Question 1

Which of statements a) through d) concerning project finance is FALSE?

Accepted Answer

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. 
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. D

Question 2

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.

Accepted Answer

A) True 
 B)False  True

Question 3

Vehicles for repatriating funds from a foreign affiliate to the parent include each of the following EXCEPT

Accepted Answer

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 
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 B

Question 4

Stakeholders prefer internally generated funds to external funds because ______.

Accepted Answer

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 
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

Question 5

The target debt capacity of a foreign project should reflect the firm's existing assets and debt-equity mix.

Accepted Answer

A) True 
 B)False

Question 6

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.

Accepted Answer

A) True 
 B)False

Question 7

The discount rate in project valuation should reflect the mix of debt and equity that is actually raised to finance a particular project.

Accepted Answer

A) True 
 B)False

Question 8

Foreign political risk includes each of the following EXCEPT

Accepted Answer

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 
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

Question 9

In the capital asset pricing model, diversifiable risks do not affect the cost of capital.

Accepted Answer

A) True 
 B)False

Question 10

A targeted registered offering must satisfy which of requirements a) through d)?

Accepted Answer

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 
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

Question 11

Which of the following factors is the best predictor of return in an emerging market?

Accepted Answer

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 
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

Question 12

Adjusted present value is found by discounting cash flows to levered equity at a discount rate that reflects the systematic risk of levered equity.

Accepted Answer

A) True 
 B)False

Question 13

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.

Accepted Answer

A) True 
 B)False

Question 14

The _______ method is the most popular approach to project valuation.

Accepted Answer

A)  adjusted present value 
B)  Boston Consulting Group 
C)  opportunity cost method 
D)  price elasticity of demand 
E)  weighted average cost of capital 
A)  adjusted present value 
B)  Boston Consulting Group 
C)  opportunity cost method 
D)  price elasticity of demand 
E)  weighted average cost of capital

Question 15

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.

Accepted Answer

A) True 
 B)False

Question 16

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.

Accepted Answer

A) True 
 B)False

Question 17

The goal of financial policy is to minimize the firm's overall cost of capital, given the firm's assets.

Accepted Answer

A) True 
 B)False

Question 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.

Accepted Answer

A) True 
 B)False

Question 19

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.

Accepted Answer

A) True 
 B)False

Question 20

In the real world, hedging can increase the firm's expected cash flows by reducing expected taxes, bankruptcy costs, and agency costs.

Accepted Answer

A) True 
 B)False

Exam 14: Multinational Capital Structure and Cost of Capital

Which of statements a) through d) concerning project finance is FALSE?

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.

Vehicles for repatriating funds from a foreign affiliate to the parent include each of the following EXCEPT

Stakeholders prefer internally generated funds to external funds because ______.

The target debt capacity of a foreign project should reflect the firm's existing assets and debt-equity mix.

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.

The discount rate in project valuation should reflect the mix of debt and equity that is actually raised to finance a particular project.

Foreign political risk includes each of the following EXCEPT

In the capital asset pricing model, diversifiable risks do not affect the cost of capital.

A targeted registered offering must satisfy which of requirements a) through d)?

Which of the following factors is the best predictor of return in an emerging market?

Adjusted present value is found by discounting cash flows to levered equity at a discount rate that reflects the systematic risk of levered equity.

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.

The _______ method is the most popular approach to project valuation.

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.

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.

The goal of financial policy is to minimize the firm's overall cost of capital, given the firm's assets.

When evaluating new investment alternatives, the multinational corporation should use a discount rate that reflects the systematic risk of other assets in that country.

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.

In the real world, hedging can increase the firm's expected cash flows by reducing expected taxes, bankruptcy costs, and agency costs.

An Introduction to Multinational Finance

World Trade and the International Monetary System

Foreign Exchange and Eurocurrency Markets

The International Parity Conditions and Their Consequences

Extension: the International Parity Conditions and Their Consequences

Currency Futures and Futures Markets

Currency Options and Options Markets

Currency Swaps and Swaps Markets

Multinational Treasury Management

Extension: Multinational Treasury Management

Managing Transaction Exposure to Currency Risk

Managing Operating Exposure to Currency Risk

Managing Translation Exposure and Accounting for Financial Transactions

Foreign Market Entry and Country Risk Management

Multinational Capital Budgeting

Taxes and Multinational Corporate Strategy

Real Options and Cross-Border Investment Strategy

Corporate Governance and the International Market for Corporate Control

International Capital Markets

International Portfolio Diversification

International Asset Pricing

Filters