SECOND EXAM SPRING 2020
1. Mark Price the marketing manager for Speakers needs to find which variable most affects the demand for a line of speakers. He is uncertain whether the price of speakers of the advertising expenditures drive the sale of speakers. He plans to use the regression analysis to determine the relative impact price an advertising. He used 12 years of data which is given below. The output from his regression analysis also give:
Sales
(000)
Price Per Unit
Advertising
($000)
400
280
600
700
215
835
900
211
1100
1300
210
1400
1150
215
1200
1200
200
1300
900
225
900
1100
207
1100
980
220
700
1234
211
900
925
227
700
800
245
690
Regression Statistics
Multiple R
0.8550
R Square
0.7310
Adjusted R Square
0.6712
Standard Error
146.6234
Observations
12
ANOVA
df
SS
MS
F
Significance F
Regression
2
525718.3339
262859.1669
12.2269
0.0027
Residual
9
193485.9161
21498.4351
Total
11
719204.2500
Coefficients
Standard Error
t Stat
P-value
Lower 95%
Intercept
2191.34
826.08
2.65
0.03
322.61
Price
-6.91
2.92
-2.37
0.04
-13.51
Advertising
0.33
0.24
1.36
0.21
-0.21
a. Interpret the output from the regression analysis given above – is this a good regression model to forecast sales
b. Evaluate the regression model. Also, comment on the sample size (observations)
c. Write the regression equation showing the relationship between Sales versus Advertising and Price
d. Determine whether Price or Advertising has more impact on the forecast of Sales
e. Predict average yearly speaker sales the price was $300 per unit and Mark is planning to spend $900 thousand in Advertising.
2. Assume the network and data as follows:
a. Construct the network diagram
b. Indicate the critical path when normal activity times are used
c. Explain the procedure you would use to crash this project if you had a penalty cost per week above 15 weeks as well you had indirect costs per week
3. Ace Steel Mill estimates the Demand for steel in millions of tons per year as follows
Millions of t tons
Probability
10
10
12
25
14
30
16
20
18
15
a. If capacity is set at 18 Million tons what is the capacity cushion
b. What is the probability of Idle capacity
c. What is the average utilization of the plant at 18 million ton capacity
d. If it costs $8 million per ton of lost business and $80 million to build a million ton of capacity how much capacity should be built to minimize the total cost
4. Explain the reasons for
a. Carrying large levels of inventories
b. Carrying Small Levels of Inventories
5. We discussed in class how MRP (Materials Planning System) works we examined an example of the a Table with four legs and a leg assembly. We discussed the following charts.
Please explain how the Bill of Materials Explosion takes place in these charts
6.
7. Explain the following as discussed in class
Thompson manufacturing produces industrial scales for the electronics ind.
Name ;- SECOND EXAM SPRING 20201. Mark Price the marketi.docxroushhsiu
Name ;
- SECOND EXAM SPRING 2020
1. Mark Price the marketing manager for Speakers needs to find which variable most affects the demand for a line of speakers. He is uncertain whether the price of speakers of the advertising expenditures drive the sale of speakers. He plans to use the regression analysis to determine the relative impact price an advertising. He used 12 years of data which is given below. The output from his regression analysis also give:
Sales
(000)
Price Per Unit
Advertising
($000)
400
280
600
700
215
835
900
211
1100
1300
210
1400
1150
215
1200
1200
200
1300
900
225
900
1100
207
1100
980
220
700
1234
211
900
925
227
700
800
245
690
Regression Statistics
Multiple R
0.8550
R Square
0.7310
Adjusted R Square
0.6712
Standard Error
146.6234
Observations
12
ANOVA
df
SS
MS
F
Significance F
Regression
2
525718.3339
262859.1669
12.2269
0.0027
Residual
9
193485.9161
21498.4351
Total
11
719204.2500
Coefficients
Standard Error
t Stat
P-value
Lower 95%
Intercept
2191.34
826.08
2.65
0.03
322.61
Price
-6.91
2.92
-2.37
0.04
-13.51
Advertising
0.33
0.24
1.36
0.21
-0.21
a. Interpret the output from the regression analysis given above – is this a good regression model to forecast sales
b. Evaluate the regression model. Also, comment on the sample size (observations)
c. Write the regression equation showing the relationship between Sales versus Advertising and Price
d. Determine whether Price or Advertising has more impact on the forecast of Sales
e. Predict average yearly speaker sales the price was $300 per unit and Mark is planning to spend $900 thousand in Advertising.
