Question 1

Based on the CAPM, the ____ the beta of a project, the ____ the required rate of return on that project.

Accepted Answer

A)   higher; higher
B)   lower; higher
C)   higher; lower
D)   B and C
E)   none of the above

Question 2

Assume that the risk-free interest rate in the U.S. is the same as that in Country M. Assume that the government of Country M is more likely to rescue local firms that experience financial problems. Other things being equal, Country M's firms are likely to use a ____ degree of financial leverage than U.S. firms. If a firm based in Country M had the same degree of financial leverage and the same operating characteristics as a U.S. firm, its cost of capital would be ____ than that of the U.S. firm.

Accepted Answer

A)   higher; higher
B)   higher; lower
C)   lower; lower
D)   lower; higher

Question 3

An MNC's cost of capital may differ from that of domestic firms because of their access to international capital markets, their exposure to exchange rate risk, and other characteristics.

Accepted Answer

A) True 
 B)False

Question 4

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

Accepted Answer

A) True 
 B)False

Question 5

The term "local target capital structure" is used in the text to represent the:

Accepted Answer

A)   average capital structure of local firms where the MNC's subsidiary is based.
B)   average capital structure of local firms where the MNC's parent is based.
C)   capital structure of a subsidiary of a particular MNC.
D)   capital structure of a particular MNC overall (including all subsidiaries) .

Question 6

Other things being equal, countries with relatively ____ populations and ____ inflation are more likely to have a low cost of capital.

Accepted Answer

A)   young; high
B)   old; high
C)   old; low
D)   young; low

Question 7

Since the cost of funds can vary among markets, the MNC's access to the international capital markets may allow it to attract funds at a lower cost than that paid by domestic firms.

Accepted Answer

A) True 
 B)False

Question 8

Zoro Corporation has a beta of 2.0. The risk-free rate of interest is 5%, and the return on the stock market overall is expected to be 13%. What is the required rate of return on Zoro stock?

Accepted Answer

A)   21%.
B)   41%.
C)   16%.
D)   13%.
E)   none of the above

Question 9

Which of the following is not a host country characteristic than can affect an MNC's capital structure decision?

Accepted Answer

A)   The strength of host country currencies
B)   The country risk in host countries
C)   Political decisions to increase penalties for criminals
D)   Tax laws in host countries

Question 10

Most MNCs obtain equity funding:

Accepted Answer

A)   in foreign countries.
B)   in their home country.
C)   through global offerings.
D)   through private placements.

Question 11

There is an advantage to using equity rather than debt financing because dividend payments are tax deductible.

Accepted Answer

A) True 
 B)False

Question 12

The ____ the MNC's cost of capital, the ____ will be a project's net present value for its proposed project with a given set of expected cash flows.

Accepted Answer

A)   lower; higher
B)   higher; higher
C)   lower; lower
D)   none of the above

Question 13

In the United States, government rescues are not as common as in other countries. Assuming that this is expected to continue in the future, the risk premium on a given level of debt would be higher for U.S. firms than for firms of other countries, everything else being equal.

Accepted Answer

A) True 
 B)False

Question 14

The capital asset pricing model suggests that the required return on a firm's stock is a negative function of:

Accepted Answer

A)   the risk-free rate of interest.
B)   the market rate of return.
C)   the stock's beta.
D)   none of the above

Question 15

According to the text, MNCs can:

Accepted Answer

A)   use only debt financing in foreign countries to support foreign subsidiaries.
B)   use only equity financing in foreign countries to support foreign subsidiaries.
C)   use only parent financing in foreign countries to support foreign subsidiaries.
D)   none of the above

Question 16

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 17

Which of the following is least likely to influence an MNC's capital structure?

Accepted Answer

A)   The stability of MNC's cash flows
B)   The MNC's credit risk
C)   The MNC's access to earnings
D)   The MNC's decision to invest excess cash in a Treasury bill rather than in a bank

Question 18

When MNCs pursue international projects that have a high potential for return, but also increase their risk, this increases the return to the bondholders that provided credit to the MNCs.

Accepted Answer

A) True 
 B)False

Question 19

The term "global capital structure" is used in the text to represent the:

Accepted Answer

A)   average capital structure of all MNCs across countries.
B)   average capital structure of all domestic firms across countries.
C)   capital structure of a subsidiary of a particular MNC.
D)   capital structure of a particular MNC overall (including all subsidiaries) .

Question 20

One argument for why subsidiaries should be only partly-owned by the parent is:

Accepted Answer

A)   that the potential conflict of interests between the MNC's managers and shareholders is avoided.
B)   that the potential conflict of interests between the MNC's majority shareholders and minority shareholders is avoided.
C)   that the potential conflict of interests between the MNC's existing creditors is avoided.
D)   to motivate subsidiary managers by allowing them partial ownership.

