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.

a. Explain how the capital asset pricing model could be used in validating the equity financing decision to tap the Hong Kong versus the Bombay Stock Exchange. What information do you need?

b. If the shipping industry index’s β is 1. 11 in Hong Kong with a risk-free and market risk premium of 3 percent and 6 percent respectively for the Hong Kong Stock Exchange, what would be the adviser’s recommendation to Salgacoar Shipping?

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.