Western Sydney
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EXAMINATION
INSTRUCTIONS
PLEASE READ CAREFULLY BEFORE PROCEEDING
1 Write your name and student number on the top of this examination paper and on ALL
answers booklets.
2 CLOSED book examination.
ratios because their cash flows are diversified internationally. However, recent empirical studies have come to
the opposite conclusion. These studies also concluded that MNEs have higher betas than their domestic
counterparts. Discuss.
b). Tata is a large and successful specialty goods company based in Bangalore, India. It has not
entered the North American marketplace yet, but is considering establishing both manufacturing and
distribution facilities in the United States through a wholly owned subsidiary. It has approached two
different investment banking advisors, Goldman Sachs and Bank of New York, for estimates of what
its costs of capital would be several years into the future when it plans to list its American subsidiary
(i) Using the following assumptions by the two different advisors, calculate the prospective costs of
(ii) Explain why differences exist betw~en each company's assessment of Tata' s beta, cost of equity
and debt.
Bank of New
Assumptions Symbol Goldman Sachs York
Components of beta: p
Estimate of correlation between security and
market pjm 0.90 0.85
Estimate of standard deviation of Tata's
returns oj 24.0% 30.0%
Estimate of standard deviation of market's
return om 18.0% 22.0%
Estimated beta
p = ( pjm x crj ) / ( crm )
Estimated cost of equity
ke = krf + (krn - krf) J3 ke
c) Varying debt proportions. As debt in a firm's capital structure is increased from no debt to a
significant proportion of debt (say, 60%), what tends to happen to the cost of debt, to the cost of
equity, and to the overall weighted average cost of capital?
a) Evolving into multinational ism. As a finn evolves from purely domestic into a true
multinational enterprise, it must consider (i) its competitive advantages; (ii) where it wants
to locate production; (ii) the type of control it wants to have over any foreign operations;
and (iv) how much monetary capital to invest abroad. Explain how each of these four
considerations is important to the success of foreign operations.
c) Economies of scale and scope. Explain briefly how economies of scale and scope can
be developed in production, marketing, finance, research and development, transportation,
and purchasing.
d) What are the advantages and disadvantages of limiting a finn's activities to exporting
compared to producing abroad?
b) Exporting versus producing abroad. What are the advantages and disadvantages of
c) What are the advantages and disadvantages offonning ajoint venture to serve a
foreign market compared to serving that market with a wholly owned production
subsidiary?
d). Explain the reasons why Australia's perfonnance in the area ofFDI compared with
b) Forward rate agreement. How can a business firm that has borrowed on a floating
rate basis use a forward rate agreement to reduce interest rate risk?
c) Currency swaps. Why would one company with interest payments due in pounds sterling
want to swap those payments for interest payments due in U.S. dollars?
d) Xavier Manufacturing and Zulu Products both seek funding at the lowest possible
cost. Xavier would prefer the flexibility of floating rate borrowing, while Zulu wants
the security of fixed rate borrowing. Xavier is the more credit-worthy company.
They face the following rate structure. Xavier, with the better credit rating, has lower
borrowing costs in both types of borrowing.
Xavier wants floating rate debt, so it could borrow at LIBOR+1%. However it could
borrow fixed at 8% and swap for floating rate debt. Zulu wants fixed rate, so it could
borrow fixed at 12%. However it could borrow floating at LIBOR+2% and swap for
fixed rate debt. What should they do?
a) List three specific signals that a country's BOP data can provide.
a) Discuss three (3) Arguments For and three (3) Arguments against currency risk
management. What are six arguments against a firm pursuing an active currency
risk management program?
c) Forward rate as an unbiased predictor of the future spot rate. Some forecasters
believe that foreign exchange markets for the major floating currencies are "efficient"
and forward exchange rates are unbiasedpredictors of future spot exchange rates. What
is meant by "unbiased predictor" in terms of how the forward rate performs in
estimating future spot exchange rates?
b) What is the difference between 'internal' financing and 'external' financing for a subsidiary?
List three types of internal finance and three types of external financing available to a
foreign subsidiary.
c) Give three reasons why a firm might cross-list and sell its shares on a very liquid stock
exchange.
d) The benefits of portfolio construction, domestically or internationally, arise from the lack of
correlation among assets and markets. The increasing globalisation of business is expected to
change these correlations over time. How do you believe they will change and why?
End of Examination