a. Discuss the two methods that families can gain control over firms even when they do not own more than half of the shares. (3 marks)

b. William Companies (WMB) needs to borrow $100 million in cash. Currently it can borrow short term at a spread of 1.5% over LIBOR. Alternatively, WMB can issue 10-year, fixed-rate bonds at the yield of 9.5%. Current 10-year interest rate swaps are quoted at the LIBOR rate versus 8% fixed rate.

WMB is expecting interest rates to fall over the next few years, so it would prefer to borrow at the short-term rates and refinance after rates have dropped. WMB management is afraid, however, that its credit rating may fall due to increased competition, which could greatly increase the spread the firm must pay on new borrowings.

(i) How can WMB benefit from the expected decline in future interest rates without exposure to the risk that potential future changes to its credit ratings bring? (2 marks)

(ii) What is WMB's effective borrowing rate? (1 mark)

c. Describe the two methods that are available for calculating the NPV of a foreign project. Do the methods yield the same results in the internationally segmented capital markets? Why? (3 marks)

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