Question 2

Imperial plc, a UK multinational corporation financed by only equity is looking into venturing into the overseas market. It is evaluating whether it should set up a plant in Malaysia. The project expected payoff is determined by the state of economy in Malaysia as the following :

State of the Malaysian Economy	Probability	Project Internal Rate of Return (%)
A	0.2	20
B	0.3	30
C	0.2	20
D	0.3	30

Imperials current business activities are expected to produce 40% rate of return with a standard deviation of 24%. Imperials returns possess a correlation coefficient of -0.46 with the new project. Its returns also have a correlation coefficient of 0.90 with the market portfolio return and the new project possesses a correlation coefficient of -0.20 with the market portfolio in the UK.

• Imperials beta coefficient is 1.30
• The rate of return from investing in government bonds is 13%
• The risk premium for the market portfolio in the UK is 16%
• The stock prices at the London Stock Exchange (LSE) in which Imperials stock is listed is assumed to be efficient.

Required:

1. Find out the expected return and standard deviation of the new projects return.

(4 marks)

2. After the company had set up its subsidiary plant in Malaysia and hired managers to manage the plant, it found that the plant encounters an organisational problem as a result of its operations in Malaysia. Critically evaluate what type of problem can arise in its subsidiary plant using a relevant example and critically discuss what are the possible solutions to resolve this problem. (12 marks)

3. As the firms overseas business expanded and became successful, it decides to compensate its shareholders for their trust in investing in the firm. Critically discuss one common method to reward the firms shareholders as well as the factors which determine how much of the reward the firm should provide to its shareholders. (9 marks)

[Total : 25 Marks]