Question 1

Capital asset pricing theory would most likely suggest that the cost of capital is generally ____ for ____.

Accepted Answer

A) higher; MNCs 
B) lower; domestic firms 
C) lower; MNCs 
D) none of the above 
A) higher; MNCs 
B) lower; domestic firms 
C) lower; MNCs 
D) none of the above

Question 2

Assume that an MNC has very stable cash flows and uses very little debt. Its cost of debt should be:

Accepted Answer

A) lower than its cost of equity. 
B) higher than its cost of equity. 
C) lower than the country's risk-free rate. 
D) lower than its credit risk premium. 
A) lower than its cost of equity. 
B) higher than its cost of equity. 
C) lower than the country's risk-free rate. 
D) lower than its credit risk premium.

Question 3

An argument for an MNC to have a debt-intensive capital structure is that:​

Accepted Answer

A) it can reduce the MNC's exposure to exchange rate risk on earnings remitted by subsidiaries to the parent. 
B) it can reduce the chance of bankruptcy. 
C) it spreads the shareholder base. 
D) it forces subsidiaries to pay dividends to shareholders. 
A) it can reduce the MNC's exposure to exchange rate risk on earnings remitted by subsidiaries to the parent. 
B) it can reduce the chance of bankruptcy. 
C) it spreads the shareholder base. 
D) it forces subsidiaries to pay dividends to shareholders.

Question 4

Because increased external financing by a foreign subsidiary reduces the external financing needed by the parent, such an action will not affect the MNC's overall cost of capital.

Accepted Answer

A) True 
 B)False

Question 5

It is always advantageous to use foreign debt to finance a foreign project, particularly in developing countries.

Accepted Answer

A) True 
 B)False

Question 6

Zoro Corp. has a beta of 2.0. The risk-free rate of interest is 5 percent, and the return on the stock market overall is expected to be 13 percent. What is the required rate of return on Zoro stock?​

Accepted Answer

A) 21 percent 
B) 41 percent 
C) 16 percent 
D) 13 percent 
E) none of the above 
A) 21 percent 
B) 41 percent 
C) 16 percent 
D) 13 percent 
E) none of the above

Question 7

When assuming that investors in the United States are most concerned with their exposure to the U.S. stock market, it is acceptable to use the U.S. market when measuring a U.S.-based MNC's project's beta.

Accepted Answer

A) True 
 B)False

Question 8

Other things being equal, countries with relatively ____ populations and ____ inflation are more likely to have a low cost of capital.

Accepted Answer

A) young; high 
B) old; high 
C) old; low 
D) young; low 
A) young; high 
B) old; high 
C) old; low 
D) young; low

Question 9

One argument for why subsidiaries should be wholly owned by the MNC parent is that parent ownership avoids a potential conflict of interest between the:​

Accepted Answer

A) parent's managers and board of directors. 
B) parent and managers at the subsidiary who are minority shareholders. 
C) parent and existing creditors. 
D) subsidiary's managers and creditors. 
A) parent's managers and board of directors. 
B) parent and managers at the subsidiary who are minority shareholders. 
C) parent and existing creditors. 
D) subsidiary's managers and creditors.

Question 10

____ are beneficial because they may reduce transaction costs. However, MNCs may not be able to obtain all the funds that they need.

Accepted Answer

A) Private placements 
B) Domestic equity offerings 
C) Global equity offerings 
D) Global debt offerings 
A) Private placements 
B) Domestic equity offerings 
C) Global equity offerings 
D) Global debt offerings

Question 11

Which of the following is least likely to influence an MNC's capital structure?

Accepted Answer

A) stability of the MNC's cash flows 
B) the MNC's credit risk 
C) the MNC's access to earnings 
D) the MNC's decision to invest excess cash in a Treasury bill rather than in a bank 
A) stability of the MNC's cash flows 
B) the MNC's credit risk 
C) the MNC's access to earnings 
D) the MNC's decision to invest excess cash in a Treasury bill rather than in a bank

Question 12

The ____ an MNC, the ____ its cost of capital is likely to be.

Accepted Answer

A) larger; higher 
B) larger; lower 
C) smaller; lower 
D) A and C 
A) larger; higher 
B) larger; lower 
C) smaller; lower 
D) A and C

Question 13

An MNC's "global" target capital structure is:

Accepted Answer

A) always debt intensive. 
B) always equity intensive. 
C) sometimes different from the MNC's "local" capital structure (at a subsidiary). 
D) none of the above 
A) always debt intensive. 
B) always equity intensive. 
C) sometimes different from the MNC's "local" capital structure (at a subsidiary). 
D) none of the above

Question 14

Which of the following is not a source of equity for an MNC?​

Accepted Answer

A) retained earnings 
B) a global equity offering 
C) a domestic equity offering 
D) All of the above are sources of equity for an MNC. 
A) retained earnings 
B) a global equity offering 
C) a domestic equity offering 
D) All of the above are sources of equity for an MNC.

Question 15

When a country's risk-free rate rises, the cost of equity to an MNC in that country _____, and the cost of debt to an MNC in that country ____, other things held constant.