2. Assume the network and data as follows:
a. Construct the network diagram
b. Indicate the critical path when normal activity times are used
c. Explain the procedure you would use to crash this project if you had a penalty cost per week above 15 weeks as well you had indirect costs per week
3. Ace Steel Mill estimates the Demand for steel in millions of tons per year as follows
Millions of t tons
Probability
10
10
12
25
14
30
16
20
18
15
a. If capacity is set at 18 Million tons what is the capacity cushion
b. What is the probability of Idle capacity
c. What is the average utilization of the plant at 18 million ton capacity
d. If it costs $8 million per ton of lost business and $80 million to build a million ton of capacity how much capacity should be built to minimize the total cost
4. Explain the reasons for
a. Carrying large levels of inventories
b. Carrying Small Levels of Inventories
5. We discussed in class how MRP (Materials Planning System) works we examined an example of the a Table with four legs and a leg assembly. We discussed the following charts.
Please explain how the Bill of Materials Explosion takes place in these charts
6.
7. Explain the following as discussed in class
Thompson manufacturing produces industrial scales for the electronics ind ...
Cost of capital, international financial managementAshutosh136471
User
in short
ChatGPT
Capital budgeting is about choosing the right long-term investments, while cost of capital is the expense associated with financing those investments.
Tricumen / Revenue and (lack of) volatility_17-June-14Tricumen Ltd
Revenue and (lack of) volatility
The current lack of volatility is not exceptional; in equities, FX, and rates it has merely returned to pre-‘Crunch’ levels.
The link between banks’ revenue and volatility has been overstated. Equally important factors – to name a few - are banks’ risk management, regulatory initiatives, and investors’ inertia.
We reiterate our view that successful banks adapted to ‘flat’ markets by better monitoring of trading patterns and by successfully internalising trades via their electronic trading units.
USDA Loans in California: A Comprehensive Overview.pptxmarketing367770
USDA Loans in California: A Comprehensive Overview
If you're dreaming of owning a home in California's rural or suburban areas, a USDA loan might be the perfect solution. The U.S. Department of Agriculture (USDA) offers these loans to help low-to-moderate-income individuals and families achieve homeownership.
Key Features of USDA Loans:
Zero Down Payment: USDA loans require no down payment, making homeownership more accessible.
Competitive Interest Rates: These loans often come with lower interest rates compared to conventional loans.
Flexible Credit Requirements: USDA loans have more lenient credit score requirements, helping those with less-than-perfect credit.
Guaranteed Loan Program: The USDA guarantees a portion of the loan, reducing risk for lenders and expanding borrowing options.
Eligibility Criteria:
Location: The property must be located in a USDA-designated rural or suburban area. Many areas in California qualify.
Income Limits: Applicants must meet income guidelines, which vary by region and household size.
Primary Residence: The home must be used as the borrower's primary residence.
Application Process:
Find a USDA-Approved Lender: Not all lenders offer USDA loans, so it's essential to choose one approved by the USDA.
Pre-Qualification: Determine your eligibility and the amount you can borrow.
Property Search: Look for properties in eligible rural or suburban areas.
Loan Application: Submit your application, including financial and personal information.
Processing and Approval: The lender and USDA will review your application. If approved, you can proceed to closing.
USDA loans are an excellent option for those looking to buy a home in California's rural and suburban areas. With no down payment and flexible requirements, these loans make homeownership more attainable for many families. Explore your eligibility today and take the first step toward owning your dream home.
how can i use my minded pi coins I need some funds.DOT TECH
If you are interested in selling your pi coins, i have a verified pi merchant, who buys pi coins and resell them to exchanges looking forward to hold till mainnet launch.
