Question 1

The cost of capital is:

Accepted Answer

A)  the minimum rate of return an investment project must generate in order to pay its financing costs. 
B)  the minimum rate of return an investment project must generate in order to pay its financing costs plus a reasonable profit. 
C)  the maximum rate of return an investment project must generate in order to pay its financing costs. 
D)  the maximum rate of return an investment project must generate in order to pay its financing costs plus a reasonable profit. 
A)  the minimum rate of return an investment project must generate in order to pay its financing costs. 
B)  the minimum rate of return an investment project must generate in order to pay its financing costs plus a reasonable profit. 
C)  the maximum rate of return an investment project must generate in order to pay its financing costs. 
D)  the maximum rate of return an investment project must generate in order to pay its financing costs plus a reasonable profit. A

Question 2

What are the alternative financial structures for a subsidiary?
 Which of the alternatives is the best?

Accepted Answer

The three main alternatives for the financial structure of a subsidiary are (1)conform to the parent's norms, (2)conform to the local norms of the country where the subsidiary operates,or (3)vary judiciously to capitalize on opportunities to lower taxes,reduce financing costs and risks,and take advantage of various market imperfections.The third approach fits best with the overall goals of the firm to minimize the worldwide cost of capital and risks.

Question 3

Assume that XYZ Corporation is a leveraged company with the following information:
Kl = cost of equity capital for XYZ = 13%
i = before-tax borrowing cost = 8%
t = marginal corporate income tax rate = 30%
-Calculate the debt-to-total-market-value ratio that would result in XYZ having a weighted average cost of capital of 9.3%.(Do not round intermediate calculations)

Accepted Answer

A)  35% 
B)  40% 
C)  45% 
D)  50% 
A)  35% 
B)  40% 
C)  45% 
D)  50% D

Question 4

Which one of the following is not an approach to determine a subsidiary's financial structure?

Accepted Answer

A)  Conform to the parent company's norm. 
B)  Conform to the local norm of the country where the subsidiary operates. 
C)  Vary judiciously. 
D)  Vary randomly. 
A)  Conform to the parent company's norm. 
B)  Conform to the local norm of the country where the subsidiary operates. 
C)  Vary judiciously. 
D)  Vary randomly.

Question 5

Which of the following statements is not true about the pricing-to-market phenomenon?

Accepted Answer

A)  It is due to legal restrictions imposed on foreigners. 
B)  It may lead to dual pricing. 
C)  It occurs only when the restrictions are binding. 
D)  Foreigners will always pay a premium for shares if legal restrictions are imposed on foreigners. 
A)  It is due to legal restrictions imposed on foreigners. 
B)  It may lead to dual pricing. 
C)  It occurs only when the restrictions are binding. 
D)  Foreigners will always pay a premium for shares if legal restrictions are imposed on foreigners.

Question 6

Assume that A-Plus Corporation is a leveraged company with a marginal income tax rate of 30%,an average income tax rate of 25%,and before tax-cost of borrowing of 5%.The firm's domestic beta is 1.4 and its world market beta is 0.8.The domestic market return is 12% and the world market return is 14%.The risk-free rate is 4%.The firm's debt-to-equity ratio is 1:3.Determine the firm's weighted average cost of capital if capital markets are integrated.

Accepted Answer

cost of equity: Ki = 0.04 + 0.

Question 7

Assume that the risk-free rate of return is 4%,and the expected return on the market portfolio is 10%.If the systematic risk inherent in the stock of ABC Corporation is 1.80,using the Capital Asset Pricing Model (CAPM)calculate the expected return of ABC.(Do not round intermediate calculations and round your percentage final answer to 1 decimal place.)

