金融英语

1. B C C C B ， A B A A D

Reading Comprehension: (10 points)

Part 1)

Your answer: The correct answer was A!

Because a U.S. denominated local government bond does not exist, the following formula must be used to calculate the country risk premium:

Local government bond yield (non–US dollar denominated)

- U.S. 10 year T-bond yield

- Inflation differential between local country and U.S.

- Yield spread between comparably rated U.S. corporate and U.S. T-bond yields

= Country Risk Premium

Country Risk Premium = 11.50 – 4.50 – (6.50-3.00) – (7.75-4.50)

= 11.50 – 4.50 – 3.50 – 3.25

= 0.25

Note that if a U.S. denominated local government bond did exist, we would use that bond in our calculation and would not include the inflation differential.

Part 2)

Your answer: The correct answer was A!

P0/E1 = 1 / [real required return + (1 – inflation flow-through rate) × inflation rate]

= 1 / [0.05 + (1-.65) × 0.065]

= 1 / [0.05 + 0.02275]

= 1 / 0.07275 = 13.75

Part 3)

Your answer: The correct answer was A!

Although emerging market risk can be incorporated into the valuation process either by adjusting the discount rate (required return), or by adjusting cash flows in a scenario analysis, evidence suggests that country risks can be best captured through cash flow adjustment. The four arguments that support adjustments to cash flow rather than adjusting the discount rate are:

Country risks are diversifiable. Modern finance theory states that country risks can be diversified away, and therefore should not be included in the cost of capital. Testorf’s first reason is correct.

Companies respond differently to country risk. A general discount rate cannot be applied uniformly to every company valuation in the country because it would not capture the different operating characteristics of the company that could be captured by adjusting the cash flows. Testorf’s third reason is correct.

Country risk is one-sided. Emerging markets have a tendency for companies to exhibit one-sided (down only) risk profiles. Therefore, the risks are asymmetrical and adjusting the cash flows best captures these asymmetrical risks. Testorf’s second reason is incorrect.

Identifying cash flow effects aids risk management. Managers tend to identify specific factors affecting cash flow and plan to mitigate their risks by adjusting cash flows rather than adjusting the discount rate.

Part 4)

Your answer: The correct answer was A!

When calculating ROIC, excluding goodwill is useful for comparing different local companies and evaluating trends. Goodwill can distort the comparison when firms have differing levels of goodwill. ROIC that includes goodwill measures returns generated by the firm’s acquisitions based on the use of its investors’ capital, and is used for determining whether or not the company earned an acceptable rate of return over its cost of capital. Note that revaluation is also important here. ROIC including revaluation of fixed assets measures the company’s operating performance, and is also useful for comparing different companies and evaluating trends.

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