Implications of the capm for an mncs projects o

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Implications of the CAPM for an MNC’s projectsoBecause many projects of U.S.-based MNCs are in foreign countries, their cashflows are less sensitive to general U.S. market conditions leading lower projectbetas.Applying CAPM with a World Market Index:oA world market may be more appropriate than a U.S. market for determining thebetas 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 loansto 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 mustbe large enough to compensate creditors for taking the risk that the MNC may not meetits payment obligations.Comparative costs of debt across countries– There is some positive correlation betweencountry 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, localinvestors would only invest in equity if the potential return is sufficiently higher thanthat they can earn at the risk-free rate.Differences in the Equity Risk Premium- Based on investment opportunities in thecountry of concern. A second factor that can influence the equity risk premium is thecountry riskChapter 19 – Financing International Trade:Payment Methods for International Trade:Five basic methods of payment are used to settle international transactions, each with adifferent degree of risk to the exporter and importeroPrepaymentoLetters of creditoDrafts (sight/time)oConsignmentoOpen account
PrepaymentoSame as cash in advanceoPayment usually by wire transferoMethod offers exporter greatest degree of protectionoUsually requested whenFirst time buyerDanger of pre-shipment cancellationImporter country has high political riskLetters of Credit (L/C2)oAn instrument issued by a bank on behalf of the importer (buyer) promising topay the exporter (beneficiary) upon presentation ofshipping documents incompliance with the terms stipulated therein.oIn effect, the bank is substituting its credit for that of the buyer.Drafts (or bill of exchange)oAn unconditional promise drawn by one party, usually the exporter, instructingthe buyer to pay the face amount of the draft upon presentation.oDraft represents the exporter’s formal demand for payment from the buyer.oDraft affords the exporter less protection than an L/C because the banks are notobligated to honor payments on the buyer’s behalf.ConsignmentoExporter ships the goods to the importer while still retaining actual title to themerchandise.

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Term
Spring
Professor
Mr.Guedhami

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