Question 1

A firm's cost of ___________ reflects an opportunity cost: what the existing shareholders could have earned if they had received the earnings as dividends and invested the funds themselves..

Accepted Answer

A)   debt
B)   retained earnings
C)   new common equity
D)   none of the aboveE) A) and C)
F) None of the above

Question 2

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

Accepted Answer

A)   lower;higher
B)   higher;higher
C)   lower;lower
D)   none of the aboveE) All of the above
F) C) and D) A

Question 3

According to the text,there is evidence that the debt ratios (debt/capital) of MNCs based in:

Accepted Answer

A)   the U.S. tend to be generally higher than MNCs headquartered in Japan and Germany.
B)   the United Kingdom tend to be generally higher than MNCs headquartered in other non U.S. countries.
C)   the U.S. tend to be generally lower than MNCs headquar tered in Japan and Germany.
D)   A and BE) C) and D)
F) A) and B)

Question 4

The term "global" target capital structure for an MNC represents the MNC's capital structure:

Accepted Answer

A)   in the U.S.
B)   relative to competitors across all countries.
C)   where it has its largest subsidiary.
D)   when consolidating all of its subsidiaries.E) A) and B)
F) B) and D)

Question 5

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) A) and B)

Question 6

An argument for MNCs to have a debt-intensive capital structure is:

Accepted Answer

A)   they are well diversified.
B)   foreign government tax rules may change over time.
C)   exposure to exchange rate fluctuations.
D)   exposure to fund blockage.E) C) and D)
F) A) and B)

Question 7

According to the text:

Accepted Answer

A)   the cost of debt for each country is somewhat stable over time.
B)   the cost of debt for countries change over time, and these changes are negatively correlated.
C)   the cost of debt for countries change over time, and these changes are positively correlated.
D)   the cost of debt for countries change over time, and are not correlated.E) C) and D)
F) A) and D)

Question 8

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

Accepted Answer

A) True 
 B)False

Question 9

In the United States,government rescues are not as common as in other countries,such as the United Kingdom.Therefore,the risk premium on a given level of debt would be higher for U.S.firms than for firms of the United Kingdom,everything else being equal.

Accepted Answer

A) True 
 B)False

Question 10

Generally speaking,an MNC's size,its access to international capital markets,and international diversification are unfavorable to an MNC's cost of capital.

Accepted Answer

A) True 
 B)False

Question 11

Assume the following information for Pexi Co.,a U.S.-based MNC that is considering obtaining 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%
U.S.corporate tax rate = 30%
German corporate tax rate = 40%
What is Pexi's cost of dollar-denominated equity

Accepted Answer

A)   12.0%.
B)   11.2%.
C)   10.0%.
D)   7.2%.E) C) and D)
F) B) and D)

Question 12

Which of the following is not a factor that favorably affects an MNC's cost of capital,according to your text

Accepted Answer

A)   exchange rate risk.
B)   size.
C)   access to international capital markets.
D)   international diversification.E) A) and C)
F) B) and C)

Question 13

According to your text,which of the following is not a factor that affects an MNC's cost of capital unfavorably

Accepted Answer

A)   exchange rate risk.
B)   country risk.
C)   political risk.
D)   size.E) None of the above
F) A) and B)

Question 14

To the extent that individual economies are ______________ each other,net cash flows from a portfolio of subsidiaries should exhibit ________ variability,which may reduce the probability of bankruptcy.

Accepted Answer

A)   dependent on;less
B)   dependent on;more
C)   independent of;less
D)   independent of;moreE) A) and D)
F) A) and B)

Question 15

According to the text,an MNC's "global" target capital structure is:

Accepted Answer

A)   always debt intensive.
B)   always equity intensive.
C)   sometimes different from an MNC's "local" capital struc tures (at subsidiaries) .
D)   none of the aboveE) A) and C)
F) A) and B) C

Question 16

Capital asset pricing theory suggests that _____________ risk of projects can be ignored and that __________ is relevant.

Accepted Answer

A)   unsystematic;unsystematic
B)   unsystematic;systematic
C)   systematic;unsystematic
D)   systematic;systematicE) A) and B)
F) C) and D)

Question 17

Assume a subsidiary is forced to borrow in excess of the MNC's optimal capital structure.Also assume that the parent company reduces its debt financing by an offsetting amount.Under this scenario,the cost of capital for the MNC overall could not have changed.

Accepted Answer

A) True 
 B)False

Question 18

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

Accepted Answer

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

Question 19

One argument for why subsidiaries should be only partlyowned 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 offer some protection against threats of any adverse actions by the host government.E) B) and D)
F) None of the above D

Question 20

The cost of capital for MNCs based in the U.S.has been generally _______ than MNCs based in Germany and _______ than MNCs based in Japan.

