Question

what are the perfect financial market assumptions? what is their implication for multinational financial management

Answer 1

The perfect market assumptions -

in a perfect Financial market, rational investors have equal access to market prices and info in a frictionless market

1) frictionless market
No transactions costs
No government intervention
No taxes
No agency costs
No costs of Financial distress

2) Equal access to market prices
Perfect competition
No barriers to entry

3) Rational investors
More return is good, more risk is bad

4) Equal access to costless information
Everyone has instantaneous and costless access to information
-market participants are on equal footing

Assumption of frictionless markets
opertaional efficiency: That there are no drains in funds as they are transferred from one use to another

Assumptions of the last three
informationally efficienct: proves fully reflect all relevant info
-does not require frictionless markets, as prices can fully reflect info despite the existence of transaction costs

Operational and informational efficiency together promote:
allocation efficiency
An efficienct allocation of capital toward its most productive uses
-greatest when there is high liquidity and transaction volume In freely traded assets
-less liquid Financial marks do not allocate capital between savers and borrowers as efficiently as more liquid markets

Implications of a perfect financial markets for multinational financial management -

if Financial policy is to increase firm value, then it must increase the firms expected cash flows or decrease the discount rate in a way that cannot be replicated by individual investors

-imperfections are more prominent in international than domestic markets

finacial market arbitrage
Participants can take advantage of cross border differences in assets prices, such as disequilibria in currencies and interest rates

hedging policy
Financial Managers can create value by reducing drains on operating cash flows (e.g, by reducing expecting bankruptcy costs)

MNC cost of capital when there are capital flow barriers
MNCs can lower their cost of capital by selling debt or equity securities to foreign investors that are willing to pay higher prices than domestic investors

reducing taxes through multinational operations
MNCs can lower thee tax burden through multinational tax planning.
-MNCs have an incentive to recognize income in low text countries and expenses in high-taxcountries

barries To the free flow of capital across international markets
Surveys the worlds debt and equity markets and describe some of the barriers that impede the free flow of capital across national borders

*currency risk and the cost of capital
Discusses the multinational corporation exposure to currency risk and the impact of this exposure on investors required returns and the MNC's cost of capital