Question

In: Finance

Discuss the differences between the risk and return of a corporation operating domestically and internationally. Your...

Discuss the differences between the risk and return of a corporation operating domestically and internationally. Your answer must include beta and CAPM.

Solutions

Expert Solution

For a domestic corporation, the risk free rate of relevance is the domestic government borrowing rate and based on the return of corporation's stock with the market returns, the beta can be evaluated and as per CAPM, the required return on equity is calculated.
If the riskiness of the return is more, then beta is higher and required return on equity is also more. If the riskiness is less, then beta is also lesser and required return on equity is also lesser.

Compared this to a corporation acting internationally, the risk free rate is dependent on the government borrowing rate of the foreign government and the beta is adjusted for market risk, currency risk and political risk as well. Then the required return on equity is calculated based on CAPM with risk premium and the calculated beta. Typically the beta would be higher because of higher risk and required return on equity would be also more.


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