2Section A. You must answer ALL questions in this section.This section carries 55marksB&H is a large UK based company investing in various assets and sectors around the globe. Its optimal capital structure is 60% debt and 40% equity. B&H’s cost of debt is 8%. The risk-free rate of interest is 3%. Theexpected return on the market portfolio is 12%. B&H’s corporate tax rate is 25%. B&H’s beta is estimated at 1.2 and the cost of equity (after tax) is 13.8%. Please answer questions Q1 to Q4 related to B&H.Q1.[Total 15marks]a.Calculatethe market risk premium.[3 marks]b.Calculate B&H’s weighted average cost of capital.[5marks]c.Discussthe impact onthe cost of equity if corporate tax increases.[7 marks]Q2.B&H is now looking to expandits investments more globally:[Total 20 marks]a)Assume the annual interest rate for borrowing in the EU is 3.1%, if B&HborrowsEUR1,000,000todayfor one year, how much money would B&Howe at maturityin EUR? [5 marks]b)ConsiderthatB&Hwantsto use the money theyborrowed today(from part a)to invest in the US. Using the information in table1, how much USD will B&Hget from the banktoday? [5 marks]Table 1BidAskSpot rateUSD 1.42 = EUR 1 USD 1.45 = EUR 1 1 year forward rateUSD 1.48 = EUR 1 USD 1.50 = EUR 1 c)B&H wants to estimatethe payable amount in its own home currency GBPin one year. Given theexpectedspot rate in one year is1.24EUR=1GBP, and the forward ratefor one-year maturityis 1.22EUR=1GBP, should B&H hedge its payment using a forward contract or not? And why? [10marks]
3Q3. [10marks]In table 2 below you are given the expected transactions and standard deviation of the affiliates of B&H around the world. Theinter-affiliate cash flows are uncorrelated with one another. Calculate the standard deviation of the portfolio of cash held by the centralized depositoryof B&Hin the UKfor the following affiliate membersin various countries:Table 2AffiliateExpected TransactionsStandard DeviationUK£100,000 £40,000Europe£150,000£60,000US£175,000£30,000Africa£200,000£70,000Q4.[10marks]B&H is nowassessing the possibility to make anewforeign direct investmentin Thailand. The initial cost of the project in ThaiBahtcurrency is THB10,000,000. The annual cash flows over the five-year economic life of the project in THB are estimated to be 3,000,000; 4,000,000; 5,000,000; 6000,000; and 7,000,000. Long-run inflation is forecasted to be 3% per annum in the UKand 6% per annum in Thailand. The current spot rate is 1GBP= THB40.00-If the new cost of capital of B&H is 10%. Calculate the NPV of the project in GBP(Note: the cost of capital is related to the parent company which is UK based). Section B. You must answer ALLquestions in this section.This section carries 45marks (each question carries 15 markswith a maximum word limit of just 300)Q5.a. Discuss the main barriers to cross-listing abroad.[8 marks]b. What is effective cash management within a firm? Discuss the key factors contributing to effective cash management. Discuss the reasons why cash management process is more difficult in a MNC. [7 marks]
4Q6. Define and explainletter of credit (L/C), itsprinciple parties andprinciple advantages, Discusshow the L/C facilitates international trade. [15 marks]Q7. What are the advantages and disadvantages of investing ina foreign market through a greenfield foreign direct investment compared to an acquisition of a local firm in the target market?