Because the core team has announced that pi network will not be doing any pre-sale. The only way exchanges like huobi, bitmart and hotbit can get pi is by buying from miners.
Now a merchant stands in between these exchanges and the miners. As a link to make transactions smooth. Because right now in the enclosed mainnet you can't sell pi coins your self. You need the help of a merchant,
i will leave the telegram contact of my personal pi merchant below. 👇 I and my friends has traded more than 3000pi coins with him successfully.
@Pi_vendor_247
how can I sell pi coins after successfully completing KYCDOT TECH
Pi coins is not launched yet in any exchange 💱 this means it's not swappable, the current pi displaying on coin market cap is the iou version of pi. And you can learn all about that on my previous post.
RIGHT NOW THE ONLY WAY you can sell pi coins is through verified pi merchants. A pi merchant is someone who buys pi coins and resell them to exchanges and crypto whales. Looking forward to hold massive quantities of pi coins before the mainnet launch.
This is because pi network is not doing any pre-sale or ico offerings, the only way to get my coins is from buying from miners. So a merchant facilitates the transactions between the miners and these exchanges holding pi.
I and my friends has sold more than 6000 pi coins successfully with this method. I will be happy to share the contact of my personal pi merchant. The one i trade with, if you have your own merchant you can trade with them. For those who are new.
Message: @Pi_vendor_247 on telegram.
I wouldn't advise you selling all percentage of the pi coins. Leave at least a before so its a win win during open mainnet. Have a nice day pioneers ♥️
#kyc #mainnet #picoins #pi #sellpi #piwallet
#pinetwork
Currently pi network is not tradable on binance or any other exchange because we are still in the enclosed mainnet.
Right now the only way to sell pi coins is by trading with a verified merchant.
What is a pi merchant?
A pi merchant is someone verified by pi network team and allowed to barter pi coins for goods and services.
Since pi network is not doing any pre-sale The only way exchanges like binance/huobi or crypto whales can get pi is by buying from miners. And a merchant stands in between the exchanges and the miners.
I will leave the telegram contact of my personal pi merchant. I and my friends has traded more than 6000pi coins successfully
Tele-gram
@Pi_vendor_247
how to sell pi coins on Bitmart crypto exchangeDOT TECH
Yes. Pi network coins can be exchanged but not on bitmart exchange. Because pi network is still in the enclosed mainnet. The only way pioneers are able to trade pi coins is by reselling the pi coins to pi verified merchants.
A verified merchant is someone who buys pi network coins and resell it to exchanges looking forward to hold till mainnet launch.
I will leave the telegram contact of my personal pi merchant to trade with.
@Pi_vendor_247
what is the future of Pi Network currency.DOT TECH
The future of the Pi cryptocurrency is uncertain, and its success will depend on several factors. Pi is a relatively new cryptocurrency that aims to be user-friendly and accessible to a wide audience. Here are a few key considerations for its future:
Message: @Pi_vendor_247 on telegram if u want to sell PI COINS.
1. Mainnet Launch: As of my last knowledge update in January 2022, Pi was still in the testnet phase. Its success will depend on a successful transition to a mainnet, where actual transactions can take place.
2. User Adoption: Pi's success will be closely tied to user adoption. The more users who join the network and actively participate, the stronger the ecosystem can become.
3. Utility and Use Cases: For a cryptocurrency to thrive, it must offer utility and practical use cases. The Pi team has talked about various applications, including peer-to-peer transactions, smart contracts, and more. The development and implementation of these features will be essential.
4. Regulatory Environment: The regulatory environment for cryptocurrencies is evolving globally. How Pi navigates and complies with regulations in various jurisdictions will significantly impact its future.
5. Technology Development: The Pi network must continue to develop and improve its technology, security, and scalability to compete with established cryptocurrencies.
6. Community Engagement: The Pi community plays a critical role in its future. Engaged users can help build trust and grow the network.
7. Monetization and Sustainability: The Pi team's monetization strategy, such as fees, partnerships, or other revenue sources, will affect its long-term sustainability.
