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Exam 17: Multinational Cost of Capital and Capital Structure

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Question 1

True/False

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Because their economies have lower growth, the cost of debt in industrialized countries is much higher than the cost of debt in many less developed countries.

A) True
B) False

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False

Question 2

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Which of the following is a corporate characteristic that may affect an MNC's capital structure decision?​

A) the MNC's cash flow stability
B) its access to retained earnings
C) its credit risk
D) All of the above may affect an MNC's capital structure decision.

E) None of the above
F) B) and C)

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Question 3

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An MNC's "global" capital structure is:

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

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.

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

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

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?

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

Werner Corporation has a target capital structure that consists of 40 percent debt and 60 percent equity. Werner can borrow at an interest rate of 10 percent. Also, Werner has determined its cost of equity to be 14 percent. Werner's tax rate is 40 percent. What is Werner's weighted average cost of capital?​

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.

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

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

If the parent ____ the debt of the subsidiary, the subsidiary's borrowing capacity might be ____.

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

Assume that the risk-free interest rate in the United States 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 has the same degree of financial leverage and the same operating characteristics as a U.S. firm, its cost of capital will likely be ____ than that of the U.S. firm.

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

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

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?​