Coût global et disponibilité du capital (document en anglais)

The Global Cost and Availability of Capital

 Questions

13-1. Dimensions of the Cost and Availability of Capital. Global integration has given many firms access to new and cheaper sources of funds beyond those available in their home markets. What are the dimensions of a strategy to capture this lower cost and greater availability of capital?

Global integration of capital markets has given many firms access to new and cheaper sources of funds beyond those available in their home markets. These firms can then accept more long-term projects, and invest more in capital improvements and expansion. If a firm resides in a country with illiquid and/or segmented capital markets, it can achieve this lower global cost and greater availability of capital by using a properly designed and implemented strategy.

13-2. Benefits. What are the benefits of achieving a lower cost and greater availability of capital?

A firm can accept more long-term projects and invest more in capital improvements and expansion because of the lower hurdle rate in capital budgeting, and the lower marginal cost of capital as more funds are raised.

13-3. Definitions. Define the following terms:

a. Systematic risk. Systematic risk is the risk of share price changes that cannot be avoided by diversification. In other words, it is the risk that the stock market as a whole will rise or fall, and the price of shares of an individual company will rise and fall with the market. Systematic risk is sometimes called market risk.

b. Beta (in the Capital Asset Pricing Model). Beta is a measure of the systematic risk of a firm, where “systematic risk” means that risk that cannot be diversified away. Beta measures the amount of fluctuation expected in a firm’s share price, relative to the stock market as a whole. Thus a beta of 0.8 would indicate an expectation that the share price of a given company would rise or fall at 80% of the rise or fall of the stock market in general. The stock is expected to be less volatile than the market as a whole. A beta of 1.6 would indicate an expectation that the share price of a given company would rise or fall at 60% more than the rise or fall in the market. If the market rose, say, 20% during a year, a stock with a beta of 1.6 would be expected to rise (0.20)(1.6) = 0.32, or 32%.

13-4. Equity Risk Premiums.

a. What is an equity risk premium? The equity risk premium is the average annual return of the market expected by investors over and above riskless debt, the term

b. What is the difference between calculating an equity risk premium using arithmetic returns compared to using geometric returns? The mean arithmetic return is simply the average of the annual percentage changes in capital appreciation plus dividend distributions. This is a rate of return calculation with which every business student is familiar. The mean geometric return, however, is a more specialized calculation that takes into account only the beginning and ending values over an extended period of history. It then calculates the annual average rate of compounded growth to get from the beginning to the end, without paying attention to the specific path taken in between.

c. In Exhibit 13.3, why are arithmetic mean risk premiums always higher than geometric mean risk premiums? The geometric change is calculated using only the beginning and ending values, 10 and 14, and the geometric root of is found (the ¼ is in reference to 4 periods of change). The geometric change assumes reinvested compounding, whereas the arithmetic mean only assumes point to point investment.

13-5. Portfolio Investors. Both domestic and international portfolio managers are asset allocators.

a. What is their portfolio management objective? Both domestic and international portfolio managers are asset allocators. 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. International portfolio managers can choose from a larger bundle of assets than can portfolio managers limited to domestic-only asset allocations.

b. What is the main advantage that international portfolio managers have compared to portfolio managers limited to domestic-only asset allocation? Internationally diversified portfolios often have a higher expected rate of return, and they nearly always have a lower level of portfolio risk, since national securities markets are imperfectly correlated with one another.

13-6. Dimensions of Asset Allocation. Portfolio asset allocation can be accomplished along many dimensions, depending on the investment objective of the portfolio manager. Identify the various dimensions.

Portfolio asset allocation can be accomplished along many dimensions depending on the investment objective of the portfolio manager. For example, portfolios can be diversified according to the type of securities. They can be composed of stocks only, or bonds only, or a combination of both. They also can be diversified by industry, or by size of capitalization (small-cap, mid-cap, and large-cap stock portfolios).

For our purposes, the most relevant dimensions are diversification by country, geographic region, stage of development, or a combination of these (global). An example of diversification by country is the Korea Fund. It was at one time the only vehicle for foreign investors to hold South Korean securities, but foreign ownership restrictions have more recently been liberalized. A typical regional diversification would be one of the many Asian funds. These performed exceptionally well until the “bubble” burst in Japan and Southeast Asia during the second half of the 1990s. Portfolios composed of emerging market securities are examples of diversification by stage of development. They are composed of securities from different countries, geographic regions, and stage(s) of development.

13-7. Market Liquidity. Answer the following questions:

a. Define what is meant by the term market liquidity. Although no consensus exists about the definition of market liquidity, we can observe market liquidity by noting the degree to which a firm can issue a new security without depressing the existing market price, as well as the degree to which a change in price of its securities elicits a substantial order flow.

b. What are the main disadvantages for a firm to be located in an illiquid market? An illiquid market is one in which it is difficult to buy or sell shares, and especially an abnormally large number of shares, without a major change in price. From a company perspective, an illiquid market

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