U.S. pharmaceutical companies have an average beta of about 8. These companies have very little debt financing, so the asset beta is also about .8. Yet a European investor would calculate a beta of much less than .8 relative to returns on European stock markets. (How do you explain this?) Now consider some possible implications.

a. Should German pharmaceutical companies move their R&D and production facilities to the United States?

b. Suppose the German company uses the CAPM to calculate a cost of capital of 9 percent for investments in the United States and 12 percent at home. As a result it plans to invest large amounts of its shareholders’ money in the United States. But its shareholders have already demonstrated their home country bias. Should the German company respect its shareholders’ preferences and also invest mostly at home?

c. The German company can also buy shares of U.S. pharmaceutical companies. Suppose the expected rate of return in these shares is 13 percent, reflecting their beta of about 1.0 with respect to the U.S. market. Should the German company demand a 13 percent rate of return on investments in the United States?