Question

Plz answer

1.What are some strategies a multinational firm could undertake to lower its cost of capital? Mention at least two. Explain why these strategies would lower the cost of capital.

2.You want to use the dividend discount model with a constant growth rate to value a security. What is the most difficult input to estimate correctly? Why? Does getting this input wrong give significant consequences? Explain.
3.You are considering a project in South Korea. The cash flows are in South Korean won (KRW). Given your current estimates of the future spot rate of USD/KRW, the NPV is positive. Explain why you should proceed with the project.

If you think the South Korean won will appreciate more against the dollar than what you originally estimated will this make it more or less likely that you proceed with the project. Explain.

4.General Motors (GM) is buying some parts from a European factory. Specifically GM has ordered 2000 engines to put in Chevrolet Silverado pickup trucks it plans to produce at its US assembly plants. Each pickup truck engine is priced at 2500 EUR and GM will pay the European factory for the 2000 eninges in 2 months. The current spot rate is 1 USD/EUR and the two month forward rate $1.1 USD/EUR.

Is this foreign exchange rate exposure best described as transaction, translation or operating exposure for GM? Why? How can GM hedge this exposure to foreign exchange risk? Explain why the strategy works.

Answer 1

1. The cost of capital is very important for a company. It is called as average cost of capital or weighted average cost of capital after taking all the cost that a firm have. It can be reduced if the debt component is used more as th einterest expense is tax deductible expenses and ultimately lowers the costs. As it is multinational firm, it can go overseas and raise the fund. The company can also use the retained earnings to finance the further activities as cost on retained earnings are comparatively less as compared with issuing new equity. Because issuing equity involves flotation costs. This makes new issue expensive. So, company can rely on its retained earnings and can reduce its cost of capital.

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