Accepted Answer

A)   lower;lower
B)   lower;higher
C)   higher;higher
D)   higher;lowerE) All of the above
F) None of the above

Exam 17: Multinational Cost of Capital and Capital Structure

A firm's cost of ___________ reflects an opportunity cost: what the existing shareholders could have earned if they had received the earnings as dividends and invested the funds themselves..

Correct Answer
verified

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

Correct Answer
verified
A

According to the text,there is evidence that the debt ratios (debt/capital) of MNCs based in:

Correct Answer
verified

The term "global" target capital structure for an MNC represents the MNC's capital structure:

Correct Answer
verified

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

Correct Answer
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An argument for MNCs to have a debt-intensive capital structure is:

Correct Answer
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According to the text:

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

Correct Answer
verified

In the United States,government rescues are not as common as in other countries,such as the United Kingdom.Therefore,the risk premium on a given level of debt would be higher for U.S.firms than for firms of the United Kingdom,everything else being equal.

Correct Answer
verified

Generally speaking,an MNC's size,its access to international capital markets,and international diversification are unfavorable to an MNC's cost of capital.

Correct Answer
verified

Correct Answer
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Which of the following is not a factor that favorably affects an MNC's cost of capital,according to your text

Correct Answer
verified

According to your text,which of the following is not a factor that affects an MNC's cost of capital unfavorably

Correct Answer
verified

To the extent that individual economies are ______ each other,net cash flows from a portfolio of subsidiaries should exhibit variability,which may reduce the probability of bankruptcy.

Correct Answer
verified

According to the text,an MNC's "global" target capital structure is:

Correct Answer
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C

Capital asset pricing theory suggests that ___ risk of projects can be ignored and that is relevant.

Correct Answer
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Assume a subsidiary is forced to borrow in excess of the MNC's optimal capital structure.Also assume that the parent company reduces its debt financing by an offsetting amount.Under this scenario,the cost of capital for the MNC overall could not have changed.

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

Correct Answer
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One argument for why subsidiaries should be only partlyowned by the parent is:

Correct Answer
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D

The cost of capital for MNCs based in the U.S.has been generally _ than MNCs based in Germany and _ than MNCs based in Japan.

Correct Answer
verified

Exam 17: Multinational Cost of Capital and Capital Structure

A firm's cost of ___________ reflects an opportunity cost: what the existing shareholders could have earned if they had received the earnings as dividends and invested the funds themselves..

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedA

According to the text,there is evidence that the debt ratios (debt/capital) of MNCs based in:

Correct AnswerverifiedShow Answer

The term "global" target capital structure for an MNC represents the MNC's capital structure:

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

An argument for MNCs to have a debt-intensive capital structure is:

Correct AnswerverifiedShow Answer

According to the text:

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 overall MNC's cost of capital.

Correct AnswerverifiedShow Answer

In the United States,government rescues are not as common as in other countries,such as the United Kingdom.Therefore,the risk premium on a given level of debt would be higher for U.S.firms than for firms of the United Kingdom,everything else being equal.

Correct AnswerverifiedShow Answer

Generally speaking,an MNC's size,its access to international capital markets,and international diversification are unfavorable to an MNC's cost of capital.

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Which of the following is not a factor that favorably affects an MNC's cost of capital,according to your text

Correct AnswerverifiedShow Answer

According to your text,which of the following is not a factor that affects an MNC's cost of capital unfavorably

Correct AnswerverifiedShow Answer

To the extent that individual economies are ______________ each other,net cash flows from a portfolio of subsidiaries should exhibit ________ variability,which may reduce the probability of bankruptcy.

Correct AnswerverifiedShow Answer

According to the text,an MNC's "global" target capital structure is:

Correct AnswerverifiedC

Capital asset pricing theory suggests that _____________ risk of projects can be ignored and that __________ is relevant.

Correct AnswerverifiedShow Answer

Assume a subsidiary is forced to borrow in excess of the MNC's optimal capital structure.Also assume that the parent company reduces its debt financing by an offsetting amount.Under this scenario,the cost of capital for the MNC overall could not have changed.

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

One argument for why subsidiaries should be only partlyowned by the parent is:

Correct AnswerverifiedD

The cost of capital for MNCs based in the U.S.has been generally _______ than MNCs based in Germany and _______ than MNCs based in Japan.

Correct AnswerverifiedShow Answer

Correct Answer
verified

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

Correct Answer
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A

Correct Answer
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Correct Answer
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The lower a project's beta,the _ is the project's ___ risk.

Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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To the extent that individual economies are ______ each other,net cash flows from a portfolio of subsidiaries should exhibit variability,which may reduce the probability of bankruptcy.

Correct Answer
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Correct Answer
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C

Capital asset pricing theory suggests that ___ risk of projects can be ignored and that is relevant.

Correct Answer
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Correct Answer
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D

The cost of capital for MNCs based in the U.S.has been generally _ than MNCs based in Germany and _ than MNCs based in Japan.

Correct Answer
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