Quiz 14: Multinational Capital Structure and Cost of Capital
Business
Q 1Q 1
A consequence of the perfect market assumptions is that a firm's cost of capital is independent of its capital structure.
Free
True False
False Explanation: Given the firm's investments, financial structure determines the firm's cost of capital.
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True False
False Explanation: Capital structure refers to the proportions and forms of long-term debt and equity capital used to finance the assets of the firm.
Q 3Q 3
The goal of financial policy is to minimize the firm's overall cost of capital, given the firm's assets.
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True False
True
Q 4Q 4
If financial markets are perfect and there are no taxes, then corporate financial policy is vitally important to the firm's stakeholders.
Free
True False
Q 5Q 5
If financial markets are perfect, then the value of an asset is determined by the value of expected future investment cash flows and not by the way that it is financed.
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True False
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True False
Q 7Q 7
If financial markets are integrated and systematic risk is to be measured against a market portfolio, then the appropriate choice of a market portfolio is the domestic market index.
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True False
Q 8Q 8
If goods and financial markets are segmented across national borders but are otherwise efficient, then multinational corporations can reduce their cost of capital through foreign direct investment or through financing from foreign sources or both.
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True False
Q 9Q 9
On balance, market segmentation hurts the multinational corporation more than the domestic corporation.
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True False
Q 10Q 10
If investors are restricted from some markets by capital flow barriers, then the multinational corporation with access to these markets can provide indirect diversification benefits to investors.
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True False
Q 11Q 11
A higher cost of capital on foreign investment could arise if a foreign government requires that at least a part of the foreign investment be financed locally.
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True False
Q 12Q 12
Foreign political risks increase the variability of outcomes on foreign investment projects.
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True False
Q 13Q 13
The total risk of a foreign investment is likely to be greater than similar domestic investments.
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True False
Q 14Q 14
The total operating risk of a foreign investment could be greater than the risk of a similar domestic investment, and yet the investment could have a lower required return than a similar domestic investment.
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True False
Q 15Q 15
In perfect and integrated financial markets, multinational corporations are able to achieve diversification benefits that cannot be replicated by individual investors or portfolio managers.
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True False
Q 16Q 16
In a perfect and integrated financial market, investors can reduce or even eliminate the currency risk exposures of their portfolios through their own portfolio hedging and diversification strategies.
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True False
Q 17Q 17
In the real world, hedging can increase the firm's expected cash flows by reducing expected taxes, bankruptcy costs, and agency costs.
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True False
Q 18Q 18
When evaluating new investment alternatives, the multinational corporation should use a discount rate that reflects the systematic risk of other assets in that country.
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True False
Q 19Q 19
According to the weighted average cost of capital approach to project valuation, operating cash flows are discounted at the required return of levered equity capital.
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True False
Q 20Q 20
The weighted average cost of capital cannot be calculated for a single segment in a multi-segment firm when the segments have different systematic risks.
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True False
Q 21Q 21
Discount rates on new investments should reflect the discount rates on the firm's existing assets and the firm's existing debt-equity mix.
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True False
Q 22Q 22
Discounting after-tax cash flows to debt and equity at the weighted average cost of capital is the most commonly used method for project valuation in market economies.
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True False
Q 23Q 23
The target debt capacity of a foreign project is the amount of debt that the firm would choose to borrow if the project were financed as a "stand-alone" entity.
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True False
Q 24Q 24
The discount rate in project valuation should reflect the mix of debt and equity that is actually raised to finance a particular project.
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True False
Q 25Q 25
The target debt capacity of a foreign project should reflect the firm's existing assets and debt-equity mix.
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True False
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True False
Q 27Q 27
For investments in developed economies, the security market line is still the most popular method for identifying equity required returns.
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True False
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True False
Q 29Q 29
Adjusted present value is found by discounting cash flows to levered equity at a discount rate that reflects the systematic risk of levered equity.
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True False
Q 30Q 30
The systematic business risk of a project can be proxied by the beta of a similar asset that is financed with one hundred percent equity.
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True False
Q 31Q 31
Agency costs arise from conflicts of interest between the various institutional owners of the firm's equity.
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True False
Q 32Q 32
Studies find that international equity issues do not suffer the same degree of post-issuance underperformance as domestic issues do.
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True False
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True False
Q 34Q 34
Whether higher total operating risks on foreign investment translate into higher systematic risks depends only on the severity of political risks in the host country.
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True False
Q 35Q 35
Most empirical studies that study the cost of capital of multinational corporations relative to similar domestic corporations find that the risks of cross-border operations result in a higher cost of capital for the multinational corporation.
