Question

1(a). (TRUE or FALSE?) The firm using the hedging instruments such as a forward, futures, or swap contract insulates itself from the foreign exchange risk.

1(b). (TRUE or FALSE?) To calculate the cost of new common stock, we must adjust the Dividend Growth Model equation for floatation costs of the new common shares.

Answer 1

1(a)

One of the major risk Multinational companies face is flatuation in exchange rate. Multinational companies can reduce or eliminate exchnage rate risk by using variaous hedging strategies such as forward, futures, or swap contract.

Statement is true.

1(b)

To calculate the cost of new common stock, we must adjust the Dividend Growth Model equation for floatation costs of the new common shares. we calculation net procced recieve from sale of new equity by substrating floation cost from offer price.

Statement is true.