Question 1

To maximize the benefits of partial integration of capital markets

Accepted Answer

A) a country should choose to internationally cross-list those assets that are least correlated with the domestic market portfolio. 
B) a country should choose to internationally cross-list those assets that are most highly correlated with the domestic market portfolio. 
C) a country should choose to internationally cross-list those assets that are uncorrelated with the domestic market portfolio. 
D) none of the above 
A) a country should choose to internationally cross-list those assets that are least correlated with the domestic market portfolio. 
B) a country should choose to internationally cross-list those assets that are most highly correlated with the domestic market portfolio. 
C) a country should choose to internationally cross-list those assets that are uncorrelated with the domestic market portfolio. 
D) none of the above

Question 2

Solve for the weighted average cost of capital: $$\begin{aligned}
16.00 \% & = K _ { l } \
5 / 6 & = \lambda \
8.0 \% & = i \
40.0 \% & = \tau
\end{aligned}$$

Accepted Answer

A) 7.00% 
B) 6.89% 
C) 6.73% 
D) 6.67% 
E) 6.57% 
A) 7.00% 
B) 6.89% 
C) 6.73% 
D) 6.67% 
E) 6.57%

Question 3

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 4

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 above 
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 above

Question 5

A recent study of MNCs suggests that when a foreign subsidiary's obligations cannot be met with locally generated revenues,

Accepted Answer

A) parent firms bail out their subsidiaries regardless of circumstances. 
B) that parent firms routinely allow subsidiaries to default. 
C) most subsidiaries are financed almost entirely with banker's acceptances. 
D) none of the above 
A) parent firms bail out their subsidiaries regardless of circumstances. 
B) that parent firms routinely allow subsidiaries to default. 
C) most subsidiaries are financed almost entirely with banker's acceptances. 
D) none of the above

Question 6

In the real world,many firms that have cross-listed their shares on the U.S.markets have experienced a reduction in the cost of capital.This effect was greater for

Accepted Answer

A) Australian firms than for Canadian firms. 
B) United States firms than for Mexican firms. 
C) bonds than for stocks. 
D) None of the above 
A) Australian firms than for Canadian firms. 
B) United States firms than for Mexican firms. 
C) bonds than for stocks. 
D) None of the above

Question 7

Solve for the weighted average cost of capital: $14.20 \% \quad K _ { l } =$ cost of equity capital for a leveraged firm
$7 / 9 \quad \lambda =$ debt-to-total-market-value ratio
$8.0 \% \quad i =$ before-tax borrowing cost
$40.0 \% \tau =$ marginal corporate income tax rate

Accepted Answer

A) 7.00% 
B) 6.89% 
C) 6.73% 
D) 6.67% 
E) 6.57% 
A) 7.00% 
B) 6.89% 
C) 6.73% 
D) 6.67% 
E) 6.57%

Question 8

Suppose that the firm's cost of capital can be reduced from Kl under the local capital structure to Kg under an internationalized capital structure.The take-away lesson from the graph is that

Accepted Answer

A) The firm can then increase its profitable investment outlay from Il to Ig, contributing to the firm's value. 
B) A reduced cost of capital increases the firm's value not only through increased investments in new projects but also through revaluation of the cash flows from existing projects. 
C) Kl and Kg represent, respectively, the cost of capital under local and international capital structures; IRR represents the internal rate of return on investment projects; Il and Ig represent the optimal investment outlays under the alternative capital structures. 
D) All of the above 
A) The firm can then increase its profitable investment outlay from Il to Ig, contributing to the firm's value. 
B) A reduced cost of capital increases the firm's value not only through increased investments in new projects but also through revaluation of the cash flows from existing projects. 
C) Kl and Kg represent, respectively, the cost of capital under local and international capital structures; IRR represents the internal rate of return on investment projects; Il and Ig represent the optimal investment outlays under the alternative capital structures. 
D) All of the above

Question 9

Suppose that the British stock market is integrated with the rest of the world and Stansfield Company has made its shares tradable internationally via cross-listing on the NYSE.Using the CAPM and a risk-free rate of 5%,estimate the equity cost of capital for Stansfield.

Accepted Answer

A) 12% 
B) 10.60% 
C) 6.60% 
D) None of the above 
A) 12% 
B) 10.60% 
C) 6.60% 
D) None of the above

Question 10

Find the debt-to-value ratio for a firm with a debt-to-equity ratio of 3½.

Accepted Answer

A) 3/4 
B) 7/9 
C) 4/5 
D) 9/11 
E) 5/6 
A) 3/4 
B) 7/9 
C) 4/5 
D) 9/11 
E) 5/6

Question 11

Solve for the weighted average cost of capital: $13.60 \% K _ { l } =$ cost of equity capital for a leveraged firm
$3 / 4 \lambda =$ debt-to-total-market-value ratio
$8.0 \% \quad i =$ before-tax borrowing cost
$40.0 \% \quad \tau =$ marginal corporate income tax rate

Accepted Answer

A) 7.00% 
B) 6.89% 
C) 6.73% 
D) 6.67% 
E) 6.57% 
A) 7.00% 
B) 6.89% 
C) 6.73% 
D) 6.67% 
E) 6.57%

Question 12

Solve for the weighted average cost of capital: $10.60 \% K _ { l } =$ cost of equity capital for a leveraged firm
$1 / 3 \lambda =$ debt-to-total-market-value ratio
$8.0 \% \quad i =$ before-tax borrowing cost
$40.0 \% \quad \tau =$ marginal corporate income tax rate

Accepted Answer

A) 8.67% 
B) 8.00% 
C) 7.60% 
D) 7.33% 
E) 7.14% 
A) 8.67% 
B) 8.00% 
C) 7.60% 
D) 7.33% 
E) 7.14%

Question 13

Suppose that the British stock market is segmented from the rest of the world.Using the CAPM and a risk-free rate of 5%,estimate the equity cost of capital for Stansfield.

