If you are the manager of a U.S. corporation that is considering listing only on the Hong Kong exchange and Hong Kong investors are allowed to invest only in the Hong Kong stock market,
But all their consumption is in Japan, then how should you calculate your cost of capital?

Question

Quizplus · Accepted Answer

Since the corporation is considering listing only on the Hong Kong exchange and Hong Kong investors are only allowed to invest in the Hong Kong stock market, the most relevant market index and interest rates would be from Hong Kong. While consumption may take place in Japan, this is not relevant to the cost of capital calculation, as the investors are in Hong Kong and will be investing in the Hong Kong stock market. Therefore, choice B is the best option. Since the corporation is listing only on the Hong Kong exchange and Hong Kong investors are the main target, it is best to use Hong Kong interest rates and a Hong Kong market index to calculate the cost of capital. Even though the investors' consumption is in Japan, it does not necessarily mean that the Japanese market index and interest rates should be used. The primary focus should be on the market where the corporation is listing, which is Hong Kong.

If You Are the Manager of a U