Accepted Answer

A)  14.0% 
B)  14.8% 
C)  16.0% 
D)  16.8% 
A)  14.0% 
B)  14.8% 
C)  16.0% 
D)  16.8%

Question 8

ABC Corporation is a leveraged company. The cost of equity capital for ABC is 10%, its corporate income tax rate is 30%,, and the firm's before tax-cost of borrowing is 5%.
-Calculate the debt-to-total-market-value ratio that would result in ABC having a weighted average cost of capital of 7.5%. (Do not round intermediate calculations and round your final answer to nearest whole percent)

Accepted Answer

A)  28% 
B)  38% 
C)  46% 
D)  50% 
A)  28% 
B)  38% 
C)  46% 
D)  50%

Question 9

Assume that XYZ Corporation is a leveraged company with the following information:
Kl = cost of equity capital for XYZ = 13%
i = before-tax borrowing cost = 8%
t = marginal corporate income tax rate = 30%
-If XYZ's debt-to-total-market-value ratio is 40%,then its weighted average cost of capital,K,is: (Do not round intermediate calculations and round your final answer to nearest whole percent)

Accepted Answer

A)  8% 
B)  9% 
C)  10% 
D)  12% 
A)  8% 
B)  9% 
C)  10% 
D)  12%

Question 10

For a firm that has both debt and equity in its capital structure,its financing cost can be represented by the weighted average cost of capital that is computed by:

Accepted Answer

A)  weighing the pre-tax borrowing cost of the firm and the cost of equity capital, using the debt as the weight. 
B)  weighing the after-tax borrowing cost of the firm and the cost of equity capital, using the capital structure ratio as the weight. 
C)  $\mathrm { K } = ( 1 - \mathrm { L } ) \mathrm { K } _ { \mathrm { i } } + \mathrm { L } ( 1 - \mathrm { t } ) \mathrm { i }$
Where:
$\begin{aligned}
\mathrm { K } & = \text { weighted averaga cost of capital } \
\mathrm { K } _ { 1 } & = \text { cost of equity capital for a levered firm } \
\mathrm { i } & = \text { before-tax cost of debt capital } \
\mathrm { t } & = \text { corporate income tax rate } \
\mathrm { L } & = \text { debt-to-total-market-value ratio }
\end{aligned}$ 
D)  weighing the after-tax borrowing cost of the firm and the pre-tax cost of equity capital, using the capital structure ratio as the weight. 
A)  weighing the pre-tax borrowing cost of the firm and the cost of equity capital, using the debt as the weight. 
B)  weighing the after-tax borrowing cost of the firm and the cost of equity capital, using the capital structure ratio as the weight. 
C)  $\mathrm { K } = ( 1 - \mathrm { L } ) \mathrm { K } _ { \mathrm { i } } + \mathrm { L } ( 1 - \mathrm { t } ) \mathrm { i }$
Where:
$\begin{aligned}
\mathrm { K } & = \text { weighted averaga cost of capital } \
\mathrm { K } _ { 1 } & = \text { cost of equity capital for a levered firm } \
\mathrm { i } & = \text { before-tax cost of debt capital } \
\mathrm { t } & = \text { corporate income tax rate } \
\mathrm { L } & = \text { debt-to-total-market-value ratio }
\end{aligned}$ 
D)  weighing the after-tax borrowing cost of the firm and the pre-tax cost of equity capital, using the capital structure ratio as the weight.

Question 11

The cost of equity capital is:

Accepted Answer

A)  the expected return on the firm's stock that investors require. 
B)  frequently estimated by using the Capital Asset Pricing Model (CAPM). 
C)  generally considered to be a linear function of the systematic risk inherent in the security. 
D)  All of these. 
A)  the expected return on the firm's stock that investors require. 
B)  frequently estimated by using the Capital Asset Pricing Model (CAPM). 
C)  generally considered to be a linear function of the systematic risk inherent in the security. 
D)  All of these.

Question 12

Systematic risk refers to:

Accepted Answer

A)  the diversifiable (company specific) risk of an asset. 
B)  the non-diversifiable market risk of an asset. 
C)  economic and political risk. 
D)  the risk that can be hedged. 
A)  the diversifiable (company specific) risk of an asset. 
B)  the non-diversifiable market risk of an asset. 
C)  economic and political risk. 
D)  the risk that can be hedged.

