Question 1

Solve for the weighted average cost of capital. $\begin{aligned}
11.80 \% &=K_{1} \
3 / 5 &=\lambda \
8.0 \% &=i \
40.0 \% 0 &=\tau
\end{aligned}$

Accepted Answer

A) 8.67 percent 
B) 8.00 percent 
C) 7.60 percent 
D) 7.33 percent 
A) 8.67 percent 
B) 8.00 percent 
C) 7.60 percent 
D) 7.33 percent

Question 2

Corporations are becoming multinational not only in the scope of their business activities but also in their capital structure(.)

Accepted Answer

A) by raising funds from domestic as well as government sources. 
B) by raising funds from foreign as well as domestic sources. 
C) This trend reflects not only a conscious effort on the part of firms to raise the cost of capital by international sourcing of funds but also the ongoing liberalization and deregulation of international financial markets that make them accessible for many firms. 
D) by raising funds from foreign as well as domestic sources.This trend reflects not only a conscious effort on the part of firms to raise the cost of capital by international sourcing of funds,but also the ongoing liberalization and deregulation of international financial markets that make them accessible for many firms. 
A) by raising funds from domestic as well as government sources. 
B) by raising funds from foreign as well as domestic sources. 
C) This trend reflects not only a conscious effort on the part of firms to raise the cost of capital by international sourcing of funds but also the ongoing liberalization and deregulation of international financial markets that make them accessible for many firms. 
D) by raising funds from foreign as well as domestic sources.This trend reflects not only a conscious effort on the part of firms to raise the cost of capital by international sourcing of funds,but also the ongoing liberalization and deregulation of international financial markets that make them accessible for many firms.

Question 3

In the notation of the book,K = (1 − λ)Kl + λ(1 − τ)i ; which of the following is correct?

Accepted Answer

A) The weighted average cost of capital for a levered firm is K 
B) The tax rate is τ 
C) The after-tax cost of debt capital is i 
D) all of the options 
A) The weighted average cost of capital for a levered firm is K 
B) The tax rate is τ 
C) The after-tax cost of debt capital is i 
D) all of the options

Question 4

The pricing-to-market phenomenon

Accepted Answer

A) describes the potential effect of foreign equity ownership restrictions. 
B) describes the premium or discount faced by foreign shareholders relative to domestic investors in the price of a stock due to legal restrictions imposed on foreign equity ownership. 
C) was evidenced in the relative prices of Nestlé shares prior to November 17,1988. 
D) all of the options 
A) describes the potential effect of foreign equity ownership restrictions. 
B) describes the premium or discount faced by foreign shareholders relative to domestic investors in the price of a stock due to legal restrictions imposed on foreign equity ownership. 
C) was evidenced in the relative prices of Nestlé shares prior to November 17,1988. 
D) all of the options

Question 5

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.

Question 6

Find the debt-to-equity ratio for a firm with a debt-to-total-value ratio of 1/2.

Accepted Answer

A) 1 
B) 2 
C) 3 
D) 4 
A) 1 
B) 2 
C) 3 
D) 4

Question 7

The firm's tax rate is 34 percent.The firm's pre-tax cost of debt is 8 percent; the firm's debt-to-equity ratio is 4; the risk-free rate is 3 percent; the beta of the firm's common stock is 1.5; the market risk premium is 9 percent.What is the firm's cost of equity capital?

Accepted Answer

A) 33.33 percent 
B) 10.85 percent 
C) 13.12 percent 
D) 16.50 percent 
A) 33.33 percent 
B) 10.85 percent 
C) 13.12 percent 
D) 16.50 percent

Question 8

Benetton,an Italian clothier,is listed on the New York Stock Exchange.

