Why do you think that mncs usually enjoy lower cost

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Reference no: EM133264526

Question 1:

Part A

AussiBlast, an Australian gold mining company, has several mining fields in the African countries. They decided to issue bond denominated in pound sterling to raise finance from London for one of its subsidiaries in Ghana. Discuss some reasons why AussiBlast might issue bond denominated in pound sterling?

Part B

Assume that a portfolio is 60% invested in the U.S. stocks and 40% in the rest of the world. Annualized expected returns are 7% and 9% for the U.S. stocks and the rest of the world, respectively. Using the following information, standard deviation in the U.S. stocks, σUSA = 15%; standard deviation in the rest of the world, σWORLD = 16% and the correlation between the U.S. stocks and the rest of the world, rUSA,WORLD = 0.50, calculate the risk and return of the international portfolio (must show your workings).

Part C

You are working in an MNC which is pursuing a new foreign project. Your MNC has a group-wide debt-equity ratio of 1:2, pre-tax cost of debt 8 percent, the tax rate of 30% and a cost of equity capital of 15%. However, the systematic risk of the new project is estimated to be lower than the group and hence the required return on equity is estimated to be 12% but the cost of debt capital is expected to be 10 percent (pre-tax). What is the foreign project's weighted average cost of capital (must show your workings)?

Question 2: This question has two parts.

Part A

Why do you think that MNCs usually enjoy lower cost of capital than purely domestic firms? Does it mean that they are less risky but more profitable than purely domestic firms? Explain.

Part B

Assuming no transaction costs, Barclays Bank quotes Australian dollar (A$) per pound sterling (£) = A$1.90/£, Suisse Bank quotes euros (€) per pound sterling (£) = €1.53/£ and ANZ quotes Australian dollar (A$) per euros (€) = A$1.25/€, do you detect any arbitrage opportunities here? If so, how could you (i.e., which ways) take profitable advantage of these rates? And what will be your arbitrage gains, if any (use a hypothetical investment amount of Australian dollar ten million)? (Must show your workings).

Reference no: EM133264526

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