Question

Which of the following is true about segmented capital markets?

a.​Exhibit different bond and equity prices in different geographic areas for identical assets in terms of risk and maturity.

b.​Exhibit the same bond and equity prices in different geographic areas for identical assets in terms of risk and maturity.

c.​Exhibit different bond and equity prices in the same geographic areas for identical assets in terms of risk and maturity.

d.​Exhibit different bond prices but the same equity prices in different geographic areas for identical assets in terms of risk and maturity.

e.​None of the above

3.​Which of the following is generally not a motive for firms to expand internationally?

a. Desire to achieve geographic diversification

b. Desire to accelerate growth

c. Desire to consolidate industries

d. Desire to avoid entry barriers

e. Desire to enter countries with less favorable tax rates

4.​Firms are likely to achieve significant diversification by investing in all of the following except for

a.​Different but uncorrelated industries in the same country

b.​Different companies in the same industry in the same country

c.​The same industries in different countries

d.​Different industries in different countries.

e.​Different companies in different industries in the different countries

Answer 1

Ans 1.Option A is correct. As per Capital Market Segmentation theory, identical assets in different geographical areas exhibits different bond and equity prices because each and every capital market segment reflects special ans different expectations from their investors for the returns, capital cost, lack off transparency or political risks that a particular geographical area may be facing.

Ans 3. Option E is correct i.e. a company will never think of going and expanding its business internationally with a desire to enter in countries with less favourable tax rates because entering into such a territory will increase the tax liability of the business and may also in some instances lead to problem of Double Taxation i.e. the same income will be taxed in both Home as well as Host country.

Ans 4. Option B is correct . A company cannot achieve diversification by investing in different company of same industry in same country because all the firm of the same industry may many times will be faced by same risk of return. Therefore, decreasing returns on a company's share of a particular industry may also mean that other company's share return may also decline.