Implications of the capm for an mncs projects o

 Implications of the CAPM for an MNC’s projects
o Because many projects of U.S.-based MNCs are in foreign countries, their cash
flows are less sensitive to general U.S. market conditions leading lower project
betas.
 Applying CAPM with a World Market Index:
o A world market may be more appropriate than a U.S. market for determining the
betas of U.S.–based MNCs.
Costs of Capital Across Countries – Country Differences in the Cost of Debt:
 Differences in the risk-free rate - The risk-free rate is the interest rate charged on loans
to a country’s government that is perceived to have no risk of defaulting on the loans.
 Differences in the Credit Risk Premium - The credit risk premium paid by an MNC must
be large enough to compensate creditors for taking the risk that the MNC may not meet
its payment obligations.
 Comparative costs of debt across countries – There is some positive correlation between
country cost-of-debt levels over time.
Costs of Capital Across Countries – Country Differences in the Cost of Equity:
 Differences in the risk-free rate - When the country’s risk-free interest rate is high, local
investors would only invest in equity if the potential return is sufficiently higher than
that they can earn at the risk-free rate.
 Differences in the Equity Risk Premium - Based on investment opportunities in the
country of concern. A second factor that can influence the equity risk premium is the
country risk
Chapter 19 – Financing International Trade:
Payment Methods for International Trade:
 Five basic methods of payment are used to settle international transactions, each with a
different degree of risk to the exporter and importer
o Prepayment
o Letters of credit
o Drafts (sight/time)
o Consignment
o Open account

 Prepayment
o Same as cash in advance
o Payment usually by wire transfer
o Method offers exporter greatest degree of protection
o Usually requested when
 First time buyer
 Danger of pre-shipment cancellation
 Importer country has high political risk
 Letters of Credit (L/C2)
o An instrument issued by a bank on behalf of the importer (buyer) promising to
pay the exporter (beneficiary) upon presentation of shipping documents in
compliance with the terms stipulated therein.
o In effect, the bank is substituting its credit for that of the buyer.
 Drafts (or bill of exchange)
o An unconditional promise drawn by one party, usually the exporter, instructing
the buyer to pay the face amount of the draft upon presentation.
o Draft represents the exporter’s formal demand for payment from the buyer.
o Draft affords the exporter less protection than an L/C because the banks are not
obligated to honor payments on the buyer’s behalf.
 Consignment
o Exporter ships the goods to the importer while still retaining actual title to the
merchandise.