12.1 Financial Globalization and Strategy

Essay Questions

12.1 Financial Globalization and Strategy

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1) Your authors identify three firm and market characteristics that, in part, determine differences in a firm’s cost of capital in a purely domestic market versus a global capital market. What are these three market characteristics and how do they help differentiate a firm’s cost of capital?

12.2 The Demand for Foreign Securities: The Role of International Portfolio Investors

1) What motivates portfolio investors to purchase and hold foreign securities in their portfolio?

Answer: Both domestic and international portfolio managers are asset allocators.Their objective is to maximize a portfolio’s rate of return for a given level of risk, or to minimize risk for a given rate of return.International portfolio managers can choose from a larger bundle of assets than portfolio managers limited to domestic-only asset allocations. As a result, internationally diversified portfolios often have a higher expected rate of return, and they nearly always have a lower level of portfolio risk, since national securities markets are imperfectly correlated with one another.

12.3 The Cost of Capital for MNEs Compared to Domestic Firms

1) What are the components of the weighted average cost of capital (WACC) and how do they differ for an MNE compared to a purely domestic firm?

12.4 Solving a Riddle: Is the Weighted Average Cost of Capital for MNEs Really Higher than for Their Domestic Counterparts?

1) What do theory and empirical evidence say about capital structure and the cost of capital for MNEs versus their domestic counterparts?