Consider a U

question 41

Multiple Choice

Consider a U.S.-based MNC with a wholly-owned European subsidiary selling a product sourced in euro and priced in euro with inelastic demand. Following a depreciation of the dollar against the euro, which of the following is the most true?

• A)Since they have inelastic demand, the U.S. firm can just pass through the impact of the exchange rate change.
• B)Since they have elastic demand, the U.S. firm cannot just pass through the impact of the exchange rate change.
• C)Since the exchange rate movement was favorable to the U.S. firm, there is no impact on the firm's position.
• D)None of the above.

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Definitions:

Beta

A measure of the volatility of a stock or portfolio compared to the volatility of the overall market.

Dividend Growth Model

A method of valuing a company's stock price by using predicted dividends and discounting them back to present value.

Cost of Equity

The return that investors expect for investing in a company's equity, often calculated using models like the Capital Asset Pricing Model (CAPM).

Market Risk Premium

Slope of the Security Market Line; the difference between the expected return on a market portfolio and the risk-free rate.