(2011-S2) - FINS3616 - Tutorial Slides - Week 10

(2011-S2) - FINS3616 - Tutorial Slides - Week 10 -...

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INTERNATIONAL BUSINESS FINANCE FINS3616 Tutorial Week 10 Chapter 15 + 16
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CHAPTER 15 — QUESTION 1 Q. Does corporate financial policy matter in a perfect financial CHAPTER 15 QUESTION 1 market? A. 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. 2 FINS3616 — Peter Kjeld Andersen
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CHAPTER 15 — QUESTION 2 Q. What distinguishes an integrated from a segmented capital CHAPTER 15 QUESTION 2 market? A. In an integrated market, real after-tax required returns on equivalent assets are the same everywhere the assets are t d d traded. If l ft t t f t diff t i ti l If real after-tax rates of return are different in a particular market, then that market is at least partially segmented from other markets other markets. 3 FINS3616 — Peter Kjeld Andersen
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CHAPTER 15 — QUESTION 3 Q. What factors could lead to capital market segmentation? CHAPTER 15 QUESTION 3 A. Violations of any of the perfect market conditions can lead to capital market segmentation 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. 4 FINS3616 — Peter Kjeld Andersen
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CHAPTER 15 — QUESTION 4 Q. Does the required return on a project depend on who is CHAPTER 15 QUESTION 4 investing the money or on where the money is being invested? A. The required return on an investment project should be an t ifi di t t th t fl t th t it t 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 where it came. 5 FINS3616 — Peter Kjeld Andersen
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CHAPTER 15 — QUESTION 5 Q. Does the value of a foreign project depend on the way it is CHAPTER 15 QUESTION 5 financed? A. Yes. Additional debt brings additional tax shields from the tax Additional debt brings additional tax shields from the tax deductibility of interest payments as well as additional costs of financial distress.
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