FINC_445_HW_III - FINC 445 International Financial...

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FINC 445 International Financial Management Homework Assignment III You can provide your answers by expanding the space between questions. You must show your work and/or explain your answers sufficiently to get credit. Global Cost and Availability of Capital Interest Rate and Currency Swaps 1. In November 1988, Nestlé decided to eliminate the ownership restrictions of its shares. Prior to the decision, Nestlé had two classes of shares: Swiss investors and foreigners could own Bearer shares and only Swiss investors could own Registered shares . After the elimination of restrictions prices of Registered shares rose more than 35% while Bearer shares fell about 25%. a. How can you explain the market response? b. Assume that the prior to the lifting of the restriction the Swiss market risk premium is 5.20% and the beta of Nestlé is 0.90 and the Swiss risk-free rate is 4.50%. What is the cost of equity capital for Nestlé? c. After the restriction, assume that the Beta of Nestlé relative to Global Index is 0.60, estimated World Market risk premium is 6.00%, and the risk-free rate is the same as in (b). What is the cost of capital for Nestlé? 2. British subsidiary of a US based MNE borrows £10 million at a rate of 7.00% for one year. The current exchange rate is $1.4400/£. In one year, the exchange rate becomes $1.5600/£. What is the percent dollar cost of the loan? 3. Datta is the largest and most successful specialty goods company based in India. It has not entered the North American marketplace yet, but is considering establishing both manufacturing and distribution facilities in the United States through a wholly owned subsidiary. It has approached two different investment banking advisors, Goldman Sachs and Bank of New
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This note was uploaded on 10/21/2010 for the course ERW 12212222 taught by Professor Marks during the Spring '10 term at Charleston.

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FINC_445_HW_III - FINC 445 International Financial...

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