1. Dimensions of the cost and availability of capital. Global integration has given many firms access to new and cheaper sources of funds beyond those available in their home markets. What are the dimensions of a strategy to capture this lower cost and greater availability of capital?
A firm that must source its long-term debt and equity in a highly illiquid domesticsecurities market will probably have a relatively high cost of capital and will face limited availability of such capital
This in turn will limit the firm’s ability to compete both internationally and vis-à-vis foreign firms entering its market
Firms resident in small capital markets often source their long-term debt and equity at home in these partially-liquid domestic marketsThe costs of funds is slightly better than that of illiquid markets, however, if these firms can tap the highly liquid international capital markets, their competitiveness can be strengthened
Firms resident in segmented capital markets must devise a strategy to escape dependence on that market for their long-term debt and equity needs
2. Benefits. What are the benefits of achieving a lower costand greater availability of capital?
This availability and cost allows the MNE more optimality in capital projects and budgets compared to its domestic counterpart
3. Define the following terms:
(a) Systematic risk. is that risk which is common to an entire market and not to any individual entity or component thereof. It can be defined as "financial system instability, potentiallycatastrophic, caused or exacerbated by idiosyncratic events or conditions in financial intermediaries". It refers to the movements of the whole economy and has wide ranging effects. It is also sometimes erroneously referred to as "systematic risk
(b) Unsystematic risk.
Company or industry specific risk that is inherent in each investment. The amount of unsystematic risk can be reduced throughappropriate diversification.
Also known as "specific risk", "diversifiable risk" or "residual risk".
For example, news that is specific to a small number of stocks, such as a sudden strike by the employees of a company you have shares in, is considered to be unsystematic risk.
(c) Beta (in the Capital Asset Pricing Model). coefficient of firm’s systematic risk
4. Market liquidity.a.Define what is meant by the term market liquidity.
The degree to which a firm can issue new securities without depressing existing marketprices
In a domestic case, the underlying assumption is that total availability of capital at anytime for a firm is determined by supply and demand within its domestic the market
In the multinational case, a firm is able to improve market liquidity byraising funds in the Euromarkets, by selling securities abroad, and by tapping local capital markets
b.What are the main disadvantages for a firm to be located in an illiquid market?
The degree to which capital markets are illiquid or segmented has an important influence on a firm’s marginal cost of capital
A firm that must source its long-term debt and equity in a highly illiquid domesticsecurities market will probably have a relatively high cost of capital and will face limited availability of such capital.
An MNE has a given marginal return on capital at differing budget levels determined by which capital projects it can and chooses to take on.
c. If a firm is limited to raising funds in its domestic capital market, what happens to its marginal cost of capital as it expands?If the firm is limited to raising funds in its domestic market, it has domestic marginal cost of capital at various budget levels
5. Market segmentation.
a. Define market segmentation.
• Capital market segmentation is a financial market imperfection caused mainly by government constraints, institutional practices, and investor perceptions
• A national capital market is segmented if the...