Question

Write own your words and also give examples.

1. How the cost of capital is determined in segmented vs. integrated capital markets?

2. Why is capital budgeting analysis so important to the firm

Answer 1

1. In segmented capital markets, the cost of capital will be determined essentially by the securities domestic systematic risks.

In integrated capital markets, on the other hand, the cost of capital will be determined by the securities’ world systematic risk, regardless of nationality.

2.Capital investments involve large expendituresand the decisions are difficult to reverse, and have long-termeffects. Thus, capital budgeting decisions require careful and thorough analysis.

Thanks