It's essential to approach Pi or any new cryptocurrency with caution and conduct due diligence. Cryptocurrency investments involve risks, and potential rewards can be uncertain. The success and future of Pi will depend on the collective efforts of its team, community, and the broader cryptocurrency market dynamics. It's advisable to stay updated on Pi's development and follow any updates from the official Pi Network website or announcements from the team.
Exploring Abhay Bhutada’s Views After Poonawalla Fincorp’s Collaboration With...beulahfernandes8
The financial landscape in India has witnessed a significant development with the recent collaboration between Poonawalla Fincorp and IndusInd Bank.
The launch of the co-branded credit card, the IndusInd Bank Poonawalla Fincorp eLITE RuPay Platinum Credit Card, marks a major milestone for both entities.
This strategic move aims to redefine and elevate the banking experience for customers.
What price will pi network be listed on exchangesDOT TECH
The rate at which pi will be listed is practically unknown. But due to speculations surrounding it the predicted rate is tends to be from 30$ — 50$.
So if you are interested in selling your pi network coins at a high rate tho. Or you can't wait till the mainnet launch in 2026. You can easily trade your pi coins with a merchant.
A merchant is someone who buys pi coins from miners and resell them to Investors looking forward to hold massive quantities till mainnet launch.
I will leave the telegram contact of my personal pi vendor to trade with.
@Pi_vendor_247
Turin Startup Ecosystem 2024 - Ricerca sulle Startup e il Sistema dell'Innov...Quotidiano Piemontese
Turin Startup Ecosystem 2024
Una ricerca de il Club degli Investitori, in collaborazione con ToTeM Torino Tech Map e con il supporto della ESCP Business School e di Growth Capital
Poonawalla Fincorp and IndusInd Bank Introduce New Co-Branded Credit Cardnickysharmasucks
The unveiling of the IndusInd Bank Poonawalla Fincorp eLITE RuPay Platinum Credit Card marks a notable milestone in the Indian financial landscape, showcasing a successful partnership between two leading institutions, Poonawalla Fincorp and IndusInd Bank. This co-branded credit card not only offers users a plethora of benefits but also reflects a commitment to innovation and adaptation. With a focus on providing value-driven and customer-centric solutions, this launch represents more than just a new product—it signifies a step towards redefining the banking experience for millions. Promising convenience, rewards, and a touch of luxury in everyday financial transactions, this collaboration aims to cater to the evolving needs of customers and set new standards in the industry.
Even tho Pi network is not listed on any exchange yet.
Buying/Selling or investing in pi network coins is highly possible through the help of vendors. You can buy from vendors[ buy directly from the pi network miners and resell it]. I will leave the telegram contact of my personal vendor.
@Pi_vendor_247
Financial Assets: Debit vs Equity Securities.pptxWrito-Finance
financial assets represent claim for future benefit or cash. Financial assets are formed by establishing contracts between participants. These financial assets are used for collection of huge amounts of money for business purposes.
Two major Types: Debt Securities and Equity Securities.
Debt Securities are Also known as fixed-income securities or instruments. The type of assets is formed by establishing contracts between investor and issuer of the asset.
• The first type of Debit securities is BONDS. Bonds are issued by corporations and government (both local and national government).
• The second important type of Debit security is NOTES. Apart from similarities associated with notes and bonds, notes have shorter term maturity.
• The 3rd important type of Debit security is TRESURY BILLS. These securities have short-term ranging from three months, six months, and one year. Issuer of such securities are governments.
• Above discussed debit securities are mostly issued by governments and corporations. CERTIFICATE OF DEPOSITS CDs are issued by Banks and Financial Institutions. Risk factor associated with CDs gets reduced when issued by reputable institutions or Banks.
Following are the risk attached with debt securities: Credit risk, interest rate risk and currency risk
There are no fixed maturity dates in such securities, and asset’s value is determined by company’s performance. There are two major types of equity securities: common stock and preferred stock.
Common Stock: These are simple equity securities and bear no complexities which the preferred stock bears. Holders of such securities or instrument have the voting rights when it comes to select the company’s board of director or the business decisions to be made.
