Question 1

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

Question 2

In general, an MNC that is ____ exposed to exchange rate fluctuations will usually have a ____ distribution of possible cash flows in future periods.

Accepted Answer

A)  more; narrower 
B)  less; wider 
C)  more; wider 
D)  None of these are correct.

Question 3

If a parent MNC backs the debt of a foreign subsidiary, the borrowing capacity of the parent might be reduced because creditors may not be willing to provide as many funds to the parent if those funds may possibly be needed to rescue the subsidiary.

Accepted Answer

A) True 
 B)False

Question 4

Assume the following information for Vermont Co., a U.S-based MNC that needs funding for a project in Germany: U.S. risk-free rate = 4%
German risk-free rate = 5%
Risk premium on dollar-denominated debt provided by U.S. creditors = 3%
Risk premium on euro-denominated debt provided by German creditors = 4%
Beta of project = 1.2
Expected U.S. market return = 10%
US. corporate tax rate = 30% (federal and state combined )
German corporate tax rate = 40%
What is Vermont's after-tax cost of dollar-denominated debt?

Accepted Answer

A)  7.0 percent 
B) 4.9 percent 
C)  8.0 percent. 
D)   5.6 percent

Question 5

Other things being equal, the financial leverage of MNCs will be higher if the governments of their home countries are ____ likely to rescue them (in the event of failure), and if their home countries are ____ likely to experience a recession.​

Accepted Answer

A)  ​more; more 
B)  ​less; more 
C)  ​less; less 
D)  ​more; less

Question 6

Country differences, such as differences in the risk-free interest rate and differences in risk premiums across countries, can cause the cost of capital to vary across countries.

Accepted Answer

A) True 
 B)False

Question 7

The U.S. risk-free rate is currently 3 percent. The expected U.S. market return is 10 percent. Solso, Inc. is considering a project that has a beta of 1.2. What is the cost of dollar-denominated equity?

Accepted Answer

A)  8.4 percent 
B)  11.4 percent 
C)  10.0 percent 
D)  None of these are correct.

Question 8

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)  more; weak AND less; strong

Exam 17: Multinational Capital Structure and Cost of Capital

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.

In general, an MNC that is exposed to exchange rate fluctuations will usually have a distribution of possible cash flows in future periods.

If a parent MNC backs the debt of a foreign subsidiary, the borrowing capacity of the parent might be reduced because creditors may not be willing to provide as many funds to the parent if those funds may possibly be needed to rescue the subsidiary.

Other things being equal, the financial leverage of MNCs will be higher if the governments of their home countries are likely to rescue them (in the event of failure) , and if their home countries are likely to experience a recession.

Country differences, such as differences in the risk-free interest rate and differences in risk premiums across countries, can cause the cost of capital to vary across countries.

The U.S. risk-free rate is currently 3 percent. The expected U.S. market return is 10 percent. Solso, Inc. is considering a project that has a beta of 1.2. What is the cost of dollar-denominated equity?

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

Exam 17: Multinational Capital Structure and Cost of Capital

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.

In general, an MNC that is ____ exposed to exchange rate fluctuations will usually have a ____ distribution of possible cash flows in future periods.

If a parent MNC backs the debt of a foreign subsidiary, the borrowing capacity of the parent might be reduced because creditors may not be willing to provide as many funds to the parent if those funds may possibly be needed to rescue the subsidiary.

Other things being equal, the financial leverage of MNCs will be higher if the governments of their home countries are ____ likely to rescue them (in the event of failure) , and if their home countries are ____ likely to experience a recession.​

Country differences, such as differences in the risk-free interest rate and differences in risk premiums across countries, can cause the cost of capital to vary across countries.

The U.S. risk-free rate is currently 3 percent. The expected U.S. market return is 10 percent. Solso, Inc. is considering a project that has a beta of 1.2. What is the cost of dollar-denominated equity?

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

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.

In general, an MNC that is exposed to exchange rate fluctuations will usually have a distribution of possible cash flows in future periods.

Other things being equal, the financial leverage of MNCs will be higher if the governments of their home countries are likely to rescue them (in the event of failure) , and if their home countries are likely to experience a recession.

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