Exam 14: Financial Structure and International Debt

Which of the following statements about equity carve-outs is true? I. An equity carve-out is the sale of a minority equity interest in a subsidiary of 20% or less. II. A purpose of equity carve-outs is to raise equity capital without risking loss of control. III. Popular myth would have one believe that carve-outs increase share price and the equity capital base without sacrificing control.

Internal sources of funds for a foreign subsidiary of a MNE may come from the parent company but not from a sister subsidiary. Funding from sister subsidiaries are considered external funding.

TropiKana Inc., a U.S firm, has just borrowed euro 1,000,000 to make improvements to an Italian fruit plantation and processing plant. If the interest rate is 5.50% per year and the Euro depreciates against the dollar from $1.40/euro at the time the loan was made to $1.35/euro at the end of the first year, how much interest and principle will TropiKana pay at the end of the first year if they repay the entire loan plus interest (rounded)?

Not all firms have the same optimal capital structure. Factors that might influence a firm's capital structure include

The domestic theory of optimal capital structure does not need to be modified for MNEs.

The modern Eurodollar market has been operating since ________.

A MNE that borrows long-term in a foreign currency

Most financial theorists believe that the optimal capital structure is a ________ with a debt to total value ratio somewhere around ________.

Madison Finance Inc., has borrowed £75,000 at an interest rate of 5% to be repaid in one year. If the current spot rate is $1.90/£ and the pound appreciates in value against the U.S. dollar by 2% over the next year, what is the effective cost of this loan to Madison?

Eurobanks are

There is much debate about whether an MNE should consider individual country norms, known as localization, when attempting to optimize the consolidated capital structure and minimize the firm's cost of capital. Provide arguments for the advantages and disadvantages of localization of capital structure for subsidiaries. Do you think MNEs should localize the capital structure of their subsidiaries? Why/why not?

Which of the following is NOT a factor in the development and continuation of the Eurobond market?

Of the following, which is NOT considered to be an advantage to MNEs of having a financial structure adhere to local debt norms?

A ________ is a bond that is underwritten by an international syndicate of banks and sold exclusively in countries other than the one whose currency it is denominated.

In general, which has the shorter maturity and is more appropriate for funding short-term inventory needs?

A large U.S. MNE is looking to raise capital in Europe. The company wishes to avoid many of the regulatory constraints found in an issue of debt in the U.S. markets, wants to attract foreign investors, but also wants the issue to be denominated in dollars. The firm should issue a ________.

Of the following, which was NOT cited by the authors as a valuable function provided by the Eurocurrency market?

The United States has a smaller percentage of the total worldwide government and corporate bond market than Japan and the countries of "Euro land."

The MNE in an effort to minimize the cost of external funds should choose ________ funds to minimize ________.

If we accept the MNE objective of minimizing the consolidated cost of capital then