Accepted Answer

A) 14% 
B) 12% 
C) 9% 
D) None of the above 
A) 14% 
B) 12% 
C) 9% 
D) None of the above

Question 14

In the Capital Asset Pricing Model (CAPM),the term Beta,$\beta$,is

Accepted Answer

A) a measure of systematic risk inherent in a security. 
B) calculated as the "covariance of future returns between a specific security and the market portfolio" divided by the "variance of returns of the market portfolio". 
C) both a and b 
D) none of the above 
A) a measure of systematic risk inherent in a security. 
B) calculated as the "covariance of future returns between a specific security and the market portfolio" divided by the "variance of returns of the market portfolio". 
C) both a and b 
D) none of the above

Question 15

The parent company should decide the financing method for its own subsidiaries

Accepted Answer

A) with a view toward minimizing the parent's overall cost of capital. 
B) by copying the norms of the host country. 
C) with a view toward gaming the bankruptcy system of the host country. 
D) none of the above 
A) with a view toward minimizing the parent's overall cost of capital. 
B) by copying the norms of the host country. 
C) with a view toward gaming the bankruptcy system of the host country. 
D) none of the above

Question 16

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 the above 
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 the above

Question 17

The common stock of Kansas City Power and Light has a beta of 0.80.The Treasury bill rate is 4 percent and the market risk premium is 8 percent.KCP&L is in the 34% tax bracket.What is their cost of equity capital?

Accepted Answer

A) 12.0% 
B) 10.4% 
C) 7.20% 
D) 6.4% 
E) 8.22% 
A) 12.0% 
B) 10.4% 
C) 7.20% 
D) 6.4% 
E) 8.22%

Question 18

Solve for the weighted average cost of capital: $$\begin{aligned}
10.60 \% & = K _ { l } \
1 / 3 & = \lambda \
8.0 \% & = i \
40.0 \% & = \tau
\end{aligned}$$

Accepted Answer

A) 8.67% 
B) 8.00% 
C) 7.60% 
D) 7.33% 
E) 7.14% 
A) 8.67% 
B) 8.00% 
C) 7.60% 
D) 7.33% 
E) 7.14%

Question 19

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 above 
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 above

Question 20

A reduced cost of equity capital increases the firm's value

Accepted Answer

A) through revaluation of the firm's existing cash flows from existing projects. 
B) through increased investment as more projects become positive NPVs. 
C) both a and b 
D) none of the above 
A) through revaluation of the firm's existing cash flows from existing projects. 
B) through increased investment as more projects become positive NPVs. 
C) both a and b 
D) none of the above

Exam 17: International Capital Structure and the Cost of Capital

To maximize the benefits of partial integration of capital markets

Solve for the weighted average cost of capital: 16.00\% = 5/6 =\lambda 8.0\% =i 40.0\% =\tau

The cost of capital is

One explanation for foreign equity ownership restrictions

A recent study of MNCs suggests that when a foreign subsidiary's obligations cannot be met with locally generated revenues,

In the real world,many firms that have cross-listed their shares on the U.S.markets have experienced a reduction in the cost of capital.This effect was greater for

Suppose that the firm's cost of capital can be reduced from Kl under the local capital structure to Kg under an internationalized capital structure.The take-away lesson from the graph is that

Suppose that the British stock market is integrated with the rest of the world and Stansfield Company has made its shares tradable internationally via cross-listing on the NYSE.Using the CAPM and a risk-free rate of 5%,estimate the equity cost of capital for Stansfield.

Find the debt-to-value ratio for a firm with a debt-to-equity ratio of 3½.

Suppose that the British stock market is segmented from the rest of the world.Using the CAPM and a risk-free rate of 5%,estimate the equity cost of capital for Stansfield.

In the Capital Asset Pricing Model (CAPM),the term Beta, β\betaβ ,is

The parent company should decide the financing method for its own subsidiaries

The cost of equity capital is

The common stock of Kansas City Power and Light has a beta of 0.80.The Treasury bill rate is 4 percent and the market risk premium is 8 percent.KCP&L is in the 34% tax bracket.What is their cost of equity capital?

Solve for the weighted average cost of capital: 10.60\% = 1/3 =\lambda 8.0\% =i 40.0\% =\tau

The Pricing-to-Market phenomenon

A reduced cost of equity capital increases the firm's value

Globalization and the Multinational Firm

International Monetary System

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

Suppose that the firm's cost of capital can be reduced from K^l under the local capital structure to K^g under an internationalized capital structure.The take-away lesson from the graph is that

In the Capital Asset Pricing Model (CAPM),the term Beta, $\beta$ ,is