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True False
Q 36Q 36
Erb, Harvey, and Viskanta ["Political Risk, Financial Risk and Economic Risk," Financial Analysts Journal, 1996] found the higher volatilities of companies in emerging markets resulted in higher betas than on comparable assets in developed markets.
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True False
Q 37Q 37
In their famous articles on the cost of capital, corporation finance and the theory of investment, Modigliani and Miller made each of the following assumptions EXCEPT
A) equal access to bid and ask prices
B) homogeneous investor expectations
C) homogeneous business risk classes
D) perpetual cash flows
E) rational investors
Free
Multiple Choice
Q 38Q 38
Factors contributing to financial market segmentation include each of the following EXCEPT
A) different investor expectations
B) different legal, political, or tax systems
C) informational barriers
D) rational investors
E) transactions costs
Free
Multiple Choice
Q 39Q 39
Foreign political risk includes each of the following EXCEPT
A) unexpected changes in expropriation risk
B) unexpected changes in foreign exchange rates
C) unexpected changes in local ownership limitations
D) unexpected changes in repatriation restrictions
E) unexpected changes in taxes
Free
Multiple Choice
Q 40Q 40
Which of a) through d) is true?
A) A particular political risk is more likely to be diversifiable by local investors than by international investors.
B) A political risk such as an election imposes higher costs of capital on MNCs held by globally diversified investors.
C) From the perspective of managers in the multinational corporation, political risk is not diversifiable.
D) Global investors are exposed to a multinational corporation's total risk, measured by standard deviation of return in the investors' functional currencies.
E) None of the above
Free
Multiple Choice
Q 41Q 41
A firm's debt sells for £10 million and equity for £30 million. The firm's before-tax cost of debt is 9%. Its cost of equity is 18%. The corporate tax rate is 33%. The firm's weighted average cost of capital is closest to which of the following?
A) 6%
B) 9%
C) 12%
D) 15%
E) 18%
Free
Multiple Choice
Q 42Q 42
The cost of capital for a project in Spain should ______.
A) be a function of the riskiness of the project
B) equal the minimum rate of return necessary to induce investors to buy or hold the firm's stock
C) equal the nominal required return for a similar U.S. investment
D) equal the parent's weighted average cost of capital
E) equal the rate used by Spanish investors to capitalize corporate cash flows
Free
Multiple Choice
Q 43Q 43
Which of the following does NOT fit in a list of potential sources of capital for foreign direct investment?
A) funds generated internally by the foreign affiliate
B) funds from elsewhere within the corporation
C) funds from sources external to the corporation but within the parent country
D) funds from sources external to the corporation but within the host country
E) Each of the above can be a source of funds
Free
Multiple Choice
Q 44Q 44
The firm's existing WACC is appropriate as a discount rate on a proposed investment when ______. A the project is financed with debt from the host country
B the project has the same systematic business risk as the rest of the firm
C the project is not exposed to foreign political risk
D the optimal financial structure of the project is identical to that of the firm
Select one of the following:
A) A and B
B) A and C
C) B and C
D) B and D
E) C and D
Free
Multiple Choice
Q 45Q 45
The corporate cost of debt can be approximated by ______.
A) regressing stock returns on market returns
B) the average historical rate of 8.2 percent on corporate debt
C) the coupon rate on existing corporate debt
D) the risk-free rate of interest on government bonds
E) the yield to maturity on existing corporate debt
Free
Multiple Choice
Q 46Q 46
The yield to maturity on a junk bond ________ investors' required return.
A) equals
B) overstates
C) preempts
D) understates
E) None of the above
Free
Multiple Choice
Q 47Q 47
Erb, Harvey, and Viskanta ["Political Risk, Financial Risk and Economic Risk," Financial Analysts Journal, 1996] found which of the following?
A) A decrease in the country risk of an emerging market tends to be followed by a fall in equity share prices.
B) Emerging markets with high country risk tend to have more volatile returns than markets with low country risk.
C) Emerging markets with high country risk tend to have higher betas than markets with low country risk.
D) Financial market liberalizations tend to increase local firms' cost of capital.
E) Financial market liberalizations tend to decrease the correlation of emerging markets with the rest of the world.
Free
Multiple Choice
Q 48Q 48
Bekaert and Harvey ["Foreign Speculators and Emerging Equity Markets," Journal of Finance, 2000] found which of the following?
A) A decrease in the country risk of an emerging market tends to be followed by a fall in equity share prices.
B) Emerging markets with high country risk tend to have higher betas than markets with low country risk.
C) Emerging markets with high country risk tend to have less volatile returns than markets with low country risk.
