Exam 13: The Global Cost and Availability of Capital

Since the 1980s and 1990s,segmentation in global financial markets has been reduced.As a result of this,the correlation among securities markets has increased,thereby reducing,but not eliminating,the benefits of international portfolio diversification.

Which of the following is NOT a contributing factor to the segmentation of capital markets?

Capital market imperfections leading to financial market segmentation include:

The optimal capital budget:

The WACC is usually used as the risk-adjusted required rate of return for new projects that are of the same average risk as the firm's existing projects.

The difference between the expected (or required)return for the market portfolio and the risk-free rate of return is referred to as:

Use the information to answer the following question(s). In September 2009 a U.S. investor chooses to invest $500,000 in German equity securities at a then current spot rate of $1.30/euro. At the end of one year the spot rate is $1.35/euro. -Refer to Instruction 13.1.At the end of the year the investor sells his stock that now has an average price per share of €57.What is the investor's average rate of return before converting the stock back into dollars?

Relatively high costs of capital are more likely to occur in:

If the addition of a foreign security to the portfolio of the investor decreases the expected return for a given level of risk,then the security adds value to the portfolio.

A MNEs marginal cost of capital is constant for considerable ranges in its capital budget,but this statement cannot be made for most domestic firms.

The capital asset pricing model (CAPM)is an approach:

Systematic risk:

The opportunity set of projects is typically smaller for MNEs than for purely domestic firms because international markets are typically specialized niches.

If a firm's expected returns are more volatile than the expected return for the market portfolio,it will have a beta less than 1.0.

What are the components of the weighted average cost of capital (WACC)and how do they differ for an MNE compared to a purely domestic firm?

A well-diversified portfolio has about ________ of the risk of the typical individual stock.

In some respects,internationally diversified portfolios are the same in principle as a domestic portfolio because:

Capital market imperfections leading to financial market segmentation include:

Use of the International CAPM (ICAPM)assures that the WACC will be lower than if a purely domestic market portfolio had been used in the estimation of the cost of equity.

The geometric mean will,in all but a few extreme circumstances,yield a larger return than the arithmetic mean return.