FINS3630 Lecture Notes - Lecture 9: Transfer Pricing, Relevant Market, Systemic Risk

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Lecture 9: mnc capital budgeting and cost of capital, managing the multinational. Minimum (required) rate of return necessary to induce investors to buy or hold firm"s stock. Used to value future equity cash flows. Weights must be proportions using market, not book values. Calculating wavv, weights must be marginal, reflecting future debt structure. Foreign projects in non-synchronous economies should be less correlated with domestic markets. Paradox: ldcs have greater political risk but offer higher probability of diversification benefits. Key issues in estimating foreign project betas: Find firms publicly traded that share similar risk characteristics. Alternative: find proxy industry in local market. If capital markets are globally integrated, choose world market. Foreign project: should be higher than domestic risk and cost of capital. Mnc advantage: uses more debt due to diversification. Borrowing in local currency helps reduce exchange rate risk. Allow subsidiary to exceed parent capitalization norm if local market has lower costs.

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