Accepted Answer

A) This decision provides their shareholders with a higher degree of protection than is available in Italy. 
B) This decision can be a signal of the company's commitment to shareholder rights. 
C) This may make investors both in Italy and abroad more willing to provide capital and to increase the value of the pre-existing shares. 
D) all of the options 
A) This decision provides their shareholders with a higher degree of protection than is available in Italy. 
B) This decision can be a signal of the company's commitment to shareholder rights. 
C) This may make investors both in Italy and abroad more willing to provide capital and to increase the value of the pre-existing shares. 
D) all of the options

Question 9

Solve for the weighted average cost of capital. $\begin{array}{lcl}
17.20 \%&=&K_{1}&=&\text { cost of equity capital for a leveraged firm }\
6/ 7&=&\lambda&=&\text { debt-to-total-market-value ratio }\
8.0 \%&=&i&=&\text { before-tax borrowing cost }\
40.0 \%&=&\tau&=&\text { marginal corporate income tax rate }
\end{array}$

Accepted Answer

A) 7.00 percent 
B) 6.89 percent 
C) 6.73 percent 
D) 6.57 percent 
A) 7.00 percent 
B) 6.89 percent 
C) 6.73 percent 
D) 6.57 percent

Question 10

Solve for the weighted average cost of capital. $\begin{aligned}
13.60 \% &=K_{1} \
3 / 4 &=\lambda \
8.0 \% &=i \
40.0 \% 0 &=\tau
\end{aligned}$

Accepted Answer

A) 7.00 percent 
B) 6.89 percent 
C) 6.73 percent 
D) 6.67 percent 
A) 7.00 percent 
B) 6.89 percent 
C) 6.73 percent 
D) 6.67 percent

Question 11

Find the debt-to-value ratio for a firm with a debt-to-equity ratio of 1/2.

Accepted Answer

A) 1/3 
B) 1/2 
C) 3/5 
D) 2/3 
A) 1/3 
B) 1/2 
C) 3/5 
D) 2/3

Question 12

Solve for the weighted average cost of capital. $\begin{array}{lcl}
11.20 \%&=&K_{1}&=&\text { cost of equity capital for a leveraged firm }\
1 / 2&=&\lambda&=&\text { debt-to-total-market-value ratio }\
8.0 \%&=&i&=&\text { before-tax borrowing cost }\
40.0 \%&=&\tau&=&\text { marginal corporate income tax rate }
\end{array}$

Accepted Answer

A) 8.67 percent 
B) 8.00 percent 
C) 7.60 percent 
D) 7.33 percent 
A) 8.67 percent 
B) 8.00 percent 
C) 7.60 percent 
D) 7.33 percent

Question 13

One explanation for foreign equity ownership restrictions

Accepted Answer

A) is to make it difficult or impossible for foreigners to gain control of a domestic company. 
B) is to expropriate wealth from domestic shareholders. 
C) is the arguments in favor of free trade. 
D) none of the options 
A) is to make it difficult or impossible for foreigners to gain control of a domestic company. 
B) is to expropriate wealth from domestic shareholders. 
C) is the arguments in favor of free trade. 
D) none of the options

Question 14

For most countries and most firms,the domestic country beta

Accepted Answer

A) can be no lower than its world beta. 
B) is normally much smaller than the world beta. 
C) is normally much higher than the world beta. 
D) is exactly equal to the world beta. 
A) can be no lower than its world beta. 
B) is normally much smaller than the world beta. 
C) is normally much higher than the world beta. 
D) is exactly equal to the world beta.

Question 15

Compute the domestic country beta of Stansfield Bicycles as well as its world beta. Correlation Coefficients
Stansfield England World SD(%) $$\mathcal { R }$$ %
$$\begin{array} { l c c l c c } 
\text { Stansfield } & 1.00 & 0.90 & 0.60 & 20 & ? \
\text { England } & & 1.00 & 0.80 & 18 & 14 \
\text { World } & & & 1.00 & 15 & 12
\end{array}$$

Accepted Answer

A) 1.00 and 0.80 respectively 
B) 0.80 and 0.00 respectively 
C) 4.50 and 4.00 respectively 
D) none of the options 
A) 1.00 and 0.80 respectively 
B) 0.80 and 0.00 respectively 
C) 4.50 and 4.00 respectively 
D) none of the options

Question 16

Assume that XYZ Corporation is a leveraged company with the following information: Kl = cost of equity capital for XYZ = 13 percent
I = before-tax borrowing cost = 8 percent
T = marginal corporate income tax rate = 30 percent
Calculate the debt-to-total-market-value ratio that would result in XYZ having a weighted average cost of capital of 9.3 percent.

