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1、1CHAPTER14THECOSTOFCAPITALFORFOREIGNINVESTMENTSKeyPoints1.Aproject'scostofcapitalisafunctionoftheriskinessoftheprojectitself,nottheriskofthefirmundertakingtheproject.Thus,ifaninvestment'sriskcharacteristicsdifferfromthoseofthefirm'saverageinvestment,itisinappropriat
2、etodiscountprojectcashflowsatthefirm'scostofequitycapital.2.Evenifforeigninvestmentsareriskierthandomesticinvestments,thatdoesnotmeanthatthoserisksmustleadtoahighercostofcapitalfortheformer.Thebasicinsightofthecapitalassetpricingmodel(CAPM)isthatonlythesystematiccom
3、ponentofriskispriced;diversifiableriskmustbeborneatazeroprice.ThekeyquestionfortheMNCiswhethersystematicriskismeasuredinthecontextofaglobally-diversifiedportfoliooronlyadomesticallydiversifiedportfolio.Thereisstrongevidencethatmuchriskthatissystematicfromadomestics
4、tandpointisunsystematicfromaglobalstandpoint.Ifriskismeasuredrelativetoadomesticallydiversifiedportfolio,thenforeignprojectsprobablyhavelowersystematicriskthancomparabledomesticinvestments,andsoshouldrequirelowerreturns.Ifriskismeasuredrelativetoagloballydiversif
5、iedportfolio,foreignprojectswilllikelystillbelessriskythandomesticprojectsandrequirelowerreturns.Butthegapbetweentherequiredreturnondomesticandcomparableforeigninvestmentsshouldbelessinthesecondcase.Thetotalriskofmanyforeigninvestmentswillprobablyexceedthetotalrisko
6、ftheirdomesticcounterparts.Butbecauseofthelowercorrelationbetweenreturnsondomesticandforeignprojects,foreigninvestingcouldstillreducetheMNC'stotalrisk.Hence,executivesofmultinationalfirmsshouldseriouslyquestiontheuseofariskpremiumtoaccountfortheaddedpoliticalandecon
7、omicrisksofoverseasoperations,whenevaluatingprospectiveforeigninvestments.Theuseofanyriskpremiumignoresthefactthattheriskofanoverseasinvestmentinthecontextofthefirm'sotherinvestments,domesticaswellasforeign,willbelessthantheproject'stotalrisk.Howmuchlessdependsonhow
8、highlycorrelatedaretheoutcomesofthefirm'sdifferentinvestments.Someinvestments,however,aremoreriskpronethanareothers,andtheserisksmustbeac