Salgacoar Shipping’s CEO expressed reservations about the equity financing recommendation that the firm’s CFO was finalizing for presentation to the board (see problems 6 and 7). He generally agreed with the premise that larger, deeper equity markets may offer more favorable equity financing options but was concerned by the fact that his firm, because of its focused activities, was not directly comparable to the larger and more diversified shipping firms that made up the shipping stock index on the Hong Kong Stock Exchange. Do you share the CEO’s skepticism? Explain.

Data from problem 6

Salgacoar is an Indian shipping company that owns and operates 12 bulk dry cargo freighters. Headquartered in Goa (India), it specializes in shipping coal and iron ore primarily to South Korea. Its return on equity (ROE) is 17 percent with a book value currently at INR 15 billion. Its market capitalization on the Bombay Stock Exchange (BSE)

is INR 22. 5 billion with a β = 1. 31. Risk-free and market return on the BSE are currently at 4. 5 percent and 8 percent, respectively. Salgacoar Shipping was considering raising INR 5 billion on the Bombay Stock Exchange when its adviser at Standard Chartered Bank pointed out that the Hong Kong Stock Exchange was the world’s premier equity market for shipping companies not only for Hong Kong flag carriers but also for Indonesian, Japanese, South Korean, and other Asian firms.

Data from problem 7

Salgacoar Shipping’s CFO was preparing a final presentation to the firm’s board of directors and wanted to bring additional validation to the decision reached in problem 6.