Accepted Answer

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

Question 17

With regard to the financial structure of a foreign subsidiary

Accepted Answer

A) one option is to conform to the parent company's capital structure. 
B) one option is to conform to the local norm of the country where the subsidiary operates. 
C) one option is to vary judiciously to capitalize on opportunities to lower taxes,reduce financing costs and risks,and take advantage of market imperfections. 
D) all of the options 
A) one option is to conform to the parent company's capital structure. 
B) one option is to conform to the local norm of the country where the subsidiary operates. 
C) one option is to vary judiciously to capitalize on opportunities to lower taxes,reduce financing costs and risks,and take advantage of market imperfections. 
D) all of the options

Question 18

Recent studies suggest that agency costs of managerial discretion are lower in Japan than in the United States.This suggests that

Accepted Answer

A) the cost of capital can be lower in Japan than the United States,but only if international financial markets are not fully integrated. 
B) the cost of capital can be lower in Japan than the United States,even if international financial markets are fully integrated. 
C) the cost of capital will be higher in Japan than the United States,even if international financial markets are fully integrated. 
D) none of the options 
A) the cost of capital can be lower in Japan than the United States,but only if international financial markets are not fully integrated. 
B) the cost of capital can be lower in Japan than the United States,even if international financial markets are fully integrated. 
C) the cost of capital will be higher in Japan than the United States,even if international financial markets are fully integrated. 
D) none of the options

Question 19

When the choice of financing a foreign subsidiary is between external debt and equity financing

Accepted Answer

A) political risk considerations tend to favor the latter. 
B) political risk considerations tend to favor the former. 
C) political risk is separate from financial risk and so does not enter into a discussion of debt equity ratios. 
D) none of the options 
A) political risk considerations tend to favor the latter. 
B) political risk considerations tend to favor the former. 
C) political risk is separate from financial risk and so does not enter into a discussion of debt equity ratios. 
D) none of the options

Question 20

For a firm confronted with a fixed schedule of possible new investments,any policy that lowers the firm's cost of capital will increase the profitable capital expenditures the firm takes on and increase the wealth of the firm's shareholders.One such policy is

Accepted Answer

A) internationalizing the firm's capital budgeting opportunities. 
B) internationalizing the firm's cost of capital. 
C) investing in riskier projects financed with debt. 
D) none of the options 
A) internationalizing the firm's capital budgeting opportunities. 
B) internationalizing the firm's cost of capital. 
C) investing in riskier projects financed with debt. 
D) none of the options

Solve for the weighted average cost of capital. 11.80\% = 3/5 =\lambda 8.0\% =i 40.0\%0 =\tau

Corporations are becoming multinational not only in the scope of their business activities but also in their capital structure(.)

In the notation of the book,K = (1 − λ)K_l + λ(1 − τ)i ; which of the following is correct?

The pricing-to-market phenomenon

The cost of capital is

Find the debt-to-equity ratio for a firm with a debt-to-total-value ratio of 1/2.

The firm's tax rate is 34 percent.The firm's pre-tax cost of debt is 8 percent; the firm's debt-to-equity ratio is 4; the risk-free rate is 3 percent; the beta of the firm's common stock is 1.5; the market risk premium is 9 percent.What is the firm's cost of equity capital?

Benetton,an Italian clothier,is listed on the New York Stock Exchange.

Solve for the weighted average cost of capital. 17.20\% = = cost of equity capital for a leveraged firm 6/7 = \lambda = debt-to-total-market-value ratio 8.0\% = i = before-tax borrowing cost 40.0\% = \tau = marginal corporate income tax rate

Solve for the weighted average cost of capital. 13.60\% = 3/4 =\lambda 8.0\% =i 40.0\%0 =\tau

Find the debt-to-value ratio for a firm with a debt-to-equity ratio of 1/2.

Solve for the weighted average cost of capital. 11.20\% = = cost of equity capital for a leveraged firm 1/2 = \lambda = debt-to-total-market-value ratio 8.0\% = i = before-tax borrowing cost 40.0\% = \tau = marginal corporate income tax rate

One explanation for foreign equity ownership restrictions

For most countries and most firms,the domestic country beta

Compute the domestic country beta of Stansfield Bicycles as well as its world beta. Correlation Coefficients Stansfield England World SD(%) $\mathcal { R }$ % Stansfield 1.00 0.90 0.60 20 ? England 1.00 0.80 18 14 World 1.00 15 12

With regard to the financial structure of a foreign subsidiary

Recent studies suggest that agency costs of managerial discretion are lower in Japan than in the United States.This suggests that