Question 13

"When in Rome,do as the Romans do." best describes which approach to a subsidiary's financial structure?

Accepted Answer

A)  Conform to the parent company's norm. 
B)  Conform to the local norm of the country where the subsidiary operates. 
C)  Vary judiciously 
D)  Vary randomly 
A)  Conform to the parent company's norm. 
B)  Conform to the local norm of the country where the subsidiary operates. 
C)  Vary judiciously 
D)  Vary randomly

Question 14

The following is an outline of certain potential benefits as well as costs associated with the cross-border listings of stocks:
(i)- the company can expand its potential investor base.
(ii)- issues involving the disclosure and listing requirements.
(iii)- creates a secondary market for the company's shares.
(iv)- volatility spillover from the overseas markets.
(v)- liquidity.
(vi)- control of the company by foreigners.
(vii)- enhances the visibility of the company's name and its products in foreign marketplaces.
-Which of the following represents all the potential costs of the cross-border listings of stocks?

Accepted Answer

A)  (i), (ii), and (iii) 
B)  (ii), (iv), and (vi) 
C)  (i), (iii), (v), and (vii) 
D)  (iv), (v), (vi), and (vii) 
A)  (i), (ii), and (iii) 
B)  (ii), (iv), and (vi) 
C)  (i), (iii), (v), and (vii) 
D)  (iv), (v), (vi), and (vii)

Question 15

Capital structure refers to all of the following except:

Accepted Answer

A)  right-hand side of the corporate balance sheet. 
B)  a description of how the company is financed. 
C)  the debt-equity ratio. 
D)  what assets the firm has. 
A)  right-hand side of the corporate balance sheet. 
B)  a description of how the company is financed. 
C)  the debt-equity ratio. 
D)  what assets the firm has.

Question 16

Which of the following statements is correct?

Accepted Answer

A)  If international financial markets are integrated, the market portfolio in the CAPM formula represents the world market portfolio. 
B)  If international financial markets are integrated, the market portfolio in the CAPM formula represents the domestic market portfolio. 
C)  If international financial markets are divided, the market portfolio in the CAPM formula represents the domestic market portfolio. 
D)  If international financial markets are divided, the market portfolio in the CAPM formula represents the world market portfolio. 
A)  If international financial markets are integrated, the market portfolio in the CAPM formula represents the world market portfolio. 
B)  If international financial markets are integrated, the market portfolio in the CAPM formula represents the domestic market portfolio. 
C)  If international financial markets are divided, the market portfolio in the CAPM formula represents the domestic market portfolio. 
D)  If international financial markets are divided, the market portfolio in the CAPM formula represents the world market portfolio.

Question 17

Assume that the risk-free rate of return is 4%,and the expected return on the market portfolio is 10%.If the expected return of ABC is 12%,calculate the firm's beta using the Capital Asset Pricing Model (CAPM).(Round your final answer to 2 decimal places.)

Accepted Answer

A)  1 
B)  1.25 
C)  1.33 
D)  1.5 
A)  1 
B)  1.25 
C)  1.33 
D)  1.5

Question 18

The following is an outline of certain potential benefits as well as costs associated with the cross-border listings of stocks:
(i)- the company can expand its potential investor base.
(ii)- issues involving the disclosure and listing requirements.
(iii)- creates a secondary market for the company's shares.
(iv)- volatility spillover from the overseas markets.
(v)- liquidity.
(vi)- control of the company by foreigners.
(vii)- enhances the visibility of the company's name and its products in foreign marketplaces.
-Which of the following represents all the potential benefits of the cross-border listings of stocks?

