Tutorial+solutions+Week+11 - Chapter 15 Multinational...

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Chapter 15 Multinational Capital Structure and Cost of Capital Answers to Conceptual Questions 15.1 Does corporate financial policy matter in a perfect financial market? In a perfect financial market, investors can replicate any action that the firm can undertake. Hence, corporate financial policy is irrelevant in a perfect financial market. 15.2 What distinguishes an integrated from a segmented capital market? In an integrated market, real after-tax required returns on equivalent assets are the same everywhere the assets are traded. If real after-tax rates of return are different in a particular market, then that market is at least partially segmented from other markets. 15.3 What factors could lead to capital market segmentation? Violations of any of the perfect market conditions can lead to capital market segmentation. These factors include prohibitive transactions costs, differing legal and political systems, regulatory interference (e.g., barriers to financial flows or to financial innovation), differential taxes or tax regimes, informational barriers such as disclosure requirements, home asset bias, and differential investor expectations. 15.4 Does the required return on a project depend on who is investing the money or on where the money is being invested? The required return on an investment project should be an asset-specific discount rate that reflects the opportunity cost of capital on the project. That is, it depends on where the money is going and not from where it came. 15.5 Does the value of a foreign project depend on the way it is financed? Yes. Additional debt brings additional tax shields from the tax deductibility of interest payments as well as additional costs of financial distress. The adjusted present value approach to project valuation attempts to separate the value of the unlevered project from the value of these financial side-effects. 15.6 An important input into the required return on equity in the security market line is the market risk premium. How much is the market risk premium? This is difficult to say, as there is no easy way to identify the exact number. Indeed, the market risk premium is likely to change over time. A recent survey of academic financial economists by Ivo Welch (“The Equity Premium Consensus Forecast Revisited,” September 2001, available at www.ssrn.com ) produced an estimate of 5 to 5.5 percent. 15.7 When is the adjusted present value approach to project valuation most useful? When the financial side-effects are easy to separate from the project. This includes many of the special circumstances listed in the chapter on “Cross-Border Capital Budgeting” including blocked funds, subsidized financing, negative-NPV tie-in projects, expropriation risk, and government-sponsored tax holidays. 15.8
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This note was uploaded on 10/29/2010 for the course FINS 3616 taught by Professor Curry during the Three '10 term at University of New South Wales.

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Tutorial+solutions+Week+11 - Chapter 15 Multinational...

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