When the choice of financing a foreign subsidiary is between external debt and equity financing

For a firm confronted with a fixed schedule of possible new investments,any policy that lowers the firm's cost of capital will increase the profitable capital expenditures the firm takes on and increase the wealth of the firm's shareholders.One such policy is

International Monetary System

Globalization and the Multinational Firm

Balance of Payments

Corporate Governance Around the World

The Market for Foreign Exchange

International Parity Relationships and Forecasting Foreign Exchange Rates

Futures and Options on Foreign Exchange

Management of Transaction Exposure

Management of Economic Exposure

Management of Translation Exposure

International Banking and Money Market

International Bond Market

International Equity Markets

Interest Rate and Currency Swaps

International Portfolio Investment

Foreign Direct Investment and Cross-Border Acquisitions

International Capital Budgeting

Multinational Cash Management

International Trade Finance

International Tax Environment and Transfer Pricing

Filters

Exam 17: International Capital Structure and the Cost of Capital

Solve for the weighted average cost of capital. 11.80\% = 3/5 =\lambda 8.0\% =i 40.0\%0 =\tau

Corporations are becoming multinational not only in the scope of their business activities but also in their capital structure(.)

In the notation of the book,K = (1 − λ)Kl + λ(1 − τ)i ; which of the following is correct?

The pricing-to-market phenomenon

The cost of capital is

Find the debt-to-equity ratio for a firm with a debt-to-total-value ratio of 1/2.

The firm's tax rate is 34 percent.The firm's pre-tax cost of debt is 8 percent; the firm's debt-to-equity ratio is 4; the risk-free rate is 3 percent; the beta of the firm's common stock is 1.5; the market risk premium is 9 percent.What is the firm's cost of equity capital?

Benetton,an Italian clothier,is listed on the New York Stock Exchange.

Solve for the weighted average cost of capital. 17.20\% = = cost of equity capital for a leveraged firm 6/7 = \lambda = debt-to-total-market-value ratio 8.0\% = i = before-tax borrowing cost 40.0\% = \tau = marginal corporate income tax rate

Solve for the weighted average cost of capital. 13.60\% = 3/4 =\lambda 8.0\% =i 40.0\%0 =\tau

Find the debt-to-value ratio for a firm with a debt-to-equity ratio of 1/2.

Solve for the weighted average cost of capital. 11.20\% = = cost of equity capital for a leveraged firm 1/2 = \lambda = debt-to-total-market-value ratio 8.0\% = i = before-tax borrowing cost 40.0\% = \tau = marginal corporate income tax rate

One explanation for foreign equity ownership restrictions

For most countries and most firms,the domestic country beta

Compute the domestic country beta of Stansfield Bicycles as well as its world beta. Correlation Coefficients Stansfield England World SD(%) R\mathcal { R }R % Stansfield 1.00 0.90 0.60 20 ? England 1.00 0.80 18 14 World 1.00 15 12

With regard to the financial structure of a foreign subsidiary

Recent studies suggest that agency costs of managerial discretion are lower in Japan than in the United States.This suggests that

When the choice of financing a foreign subsidiary is between external debt and equity financing

For a firm confronted with a fixed schedule of possible new investments,any policy that lowers the firm's cost of capital will increase the profitable capital expenditures the firm takes on and increase the wealth of the firm's shareholders.One such policy is

International Monetary System

Globalization and the Multinational Firm

Balance of Payments

Corporate Governance Around the World

The Market for Foreign Exchange

International Parity Relationships and Forecasting Foreign Exchange Rates

Futures and Options on Foreign Exchange

Management of Transaction Exposure

Management of Economic Exposure

Management of Translation Exposure

International Banking and Money Market

International Bond Market

International Equity Markets

Interest Rate and Currency Swaps

International Portfolio Investment

Foreign Direct Investment and Cross-Border Acquisitions

International Capital Budgeting

Multinational Cash Management

International Trade Finance

International Tax Environment and Transfer Pricing

Filters

In the notation of the book,K = (1 − λ)K_l + λ(1 − τ)i ; which of the following is correct?

Compute the domestic country beta of Stansfield Bicycles as well as its world beta. Correlation Coefficients Stansfield England World SD(%) $\mathcal { R }$ % Stansfield 1.00 0.90 0.60 20 ? England 1.00 0.80 18 14 World 1.00 15 12