Cost of Capital

Question 1

What is one important thing when valuing a company?

Answer 1

Doing sensitivity analysis

Question 2

What is the paradox of investing in LDCs (least developed countries)?

Answer 2

1. High profitable returns
2. High political risks

Are they justified?

Question 3

What are some issues in valuing an international portfolio?

Answer 3

1. Which proxies to use: US or international

2. Which risk premium to use: US or international?

Question 4

How to measure political risks?

Answer 4

1. country-specific perspective: top-down
2. political stability
3. economic factors
4. subjective factors

Question 5

What is capital flight?

Answer 5

the export of savings by a nation’s citizens because of safety-of-capital fears

Question 6

How to measure the capital flight?

Answer 6

Use the balance of payment

Question 7

Why is it important to study economic and political factors?

Answer 7

They are the causes of fluctuations in exchange rate risks, interest rate risks and inflation.

Question 8

What are some factors in policies that need to be taken into account?

Answer 8

1. Currency or trade controls
2. Changes in labor laws
3. Regulatory restrictions
4. Requirement for additional local production

Question 9

What are some indicators of country risk?

Answer 9

1. (fiscal) A large government deficit relative to GNP
2. (monetary) A high rate of money expansion, especially when combined with a relatively fixed exchange rate
3. (spending) Substantial government expenditures yielding low rates of return
4. (restrictions)Price controls, interest rate ceilings, trade restrictions, and other barriers to the smooth adjustment of the economy to changing relative prices
5. (SOEs) Vast state owned firms run for the benefit of their managers and workers
6. A citizenry that demands, and a political system that accepts, government responsibility for maintaining and expanding the nation’s standard of living through public sector spending and regulations

Question 10

What are some indicators of economic health?

Answer 10

1. A structure of incentives that rewards risk-taking in productive ventures
2. (Legal) A legal structure that stimulates the development of free markets
3. (Restrictions) Minimal regulations and economic distortions
4. Clear INCENTIVES to save and invest
5. An open economy

rigours of competition