1) The risk-adjusted cost of capital is the cost of capital appropriate for a gi
ID: 2799076 • Letter: 1
Question
1) The risk-adjusted cost of capital is the cost of capital appropriate for a given project, given the riskiness of that project. The greater the project's risk, the higher its cost of capital. True or false?
2)A foreign bond is a type of international bond issued in the domestic capital market of the country in whose currency the bond is denominated, and underwritten by investment banks from the same country. The borrower is headquartered in a different country. True or false?
3) A Eurodollar is a U.S. dollar deposited anywhere in the world—including the U.S. True or false?
4) A good strategy for a U.S. firm's management would be to borrow in countries with the lowest interest rates—particularly if that country maintains lower inflation rates than that of the United States. True or false?
Explanation / Answer
1. TRUE. Cost of capital is the discount rate used to discount the project cash flows to calculate the Net Present Value of the project. Greater the risk, greater the discount rate and in turn lower the NP of the project.
2. TRUE. Foreign bond is the bond issued by a foreign borrower in the currency of the country in which it is sold. Hence the above statement is true.
3. FALSE. EURODOLLAR is a US dollar held in Europe or elsewhere outside the US. So it is not including the US, hence the above statement is false.
4. FALSE. In general, as interest rates are lowered, more people are able to borrow more money. The result is that consumers have more money to spend, causing the economy to grow and inflation to increase. Thus US firm's need to find country with lower interst rates OR higher inflation.
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