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Briefly explain TWO factors which can affect the cost of capital of multinational firms. (2 Points) How is it possible for a firm to incur
- Briefly explain TWO factors which can affect the cost of capital of multinational firms. (2 Points)
- How is it possible for a firm to incur a negative effective financing rate when borrowing from foreign sources? (2 Points)
- City Cable Ltd needs Japanese yen (JPY) to fund a special purchase from Japan. Assume that the local one year Australian dollar (AUD) loan rate is 4.50%, while a one year loan rate on JPY is 2.10%. By how much must the JPY should appreciate to cause the loan in JPY to be more costly than a AUD loan (hint: use IRP)? (2 points)
- Missoula Ltd decides to borrow Japanese yen for one year. The interest rate on the borrowed yen is 8 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 pound | Percentage Probability |
4% | 20% |
1 | 30 |
0 | 10 |
3 | 40 |
Given this information, what is the expected value of the effective financing rate of the Japanese yen from Missoulas perspective? (4 Points)
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