Exam 17: Multinational Cost of Capital and Capital Structure

There is an advantage to using equity rather than debt financing because dividend payments are tax deductible.

Capital asset pricing theory would most likely suggest that the MNC's cost of capital is lower than that of domestic firms.

One argument for why subsidiaries should be allowed to issue their own stock is that:​

Based on the factors that influence a country's cost of capital, the cost of capital in less developed countries is likely to be ____ than in the United States and ____ than in Japan.

The capital asset pricing model suggests that the required return on a firm's stock is a positive function of:​

The cost of an MNC's capital can be measured as the cost of its debt plus the cost of its equity, with appropriate weights applied to reflect the percentages of debt and equity.

In general, an MNC that is ____ exposed to exchange rate fluctuations will usually have a ____ distribution of possible cash flows in future periods.

A firm's cost of ____ reflects an opportunity cost: what the existing shareholders could have earned if they had received the earnings as dividends and invested the funds themselves.

In general, MNCs probably prefer to use ____ foreign debt when their foreign subsidiaries are subject to ____ local interest rates.

An MNC may deviate from its target capital structure in each country where financing is obtained, yet still achieve its target capital structure on a consolidated basis.

Which of the following is not a host country characteristic than can affect an MNC's capital structure decision?​

Most MNCs obtain equity funding:​

It is probably easier to estimate the cost of equity than it is to estimate the cost of debt.

MNCs headquartered in Japan and Germany tend to use a higher degree of financial leverage than MNCs headquartered in the United States.

Normally, each subsidiary of an MNC will issue its own stock where it does business.

When a firm issues stock in a country with weak laws on corporate disclosure and little legal protection for shareholders, the stock will generally be sold at a relatively ______ price, so the firm incurs a _____ cost of equity.

When a host country announces a plan to block funds remitted to the subsidiary's parent, the subsidiary is likely to use a strategy of increasing local debt financing.

In general, an MNC's size, its access to international capital markets, and its international diversification increase the MNC's cost of capital.

According to the text, the cost of capital for an international project will:

Since the cost of funds can vary among markets, an MNC's access to the international capital markets may allow it to attract funds at a lower cost than that paid by domestic firms.