Exam 17: Multinational Cost of Capital and Capital Structure

There is an advantage to using equity rather than debt financing because dividend payments are tax deductible.

Correct Answer
verified

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

Correct Answer
verified

Since the cost of funds can vary among markets, the MNC's access to the international capital markets may allow it to attract funds at a lower cost than that paid by domestic firms.

Correct Answer
verified

Correct Answer
verified

Which of the following is not a host country characteristic than can affect an MNC's capital structure decision?

Correct Answer
verified

The term "global capital structure" is used in the text to represent the:

Correct Answer
verified

Other things being equal, countries with relatively populations and inflation are more likely to have a low cost of capital.

Correct Answer
verified

The capital asset pricing model suggests that the required return on a firm's stock is a negative function of:

Correct Answer
verified

Most MNCs obtain equity funding:

Correct Answer
verified

One argument for why subsidiaries should be only partly-owned by the parent is:

Correct Answer
verified

An MNC's cost of capital may differ from that of domestic firms because of their access to international capital markets, their exposure to exchange rate risk, and other characteristics.

Correct Answer
verified

In the United States, government rescues are not as common as in other countries. Assuming that this is expected to continue in the future, the risk premium on a given level of debt would be higher for U.S. firms than for firms of other countries, everything else being equal.

Correct Answer
verified

Zoro Corporation has a beta of 2.0. The risk-free rate of interest is 5%, and the return on the stock market overall is expected to be 13%. What is the required rate of return on Zoro stock?

Correct Answer
verified

When MNCs pursue international projects that have a high potential for return, but also increase their risk, this increases the return to the bondholders that provided credit to the MNCs.

Correct Answer
verified

The the MNC's cost of capital, the will be a project's net present value for its proposed project with a given set of expected cash flows.

Correct Answer
verified

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.

Correct Answer
verified

Which of the following is least likely to influence an MNC's capital structure?

Correct Answer
verified

Based on the CAPM, the the beta of a project, the the required rate of return on that project.

Correct Answer
verified

The term "local target capital structure" is used in the text to represent the:

Correct Answer
verified

According to the text, MNCs can:

Correct Answer
verified

Exam 17: Multinational Cost of Capital and Capital Structure

There is an advantage to using equity rather than debt financing because dividend payments are tax deductible.

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

Since the cost of funds can vary among markets, the MNC's access to the international capital markets may allow it to attract funds at a lower cost than that paid by domestic firms.

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Which of the following is not a host country characteristic than can affect an MNC's capital structure decision?

Correct AnswerverifiedShow Answer

The term "global capital structure" is used in the text to represent the:

Correct AnswerverifiedShow Answer

Other things being equal, countries with relatively ____ populations and ____ inflation are more likely to have a low cost of capital.

Correct AnswerverifiedShow Answer

The capital asset pricing model suggests that the required return on a firm's stock is a negative function of:

Correct AnswerverifiedShow Answer

Most MNCs obtain equity funding:

Correct AnswerverifiedShow Answer

One argument for why subsidiaries should be only partly-owned by the parent is:

Correct AnswerverifiedShow Answer

An MNC's cost of capital may differ from that of domestic firms because of their access to international capital markets, their exposure to exchange rate risk, and other characteristics.

Correct AnswerverifiedShow Answer

In the United States, government rescues are not as common as in other countries. Assuming that this is expected to continue in the future, the risk premium on a given level of debt would be higher for U.S. firms than for firms of other countries, everything else being equal.

Correct AnswerverifiedShow Answer

Zoro Corporation has a beta of 2.0. The risk-free rate of interest is 5%, and the return on the stock market overall is expected to be 13%. What is the required rate of return on Zoro stock?

Correct AnswerverifiedShow Answer

When MNCs pursue international projects that have a high potential for return, but also increase their risk, this increases the return to the bondholders that provided credit to the MNCs.

Correct AnswerverifiedShow Answer

The ____ the MNC's cost of capital, the ____ will be a project's net present value for its proposed project with a given set of expected cash flows.

Correct AnswerverifiedShow Answer

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.

Correct AnswerverifiedShow Answer

Which of the following is least likely to influence an MNC's capital structure?

Correct AnswerverifiedShow Answer

Based on the CAPM, the ____ the beta of a project, the ____ the required rate of return on that project.

Correct AnswerverifiedShow Answer

The term "local target capital structure" is used in the text to represent the:

Correct AnswerverifiedShow Answer

According to the text, MNCs can:

Correct AnswerverifiedShow Answer

Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Other things being equal, countries with relatively populations and inflation are more likely to have a low cost of capital.

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
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Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

The the MNC's cost of capital, the will be a project's net present value for its proposed project with a given set of expected cash flows.

Correct Answer
verified

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.

Correct Answer
verified

Correct Answer
verified

Based on the CAPM, the the beta of a project, the the required rate of return on that project.

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified