Question

DGP, Inc. is planning an expansion of its business operations internationally by adding a subsidiary (FDI) in Spain. The CFO has approached 3 investment banks—2 in the United States and 1 in Europe—to provide the firm with financial information regarding the cost of capital in their respective markets, and also in major capital markets globally.

Instructions

1. Explain what is meant by global sourcing of capital.
2. Explain what is meant by the terms systematic risk, unsystematic risk, and beta as they relate to investment in shares of public organizations.
3. According to Eiteman, Stonehill, and Moffett (2010), “Depository receipts (depository shares) are negotiable certificates issued by a bank to represent the underlying shares of stock, which are held in trust at a foreign custodian bank” (p. 393). Define and contrast American Depository Receipts (ADRs,) and Global Depository Receipts (GDRs).
4. What is meant by the term cross-listing?

Answer 1

Global Sourcing of Capital means exploring sources of business finance across the global , i.e, cross border financing to encash the advantages of lower capital costs and ease of raising finance.

Systematic Risk is the inherent risk posed by the markets as a whole. It is uncontrollable and can be further divided into three categories.

Interest rate risk ( caused by ups and downs in the rates of interest) , market risk ( caused by the market fluctuations ) and Inflationary risk ( caused by excess demand over supply)

Unsystematic Risk refers to risks that are specific to a particular company or industry .They are generally controllable through means like product portfolio diversification.It can be further divided into Business risk and Finance risk.

Beta is a measure of the volatility of a stock that is the systematic risk it possess

American Depository Receipt (ADR) is a negotiable instrument issued by a US bank representing non-US company stock trading in the US stock exchange.The participants are Retail individual investors and are offered to American investors.These are designated in US Dollars and dividends are also paid in US Dollars. These are freely transferable without stamp duty.

Global Depository Receits (GDR) is a negotiable instrument issued by an international depository bank representing foreign company's stock trading globally.These are issued in the European Capital markets with less liquidity and are mostly issued to institutional investors.

Cross Listing refers to listing the equity shares of a company with a different exchange than the primary exchange of the country where it is domiciled, i.e foreign stock exchanges.