1. Briefly explain two country specific factors which can affect to a firm's cost of capital. (2 Points)
2. How is it possible for a firm to incur a negative effective financing rate when borrowing from foreign sources? (2 Points)
3. Assume that the U.S. interest rate is 7% and the euros interest rate is 4 percent. Assume that the euros forward rate has a premium of 3.5%. Determine whether the following statement is true: Interest rate parity does not hold; therefore, U.S. firms could lock in a lower financing cost by borrowing euros and purchasing euros forward for one year. Explain your answer.(2 points)
4. Missoula Ltd decides to borrow Japanese yen for one year. The interest rate on the borrowed yen is 9 percent. Missoula has developed the following probability distribution for the yens degree of fluctuation against the pound:

Possible degree of fluctuation of Yen against the AUD	Percentage Probability
4%	40%
2	30%
2	20%
3	10%

Given this information, what is the expected value of the effective financing rate of the Japanese yen from Missoulas perspective? (4 Points)