Question 1

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

Accepted Answer

A)   21 percent
B)   41 percent
C)   16 percent
D)   13 percent
E)   None of these are correct.​F) A) and C)
G) A) and E)

Question 2

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

Accepted Answer

A)   more; low
B)   more; high
C)   less; low
D)   more; high AND less; low
E)   None of these are correct.F) A) and B)
G) None of the above

Question 3

Which of the following factors is generally not expected to have a favorable impact on an MNC's cost of capital according to the text?

Accepted Answer

A)   easy access to international capital markets
B)   high degree of international diversification
C)   high exposure to exchange rate fluctuations
D)   All of these are correct.E) A) and D)
F) B) and C)

Question 4

In general, an MNC's size, its access to international capital markets, and its international diversification increase the MNC's cost of capital.

Accepted Answer

A) True 
 B)False

Question 5

When a host country announces a plan to block funds remitted to the subsidiary's parent, the subsidiary is likely to use a strategy of increasing local debt financing.

Accepted Answer

A) True 
 B)False

Question 6

The capital asset pricing model (CAPM) suggests that the required return on a firm's stock is a positive function of the risk-free rate of interest and the market rate of return and a negative function of the stock's beta.

Accepted Answer

A) True 
 B)False

Question 7

​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; lowE) A) and B)
F) B) and C)

Question 8

The cost of capital incurred by U.S.-based MNCs is primarily driven by global stock market volatility.

Accepted Answer

A) True 
 B)False

Question 9

Which of the following is not an external source of debt for an MNC?

Accepted Answer

A)   a private placement of bonds
B)   borrowing from a financial institution
C)   a domestic bond offering
D)   borrowing in the federal funds marketE) A) and B)
F) B) and C)

Question 10

The lower a project's beta, the ____ is the project's ____ risk.

Accepted Answer

A)   lower; systematic
B)   lower; unsystematic
C)   higher; systematic
D)   higher; unsystematicE) None of the above
F) C) and D)

Question 11

Which of the following is not a reason provided in the text for why the cost of debt can vary across countries?

Accepted Answer

A)   differences in the risk-free rate
B)   a high price/earnings multiple
C)   differences in the credit risk premium
D)   differences in demographicsE) A) and D)
F) A) and C)

Question 12

An MNC's cost of equity is unrelated to the local risk-free rate.

Accepted Answer

A) True 
 B)False

Question 13

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

Accepted Answer

A)   ​stability of the 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 bankE) None of the above
F) A) and B)

Question 14

An MNC with stable cash flows can probably handle more debt than an MNC with erratic cash flows.

Accepted Answer

A) True 
 B)False

Question 15

The capital asset pricing theory is based on the premise that:​

Accepted Answer

A)   ​only unsystematic variability in cash flows is relevant.
B)   ​only systematic variability in cash flows is relevant.
C)   ​both systematic and unsystematic variability in cash flows are relevant.
D)   ​neither systematic nor unsystematic variability in cash flows is relevant.E) B) and D)
F) B) and C)

Question 16

Because increased external financing by a foreign subsidiary reduces the external financing needed by the parent, such an action will not affect the MNC's overall cost of capital.

Accepted Answer

A) True 
 B)False

Question 17

One argument for why subsidiaries should be allowed to issue their own stock is that:​

Accepted Answer

A)   ​it prevents a potential conflict of interests between the MNC's managers and shareholders.
B)   ​it prevents a potential conflict of interests between the MNC's majority shareholders and minority shareholders.
C)   ​it prevents a potential conflict of interests between the MNC's existing creditors.
D)   ​having local investors as minority shareholders may offer some protection against adverse actions by the local government.E) C) and D)
F) All of the above

Question 18

According to the CAPM, the required rate of return on a stock is a positive function of all of the following except:

Accepted Answer

A)   the risk-free rate of interest.
B)   the market rate of return.
C)   the stock's beta.
D)   the company's earnings.E) None of the above
F) All of the above

Question 19

Which of the following is not a characteristic that favorably affects an MNC's cost of capital, compared to the cost of capital for a domestic firm?

Accepted Answer

A)   the MNC's exposure to exchange rate risk
B)   the MNC's size
C)   the MNC's access to international capital markets
D)   the MNC's international diversificationE) All of the above
F) B) and C)

Question 20

An argument for an MNC to have a debt-intensive capital structure is that:

Accepted Answer

A)   it can reduce the MNC's exposure to exchange rate risk on earnings remitted by subsidiaries to the parent.
B)   it can reduce the chance of bankruptcy.
C)   it spreads the shareholder base.
D)   it forces subsidiaries to pay dividends to shareholders.E) C) and D)
F) B) and C)

Exam 17: Multinational Capital Structure and Cost of Capital

Which of the following is not a reason provided in the text for why the cost of debt can vary across countries?

Correct AnswerverifiedShow Answer

Because increased external financing by a foreign subsidiary reduces the external financing needed by the parent, such an action will not affect the MNC's overall cost of capital.

Correct AnswerverifiedShow Answer

According to the CAPM, the required rate of return on a stock is a positive function of all of the following except:

Correct AnswerverifiedShow Answer

An argument for an MNC to have a debt-intensive capital structure is that:

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

The capital asset pricing theory is based on the premise that:​

Correct AnswerverifiedShow Answer

When a host country announces a plan to block funds remitted to the subsidiary's parent, the subsidiary is likely to use a strategy of increasing local debt financing.

Correct AnswerverifiedShow Answer

One argument for why subsidiaries should be allowed to issue their own stock is that:​

Correct AnswerverifiedShow Answer

Which of the following is not a characteristic that favorably affects an MNC's cost of capital, compared to the cost of capital for a domestic firm?

Correct AnswerverifiedShow Answer

The capital asset pricing model (CAPM) suggests that the required return on a firm's stock is a positive function of the risk-free rate of interest and the market rate of return and a negative function of the stock's beta.

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 cost of capital incurred by U.S.-based MNCs is primarily driven by global stock market volatility.

Correct AnswerverifiedShow Answer

The lower a project's beta, the ____ is the project's ____ risk.

Correct AnswerverifiedShow Answer

Which of the following factors is generally not expected to have a favorable impact on an MNC's cost of capital according to the text?

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

Which of the following is not an external source of debt for an MNC?

Correct AnswerverifiedShow Answer

An MNC with stable cash flows can probably handle more debt than an MNC with erratic cash flows.

Correct AnswerverifiedShow Answer

An MNC's cost of equity is unrelated to the local risk-free rate.

Correct AnswerverifiedShow Answer

In general, an MNC's size, its access to international capital markets, and its international diversification increase the MNC's cost of capital.

Correct AnswerverifiedShow Answer

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

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The capital asset pricing theory is based on the premise that:

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One argument for why subsidiaries should be allowed to issue their own stock is that:

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

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The lower a project's beta, the is the project's risk.

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