Question

Other things being equal, firms from a particular home country will engage in more international acquisitions if they expect foreign currencies to____against their home currency, and if their cost of capital is relatively­­­____. a. appreciate; low. b. appreciate; high. c. depreciate; high. d. depreciate; low.

Answer 1

A) appreciate; low.

Step-by-step explanation:

If a company expects that a foreign currency will appreciate in the future, it might consider investing in that foreign country. The equation is fairly simple, if you invest $1,000 in Canada and expect your investment to yield 3% a year (which is not much) but you also expect the Canadian dollar to appreciate 10% against the dollar, then your investment will yield 13.3% which is relatively high.

That logic works as long as the cost of getting the money to invest is lower than the expected returns. Following the same example, if you can obtain a 7% credit and invest that money in Canada it would still be considered a good investment.