A national market is segmented if the required rate of return on securities in t
ID: 2795763 • Letter: A
Question
A national market is segmented if the required rate of return on securities in that market differs from the required rate of return on securities of comparable expected return and risk that are traded on other national securities markets. If the markets are integrated, the securities of comparable expected return and risk should have the same required rate of return in each national market after adjusting for foreign exchange risk and political risk.
Required
i. Discuss the main causes of market segmentation drawing examples from developed and developing markets.
ii. Evaluate Difficulties and Importance of International Capital Budgeting Decisions.
iii. Discuss with examples of your choice three steps are involved in the evaluation of an investment proposal in relation to international capital budgeting
b) A multinational corporation operates in multi economic environment comprising of international, host country, and domestic financial environment. Therefore, the cost of capital for a multinational firm can be affected by any of the factors present in these environments
Required
i. Discuss the factors that can affect cost of capital in a multi economic environment comprising of international, host country and domestic financial environment.
ii. Compare and contrast Capital Structure of MNC versus Domestic Firm.
iii. What are the advantages and disadvantages of adapting local capital structure for a multinational firm?
c) After a decision has been made regarding the appropriate mix of debt and equity for the entire corporation, questions about individual operations can be raised. How should MNCs arrange the capital structures of their foreign affiliates? And what factors are relevant in making this decision?
d) Because many MNCs participate in joint ventures, either by choice or necessity, establishing an appropriate financing mix for this form of investment is an important consideration. Discuss.
e) Multinational companies usually enjoy a lower cost of capital than purely domestic companies for a number of reasons. Discuss.
Explanation / Answer
1. Main causes of Market segmentation: -
A. Different scope of profit generation amongst various geographies: - eg in case of a developing countiry, the market is not expolited hence there is a better scope of Profit in that terriotry as compared to a developed country
B. No. of sellers, thereby computing cost of competition.
C. No. of buyers and their preferences: - A Fast Moving consumer good may be more popular in highlighly populated territories.
D. Medium and Long term growth prospects of the business entity.
2. Difficulties and importance of International capital budgeting
Importance:-
A. Make more sound business decisions
B. Enhancing organisation's profits
C. Ascertaining real profits from the transaction / decision by recognising PV factors
Difficulties: -
A. Computation of correct Market rate of return to compute correct Cost of capital
B. Diverse Cost of Capital between various geographies: - An developed country generally tends to have a low cost of capital, however this is not same in each case.
C. substantial chnges in Risk free return amongst different territories.
D. Difficult to ascertain future cash outflows / inflows
E. difficult to forsee exchnage rate fluctuations for future period.
3. Steps involved in International capital budgeting: -
A. Requirement analysis, identification of alternatives.
B. Analysis of each alternative in terms of cash outflow, cash inflow and Present Value factor
C. Seletion of alternative and implement the decision.
4. Factors affecting cost of capital: -
A. Risk free rate of return
B.Business risk
C. Financial risk
D. Other factors like processing costs, exchnage costs, etc.
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