Preferred Stock: Preferred stocks are sometime referred to as hybrid securities, because it contains elements of both debit security and equity security. Preferred stock confers ownership rights to security holder that is why it is equity instrument
<a href="https://www.writofinance.com/equity-securities-features-types-risk/" >Equity securities </a> as a whole is used for capital funding for companies. Companies have multiple expenses to cover. Potential growth of company is required in competitive market. So, these securities are used for capital generation, and then uses it for company’s growth.
Concluding remarks
Both are employed in business. Businesses are often established through debit securities, then what is the need for equity securities. Companies have to cover multiple expenses and expansion of business. They can also use equity instruments for repayment of debits. So, there are multiple uses for securities. As an investor, you need tools for analysis. Investment decisions are made by carefully analyzing the market. For better analysis of the stock market, investors often employ financial analysis of companies.
The Evolution of Non-Banking Financial Companies (NBFCs) in India: Challenges...beulahfernandes8
Role in Financial System
NBFCs are critical in bridging the financial inclusion gap.
They provide specialized financial services that cater to segments often neglected by traditional banks.
Economic Impact
NBFCs contribute significantly to India's GDP.
They support sectors like micro, small, and medium enterprises (MSMEs), housing finance, and personal loans.
how to sell pi coins in all Africa Countries.DOT TECH
Yes. You can sell your pi network for other cryptocurrencies like Bitcoin, usdt , Ethereum and other currencies And this is done easily with the help from a pi merchant.
What is a pi merchant ?
Since pi is not launched yet in any exchange. The only way you can sell right now is through merchants.
A verified Pi merchant is someone who buys pi network coins from miners and resell them to investors looking forward to hold massive quantities of pi coins before mainnet launch in 2026.
I will leave the telegram contact of my personal pi merchant to trade with.
@Pi_vendor_247
1. CHAPTER 17 INTERNATIONAL CAPITAL STRUCTURE AND THE COST OF CAPITAL
SUGGESTED ANSWERS AND SOLUTIONS TO END-OF-CHAPTER
QUESTIONS AND PROBLEMS
QUESTIONS
1. Suppose that your firm is operating in a segmented capital market. What actions would you
recommend to mitigate the negative effects?
Answer: The best solution for this problem is to cross-list your firm’s stock in overseas markets like
London and New York that are not segmented. But you should be aware of the associated costs such as
the cost of adjusting financial statements, fees charged by the listing exchanges, etc.
2. Explain why and how a firm’s cost of capital may decrease when the firm’s stock is cross-listed on
foreign stock exchanges.
Answer: If a stock becomes internationally tradable upon overseas listing, the required return on the
stock is likely to go down because the stock will be priced according to the international systematic risk
rather than the local systematic risk. It is well known that for a typical stock, the international systematic
risk is lower than the local systematic risk.
3. Explain the pricing spill-over effect.
Answer: Suppose a firm operating in a segmented capital market (like China, for example) decides to
cross-list its stock in New York or London. Upon cross-border listing, the firm’s stock will be priced
internationally. In addition, the pricing of remaining purely domestic stocks (other Chinese stocks) will be
affected in such a way that these stocks will be priced partially internationally and partially domestically.
The degree of international pricing depends on the correlations between these purely domestic stocks and
internationally traded stocks.
2. 4. In what sense do firms with nontradable assets get a free-ride from firms whose securities are
internationally tradable?
Answer: Due to the spillover effect, firms with nontradable securities can benefit in terms of higher
security prices and lower cost of capital, without incurring any costs associated with making the securities
internationally tradable. This is an example of free-ride.
5. Define and discuss indirect world systematic risk.
Answer: The indirect world systematic risk can be defined as the covariance between a nontradable asset
and the world market portfolio that is induced by tradable assets. In the presence of internationally
tradable assets, nontradable assets will be priced partly by the indirect world systematic risk and partly by
the pure domestic systematic risk.
6. Discuss how the cost of capital is determined in segmented vs. integrated capital markets.
Answer: In segmented capital markets, the cost of capital will be determined essentially by the securities’
domestic systematic risks. In integrated capital markets, on the other hand, the cost of capital will be
determined by the securities’ world systematic risk, regardless of nationality.
