How a firms cost of capital may decrease

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Question 1: The United States has experienced continuous current account deficits since the early 1980s. What do you think are the main causes for the deficits? What would be the consequences of continuous U.S. current account deficits?

Explain how each of the following transactions will be classified and recorded in the debit and credit of the U.S. balance of payments:

a. A Japanese insurance company purchases U.S. Treasury bonds and pays out of its bank account kept in New York City.

b. A U.S. citizen consumes a meal at a restaurant in Paris and pays with her American Express card.

c. An Indian immigrant living in Los Angeles sends a check drawn on his LA bank account as a gift to his parents living in Mumbai.

d. A U.S. computer programmer is hired by a British company for consulting and gets paid from the U.S. bank account maintained by the British company.

Question 2:

How are translation gains and losses handled differently according to the current rate method in comparison to the other three methods, that is, the current/ noncurrent method, the monetary/nonmonetary method, and the temporal method?

It is, generally, not possible to completely eliminate both translation 'exposure and transaction exposure. In some cases, the elimination of one exposure will also eliminate the other. But in other cases, the elimination of one exposure actually creates the other.

Discuss which exposure might be viewed as the most important to effectively manage, if a conflict between controlling both arises. Also, discuss and critique the common methods for controlling translation exposure.

Suppose that your firm is operating in a segmented capital market. What actions would you recommend to mitigate the negative effects?

Explain why and how a firm's cost of capital may decrease when the firm's stock is cross-listed on foreign stock exchanges.

Discuss how the cost of capital is determined in segmented versus integrated capital markets.

Reference no: EM13718877

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