Accepted Answer

A)  (i), (ii), and (iii) 
B)  (ii), (iv), and (vi) 
C)  (i), (iii), (v), and (vii) 
D)  (iv), (v), (vi), and (vii) 
A)  (i), (ii), and (iii) 
B)  (ii), (iv), and (vi) 
C)  (i), (iii), (v), and (vii) 
D)  (iv), (v), (vi), and (vii)

Question 19

To adjust cost of equity for a country-specific risk,one needs to:

Accepted Answer

A)  use both global equity market and that country's market beta. 
B)  take into account how much the company is susceptible to political risk. 
C)  take into account both systematic and unsystematic risk. 
D)  use at least two of the these methods. 
A)  use both global equity market and that country's market beta. 
B)  take into account how much the company is susceptible to political risk. 
C)  take into account both systematic and unsystematic risk. 
D)  use at least two of the these methods.

Question 20

ABC Corporation is a leveraged company. The cost of equity capital for ABC is 10%, its corporate income tax rate is 30%,, and the firm's before tax-cost of borrowing is 5%.
-If ABC's debt-to-equity ratio is 1:1,then its weighted average cost of capital,K,is: (Do not round intermediate calculations and round your percentage final answer to 2 decimal places.)

Accepted Answer

A)  5% 
B)  5.75% 
C)  6.75% 
D)  10% 
A)  5% 
B)  5.75% 
C)  6.75% 
D)  10%

The cost of capital is:

What are the alternative financial structures for a subsidiary? Which of the alternatives is the best?

Which one of the following is not an approach to determine a subsidiary's financial structure?

Which of the following statements is not true about the pricing-to-market phenomenon?

For a firm that has both debt and equity in its capital structure,its financing cost can be represented by the weighted average cost of capital that is computed by:

The cost of equity capital is:

Systematic risk refers to:

"When in Rome,do as the Romans do." best describes which approach to a subsidiary's financial structure?

Capital structure refers to all of the following except:

Which of the following statements is correct?

Assume that the risk-free rate of return is 4%,and the expected return on the market portfolio is 10%.If the expected return of ABC is 12%,calculate the firm's beta using the Capital Asset Pricing Model (CAPM).(Round your final answer to 2 decimal places.)

To adjust cost of equity for a country-specific risk,one needs to:

Globalization and the Multinational Firm

International Monetary System

Balance of Payments

The Market for Foreign Exchange

International Parity Relationships and Forecasting Foreign Exchange Rates

International Banking and Money Market

International Bond Market

International Equity Markets

Futures and Options on Foreign Exchange

Interest Rate and Currency Swaps

International Portfolio Investment

Management of Economic Exposure

Management of Transaction Exposure

Management of Translation Exposure

Foreign Direct Investment and Cross-Border Acquisitions

International Capital Budgeting

Multinational Cash Management

Exports and Imports

International Tax Environment

Corporate Governance Around the World

Filters

Exam 16: International Capital Structure and the Cost of Capital

The cost of capital is:

What are the alternative financial structures for a subsidiary? Which of the alternatives is the best?

Which one of the following is not an approach to determine a subsidiary's financial structure?

Which of the following statements is not true about the pricing-to-market phenomenon?

For a firm that has both debt and equity in its capital structure,its financing cost can be represented by the weighted average cost of capital that is computed by:

The cost of equity capital is:

Systematic risk refers to:

"When in Rome,do as the Romans do." best describes which approach to a subsidiary's financial structure?

Capital structure refers to all of the following except:

Which of the following statements is correct?

Assume that the risk-free rate of return is 4%,and the expected return on the market portfolio is 10%.If the expected return of ABC is 12%,calculate the firm's beta using the Capital Asset Pricing Model (CAPM).(Round your final answer to 2 decimal places.)

To adjust cost of equity for a country-specific risk,one needs to:

Globalization and the Multinational Firm

International Monetary System

Balance of Payments

The Market for Foreign Exchange

International Parity Relationships and Forecasting Foreign Exchange Rates

International Banking and Money Market

International Bond Market

International Equity Markets

Futures and Options on Foreign Exchange

Interest Rate and Currency Swaps

International Portfolio Investment

Management of Economic Exposure

Management of Transaction Exposure

Management of Translation Exposure

Foreign Direct Investment and Cross-Border Acquisitions

International Capital Budgeting

Multinational Cash Management

Exports and Imports

International Tax Environment

Corporate Governance Around the World

Filters