Your answers must be typed and turned in electronically no later than 11:55pm on Friday .

1. Suppose you are a U.S.-based investor, and you would like to diversify your stock portfolio internationally. What advantages do ADRs offer you? Would it be wise to restrict your international portfolio to only ADRs?

2. Suppose General Motors managers would like to invest in a new production line and must determine a cost of capital for the investment. The beta for GM is 1.185, the beta for the automobile industry is 0.97, the equity premium on the world market is assumed to be 6%,and the risk-free rate is 3%. Propose a range of cost-of-capital estimates to consider in the analysis.

3. What economic variables would give some indication of the country risk present in a particular country?

4. Why is it necessary to consider forecasts of real currency appreciation and depreciation when doing an international capital budgeting analysis?

5. Suppose that UK Motors Ltd. is considering an investment of 30 million to develop a new factory. Assume that the companys stockholders require a 22% rate of return, that the companys bondholders require a 9% rate of return, that the UK corporate tax rate is 40%,that 35% of the project will be financed by debt, and that 65% of the project will be financed with equity. What must be the annual income from the project if it is to be a zero net present value investment?

6. Why would a firm ever forgo a positive NPV project? How can hedging help prevent this situation from arising?

7. The Indonesian government is concerned that it may contribute to the countrys balance-of trade deficit if it follows through with plans to import a large order of trucks from Germany that will be used to develop Indonesian timber resources. How might the Indonesian government use a counter purchase to its advantage?

8. How can transfer pricing be used to avoid tariffs?

9. What are you buying if you purchase a Swiss franc American call option against the U.S.dollar with a strike price of CHF1.30/$ and a maturity of January? (Assume that it isNovember and the spot rate is CHF1.35/$.)

10. What is a credit default swap? What happens in the event of default?