D) Financial market liberalizations tend to increase local firms' cost of capital.
E) Financial market liberalizations tend to increase the correlation of emerging markets with the rest of the world.
Free
Multiple Choice
Q 49Q 49
International sources of funding for foreign investment projects include each of a) through d) EXCEPT
A) cash flow from other international divisions
B) interest rate and currency swaps
C) international debt and equity
D) project finance
E) All of the above are sources of funding for international investment projects.
Free
Multiple Choice
Q 50Q 50
A targeted registered offering must satisfy which of requirements a) through d)?
A) Interest or dividends must be paid directly to individuals in foreign countries.
B) The issuer must certify that it has no knowledge that a U.S. taxpayer is the owner of the security.
C) The registered owner must be a U.S. financial institution.
D) The securities must be issued in registered form.
E) More than one of the above
Free
Multiple Choice
Q 51Q 51
Each of a) through d) can be valued as a separate side effect EXCEPT
A) blocked funds
B) expropriation risk
C) negative-NPV tie-in projects
D) subsidized financing
E) Each of the above can be valued as a side effect
Free
Multiple Choice
Q 52Q 52
Vehicles for repatriating funds from a foreign affiliate to the parent include each of the following EXCEPT
A) dividend payments on equity
B) higher prices on sales to key suppliers
C) interest payments on debt
D) lease payments on operating and financial lease agreements
E) royalties and management fees
Free
Multiple Choice
Q 53Q 53
Stakeholders prefer internally generated funds to external funds because ______.
A) internal funds avoid the discipline of the financial markets
B) internal funds avoid the transactions costs of external issues
C) they indicate the corporation has free cash flow
D) More than one of the above
E) None of the above
Free
Multiple Choice
Q 54Q 54
Most countries specify that transfer prices be set at ______.
A) an arm's length or market price
B) cost
C) cost plus a profit margin
D) the maximum price that the market will bear
E) None of the above
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Multiple Choice
Q 55Q 55
Which of statements a) through d) concerning project finance is FALSE?
A) Debt in a project finance arrangement is contractually linked to the cash flow generated by the project.
B) Governments participate in project finance in the form of infrastructure support, guarantees, and assurances against political risk.
C) In project finance, claims are contractually tied to the cash flows of the project.
D) The cash flows of a project are commingled with other corporate cash flows.
E) The project is a separate legal entity and relies heavily on debt financing.
Free
Multiple Choice
Q 56Q 56
Which of a) through d) would not be a good candidate for project finance?
A) natural resource developments
B) power generation projects
C) telecommunication
D) toll roads and bridges
E) All of the above are good candidates for project finance.
Free
Multiple Choice
Q 57Q 57
Empirical studies of the capital structure of corporations in the United States have generally agreed that leverage increases with each of the following EXCEPT
A) fixed assets
B) advertising and research/development expenditures
C) nondebt tax shields
D) growth opportunities
E) firm size
Free
Multiple Choice
Q 58Q 58
Rajan and Zingales [ "What Do We Know about Capital Structure? Some Evidence from International Data," 1995] found that leverage increases with ______.
A) the tangibility of the firm's assets
B) the presence of growth options
C) the level of profitability
D) All of the above are associated with higher leverage
E) None of the above are associated with higher leverage
Free
Multiple Choice
Q 59Q 59
Rajan and Zingales ["What Do We Know about Capital Structure? Some Evidence from International Data," 1995] found that leverage decreases with ______.
A) the tangibility of the firm's assets
B) profitability
C) firm size
D) All of the above are associated with higher leverage
E) None of the above are associated with higher leverage
Free
Multiple Choice
Q 60Q 60
Empirical studies find that emerging market returns tend to have ??______.
A) lower volatilities than developed market returns
B) lower correlations with the world market portfolio than developed market returns
C) less political risk than developed market returns
D) More than one of the above
E) None of the above
Free
Multiple Choice
Q 61Q 61
Empirical studies find that financial market liberalizations tend to ______.
A) increase local firms' cost of capital
B) increase the correlation of emerging market returns with world market returns
C) increase the volatility of emerging market returns
D) More than one of the above
E) None of the above
Free
Multiple Choice
Q 62Q 62
The _______ method is the most popular approach to project valuation.
A) adjusted present value
B) Boston Consulting Group
C) opportunity cost method
D) price elasticity of demand
E) weighted average cost of capital
Free
Multiple Choice
Q 63Q 63
Which of the following factors is the best predictor of return in an emerging market?
A) country credit risk
B) the global market return
C) the local market return
D) the local risk-free rate of interest
E) the return volatility of the local market relative to that of a developed market
Free
Multiple Choice