7. Suppose there exists a nontradable asset with a perfect positive correlation with a portfolio T of
tradable assets. How will the nontradable asset be priced?
Answer: The nontradable asset with a perfect positive correlation with portfolio T (for tradable) will be
priced as if it were tradable by itself. In a word, it will be priced solely according to its world systematic
risk.
8. Discuss what factors motivated Novo Industries to seek U.S. listing of its stock. What lessons can be
derived from Novo’s experiences?
3. Answer: Novo, a rapidly growing company, was domiciled in a small and segmented Danish market.
This restricted the firm’s ability to raise capital at a competitive rate. As discussed in the text, Novo
solved this problem by listing its stock in London and New York stock exchanges. This move enabled
Novo to gain access to large capital sources and lower its cost of capital.
9. Discuss foreign equity ownership restrictions. Why do you think countries impose these restrictions?
Answer: Many countries restrict the maximum fractional ownership of local firms by foreigners. Mostly,
these restrictions are imposed to ensure domestic control of local firms.
10. Explain the pricing-to-market phenomenon.
Answer: The pricing-to-market (PTM) refers to the phenomenon that the same securities are priced
differently for different investors. A well-known example of PTM is provided by Nestle. Up until 1988
November, foreigners were only allowed to hold Nestle bearer shares; only Swiss residents were allowed
to hold registered shares. As indicated in Exhibit 16.11 in the text, bearer shares were trading for about
twice the price of registered shares.
11. Explain how the premium and discount are determined when assets are priced-to-market. When
would the law of one price prevail in international capital markets even if foreign equity ownership
restrictions are imposed?
Answer: The premium and discount are determined by (I) the severity of restrictions imposed on
foreigners and (ii) foreigners’ ability to mitigate the effect of these restrictions using their own domestic
securities. In a special case where foreigners can exactly replicate the securities under restriction, then
PTM will cease to apply.
12. Under what conditions will the foreign subsidiary’s financial structure become relevant?
Answer: The subsidiary’s own financial structure will become relevant when the parent firm is not
responsible for the financial obligations of the subsidiary.
4. 13. Under what conditions would you recommend that the foreign subsidiary conform to the local norm
of financial structure?
Answer: It may make sense for the subsidiary to confirm to the local norm if the parent is not responsible
for the subsidiary’s debt and the subsidiary has to depend on local financial markets for raising capital.
PROBLEMS
Answer problems 1-3 based on the stock market data given by the following table.
Correlation Coefficients
Telmex Mexico World SD(%) R (%)
Telmex 1.00 .90 0.60 18 ?
Mexico 1.00 0.75 15 14
World 1.00 10 12
The above table provides the correlations among Telmex, a telephone/communication company located in
Mexico, the Mexico stock market index, and the world market index, together with the standard
deviations (SD) of returns and the expected returns ( R ). The risk-free rate is 5%.
1. Compute the domestic country beta of Telmex as well as its world beta. What do these betas measure?
2. Suppose the Mexican stock market is segmented from the rest of the world. Using the CAPM
paradigm, estimate the equity cost of capital of Telmex.
3. Suppose now that Telmex has made its shares tradable internationally via cross-listing on NYSE.
Again using the CAPM paradigm, estimate Telmex’s equity cost of capital. Discuss the possible effects of
international pricing of Telmex shares on the share prices and the firm’s investment decisions.
5. Solutions.
1. The domestic beta, T , and the world beta, T , of Telmex can be computed as follows:
M W
TM T M TM (18)(15)(0.9) 243
T
M
1.08
M 2
M 2
(15) 2 225
TW T W TW (18)(10)(0.6) 108
T
W
1.08
W 2
W2
(10) 2 100
Both the domestic and world beta turn out to be the same. As the market moves by 1%, Telmex stock
return will move by 1.08%
RT R f ( RM R f ) T
M
2.
5 (14 5)(1.08) 14.72%
RT R f ( RW R f ) T
W
3.
5 (12 5)(1.08) 12.56%
As the equity cost of capital decreases from 14.72% to 12.56%, Telmex will experience an increase in its
share price. In addition, Telmex will be able to undertake more investment projects profitably.