Accepted Answer

A) increases; increases 
B) increases; is not affected 
C) is not affected; increases 
D) is not affected; is not affected 
A) increases; increases 
B) increases; is not affected 
C) is not affected; increases 
D) is not affected; is not affected

Question 16

Which of the following is not a reason provided in the text for why the cost of debt can vary across countries?​

Accepted Answer

A) differences in the risk-free rate 
B) a high price-earnings multiple 
C) differences in the credit risk premium 
D) differences in demographics 
A) differences in the risk-free rate 
B) a high price-earnings multiple 
C) differences in the credit risk premium 
D) differences in demographics

Question 17

Which of the following is not an external source of debt for an MNC?

Accepted Answer

A) a private placement of bonds 
B) borrowing from a financial institution 
C) a domestic bond offering 
D) borrowing in the federal funds market 
A) a private placement of bonds 
B) borrowing from a financial institution 
C) a domestic bond offering 
D) borrowing in the federal funds market

Question 18

According to the text, the cost of debt in each country:

Accepted Answer

A) is somewhat stable over time. 
B) changes over time, and these changes are negatively correlated among countries. 
C) changes over time, and these changes are positively correlated among countries. 
D) changes over time, and these changes are not correlated among countries. 
A) is somewhat stable over time. 
B) changes over time, and these changes are negatively correlated among countries. 
C) changes over time, and these changes are positively correlated among countries. 
D) changes over time, and these changes are not correlated among countries.

Question 19

Assume a subsidiary is forced to borrow in excess of the MNC's optimal capital structure. Also assume that the parent company reduces its debt financing by an offsetting amount. Under this scenario, the cost of capital for the MNC overall could not have changed.

Accepted Answer

A) True 
 B)False

Question 20

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

Accepted Answer

A) more; strong 
B) more; weak 
C) less; strong 
D) less; weak 
E) B and C 
A) more; strong 
B) more; weak 
C) less; strong 
D) less; weak 
E) B and C

Exam 17: Multinational Cost of Capital and Capital Structure

Capital asset pricing theory would most likely suggest that the cost of capital is generally ____ for ____.

Assume that an MNC has very stable cash flows and uses very little debt. Its cost of debt should be:

An argument for an MNC to have a debt-intensive capital structure is that:​

Because increased external financing by a foreign subsidiary reduces the external financing needed by the parent, such an action will not affect the MNC's overall cost of capital.

It is always advantageous to use foreign debt to finance a foreign project, particularly in developing countries.

Zoro Corp. has a beta of 2.0. The risk-free rate of interest is 5 percent, and the return on the stock market overall is expected to be 13 percent. What is the required rate of return on Zoro stock?​

When assuming that investors in the United States are most concerned with their exposure to the U.S. stock market, it is acceptable to use the U.S. market when measuring a U.S.-based MNC's project's beta.

Other things being equal, countries with relatively ____ populations and ____ inflation are more likely to have a low cost of capital.

One argument for why subsidiaries should be wholly owned by the MNC parent is that parent ownership avoids a potential conflict of interest between the:​

____ are beneficial because they may reduce transaction costs. However, MNCs may not be able to obtain all the funds that they need.

Which of the following is least likely to influence an MNC's capital structure?

The ____ an MNC, the ____ its cost of capital is likely to be.

An MNC's "global" target capital structure is:

Which of the following is not a source of equity for an MNC?​

When a country's risk-free rate rises, the cost of equity to an MNC in that country _____, and the cost of debt to an MNC in that country ____, other things held constant.

Which of the following is not a reason provided in the text for why the cost of debt can vary across countries?​

Which of the following is not an external source of debt for an MNC?

According to the text, the cost of debt in each country:

Assume a subsidiary is forced to borrow in excess of the MNC's optimal capital structure. Also assume that the parent company reduces its debt financing by an offsetting amount. Under this scenario, the cost of capital for the MNC overall could not have changed.

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

Multinational Financial Management: An Overview

International Flow of Funds

International Financial Markets

Exchange Rate Determination

Currency Derivatives

Government Influence on Exchange Rates

International Arbitrage and Interest Rate Parity

Relationships among Inflation, Interest Rates, and Exchange Rates

Forecasting Exchange Rates

Measuring Exposure to Exchange Rate Fluctuations

Managing Transaction Exposure

Managing Economic Exposure and Translation Exposure

Direct Foreign Investment

Multinational Capital Budgeting

International Corporate Governance and Control

Country Risk Analysis

Long-Term Debt Financing

Financing International Trade

Short-Term Financing

International Cash Management

Filters

Capital asset pricing theory would most likely suggest that the cost of capital is generally for .

An argument for an MNC to have a debt-intensive capital structure is that:

Zoro Corp. has a beta of 2.0. The risk-free rate of interest is 5 percent, and the return on the stock market overall is expected to be 13 percent. What is the required rate of return on Zoro stock?

Other things being equal, countries with relatively populations and inflation are more likely to have a low cost of capital.

One argument for why subsidiaries should be wholly owned by the MNC parent is that parent ownership avoids a potential conflict of interest between the:

The an MNC, the its cost of capital is likely to be.

Which of the following is not a source of equity for an MNC?

When a country's risk-free rate rises, the cost of equity to an MNC in that country _, and the cost of debt to an MNC in that country , other things held constant.

Which of the following is not a reason provided in the text for why the cost of debt can vary across countries?

In general, MNCs probably prefer to use foreign debt when their foreign subsidiaries are subject to potentially local currencies.