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GLOBAL COST AND AVAILABILITY OF CAPITAL

Global integration of capital market ? access to new and cheaper sources of fundsExhibit 11.1 Dimensions of the Cost and Availability of Capital StrategyIlliquid domestic securities market ? high cost of capital and limited availability of such capital; low competitiveness ; emerging market. Capi

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GLOBAL COST AND AVAILABILITY OF CAPITAL

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    1. GLOBAL COST AND AVAILABILITY OF CAPITAL The purpose of minimizing their cost of capital and maximizing capital’s availability

    2. Global integration of capital market ? access to new and cheaper sources of funds Exhibit 11.1 Dimensions of the Cost and Availability of Capital Strategy Illiquid domestic securities market ? high cost of capital and limited availability of such capital; low competitiveness ; emerging market

    3. Capital Market Segmented A national capital market is segmented if the required rate of return on securities in that market differs from the RoR on securities of comparable expected return and risk traded on other securities markets Regulatory control Perceived political risk Anticipated foreign exchange risk Lack of transparency Asymmetric information, cronyism, insider trading Many other market imperfections

    4. WEIGHTED AVERAGE COST OF CAPITAL kwacc = ke(E/V) + kd(1 – t)D/V Where : kwacc = weighted average after-tax cost of capital ke = risk adjusted cost of equity kd = before-tax cost of debt t = marginal tax rate E = market value of the firm’s equity D = market value of the firm’s debt V = total market value of the firm’s securities (D+E) WACC. The Sum of the proportionally weighted costs of different sources of capital, used as the minimum acceptable target return on new investments.

    5. Cost of Equity (CAPM) ke = krf + ßj(km – krf) Where : ke = expected (required) rate of return on equity krf = rate of interest on risk-free bonds (T_bills) ßj = coefficient of systematic risk for the firm km= expected (required) rate of return on the market portfolio of stocks

    6. Systematic risk ßi = ?jmaj/am ßi = measure of systematic risk for security j ?jm = correlation between security j and the market aj = standard deviation of the return on firm j am = standard deviation of the market return Beta < 1 if the firm’s return are less volatile than the market Beta = 1, if the same as the market Beta > 1 if the firm’s return are more volatile than the market

    7. Exhibit 11.2 Calculation of Carlton’s Weighted Average Cost of Capital Nestle: An Application of the International CAPM Exhibit 11.3. Estimating the Global Cost of equity for Nestle (Switzerland) Calculating Equity Risk Premium in Practice The equity risk premium, km – krf Exhibit 11.4 Equity Risk Premiums Around the World, 1900 – 2002.

    8. THE DEMAND FOR FOREIGN SECURITIES: THE ROLE OF INTERNATIONAL PORTFOLIO INVESTORS Their objective is to maximize a portfolio’s rate of return for a given level of risk, or to minimize risk for a given rate of return Market liquidity ; a firm can issue security without depressing the existing market price Improving market liquidity by raising funds in the euromarkets (money, bond, and equity)

    9. Market Segmentation; The most important imperfections are: Asymmetric information Lack of transparency High securities transaction costs Foreign exchange risks Political risks Corporate governance differences Regulatory barriers

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