True or False (2 points)

1. Abandoning an investment project is similar to exercising a call option.

2. Investors prefer to hold equal proportions of foreign and domestic stocks.

3. Cross-listing reduces firm-value by lowering the discount rate on the cash flows of existing projects.

4. Portfolio A has a Sharpe Ratio of 1.2 and Portfolio B has a Sharpe Ratio of 0.8. If Portfolio B is the
world market portfolio, the CAPM does not hold.

5. Host countries tend to welcome Greenfield investments from foreign companies.

6. Transfer risk is the risk that a host country will require a multinational to transfer its operations to a
local firm.

7. A company has an equity beta of 0.6. If the market risk premium is 5 percent and the risk free rate is
3 percent, the CAPM predicts that when the market portfolio rises by 1 percent that the company’s
stock price will rise by 6 percent.

8. Labor markets tend be globally segmented.

Short Answer

9. In the real world, the cost of capital is (higher/equal/lower) in countries where investors are less
globally diversified.

10. Government restrictions of foreign equity ownership (increase/have no effect on/decrease) the
home bias.

11. Synergies occur when the value of the merged company is (greater/smaller) than the individual
companies that have merged.

12. Greenfield investments are generally (less/more) politically sensitive than acquisitions from foreign
firms.

13. Foreign equity ownership restrictions likely (raise/lower) domestic stock prices.

14. Persistent differentials can be (decreased/increased) by immigration barriers that limit the mobility
of workers across countries.

15. Cross-border mergers can offer (better/worse) access to proprietary assets relative to Greenfield
investments.

Suppose that Firm A consists of a one-time cash flow of $20M USD that will arrive next year. Assume the
risk free rate is 4 percent.
 Corr(Ri,Rj)
Firm A Local World SD (%) E(R)(%)
Firm A 1.00 0.80 0.50 20
Local Market 1.00 0.75 18 12
World 1.00 15 10

16. If you form a portfolio that combines one of the markets with the risk free asset, you should choose
(the Local Market, World Market)

17. Apply the local CAPM to calculate the local discount rate for Firm A.

18. Calculate the local market value of Firm A.

19. Calculate the world market value of Firm A.

You can invest in a project either now or next year. If it is successful, you get a perpetual cash flow of
$80M that starts the following year. If it is unsuccessful, you get a perpetual cash flow of $10M that
starts the following year. The project costs $200M and has a discount rate of 15 percent. The chance of
success is 60%.

20. What is the NPV of the project if you invest today?

21. If you wait a year, you will know whether the project will be successful (the chance of success is still
60%). What is the NPV today of the project if you decide to wait for a year?

22. What is the value of the option to wait?