Risk and Return on International Finance

Qz 1

One of the big decisions an investor make is whether to put his/her money in foreign stocks. While investing in foreign nations can sometimes be lucrative the rewards comes with other additional risks. In this regard, worthwhile foreign investments can be more expensive than investing at home. However, there are some good reasons for foreign investments invest overseas. From the portfolio management perspective, putting ones money is a way of diversity. For instance, the foreign shares and the U.S always do not move in sync .This means that when one is down, the other one is up and vice versa. In other terms, these markets lack correlation.  Many countries heavily rely on the United States for exports and imports and this can be susceptible to the US markets shifts. In the current global economy, stocks tend to move to the same direction more so when the United States is experiencing a bull market. The economic development of China has a good prospectus and currently, the asset prices are lowering. Definitely, this is the best time for an excellent investment. Over the past few years, the automobile industry has slowed down in its investment pace. The first priority will be to recruit highly qualified professionals, of which China has many excellent professionals. The company will operate in two or more countries but decisions will be centralized in the home country. With $U.S.800 million to build on, the company will take into consideration projects from shareholders to be considered for funding,  profit sharing will be 30%. By so doing, it is most likely that returns on shares will increase. On the same note, returns on equity will be expressed from the anticipated dividends on shares on a yearly basis.  (Vijay. P 2007)

Qz 2

The company will use various bonds, loans and other forms of debt. This will be a very important measure, when giving out ideas on the overall rates paid by the company while using debt financing. Equally, it will show the investors how risky the company is as compared to others. This will make investors to develop confidence in the company. On a brighter note, multinational companies are usually meet with lower inflations rates and this leads to lower interest rates on loans. Therefore, borrowing from a lower interest rate countries will be more attractive to the company. However, currencies in low-inflation nations sometimes tend to appreciate against those of high inflation countries and as a result, the effective interest cost will tend to increase over the time frame. Some other obstacles such as funds, which may be repatriated must in the first instance be converted into the U.S dollars, hence the company must take into consideration the exchange rates. Equally, most of the foreign projects are faced with political risks. This can be political changes that can alter the company’s expected income and value.

Some other events related to political instability include riots, civil war, coups and insurrection but all these will be overlooked. On the other end, most foreign investments are taxed locally, but then, the funds may be subjected to the U.S taxes. This will prove to be expensive for the company’s investment. However, the U.S government may allow for a tax credit for foreign taxes to be paid. Other than the above obstacles, cultural differences play a key role in foreign investment. Different countries have different languages and with this kind of investment, the company will need professional interpreters to break language barrier. This will attract clients and ensure smooth run of business. Lastly, most laws in various countries have their roots in social structures, economic policies and background of any country. Consequently, there are regulatory issues in foreign investments that the company must overcome before thinking of cross border investments

Qz 3

Generally, the investment project is a good value for money, as expense estimates will be accounted for. A detailed analysis of unforeseen risks which should be added to the WACC of 12% as estimation is made on the required rate of return on the proposed project investment. A summery of the above analysis indicates that foreign markets lack correlation and therefore, investing outside U.S is an effective way of diversifying your portfolio. Nevertheless, when investing in China one needs to understand the risks involved in relation to the potential rewards. Still investors have opportunities to access foreign markets and, this can be done through instruments such as international stocks which could be traded on U.S exchanges. While project investment cannot be regarded as an improvement on capital, we cannot account for a no- cash flow allowance. Hence, in our estimated risk scale is as follows:

Low =1%, moderate =2%, and high =3%, an estimated return on capital on capital investment is 30% as shown below.

WACC- 12.0%

Project Risk Premium- 2.0%

Exchange rate Risk- 2.0%

Cultural Risk, Government & Political Risk-   3%

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