Question 1

Empirical studies find that emerging market returns tend to have ??______.

Accepted Answer

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 
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

Question 2

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.

Accepted Answer

A) True 
 B)False

Question 3

Capital structure refers to the relative proportion of monetary and real assets in the firm.

Accepted Answer

A) True 
 B)False

Question 4

Agency costs arise from conflicts of interest between the various institutional owners of the firm's equity.

Accepted Answer

A) True 
 B)False

Question 5

Bekaert and Harvey ["Foreign Speculators and Emerging Equity Markets," Journal of Finance, 2000] found which of the following?

Accepted Answer

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. 
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.

Question 6

The cost of capital for a project in Spain should ______.

Accepted Answer

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 
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

Question 7

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.

Accepted Answer

A) True 
 B)False

Question 8

Rajan and Zingales [ "What Do We Know about Capital Structure? Some Evidence from International Data," 1995] found that leverage increases with ______.

Accepted Answer

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 
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

Question 9

Which of a) through d) is true?

Accepted Answer

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 
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

Question 10

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.

Accepted Answer

A) True 
 B)False

Question 11

For investments in developed economies, the security market line is still the most popular method for identifying equity required returns.

Accepted Answer

A) True 
 B)False

Question 12

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.

Accepted Answer

A) True 
 B)False

Question 13

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

Accepted Answer

A)  equal access to bid and ask prices 
B)  homogeneous investor expectations 
C)  homogeneous business risk classes 
D)  perpetual cash flows 
E)  rational investors 
A)  equal access to bid and ask prices 
B)  homogeneous investor expectations 
C)  homogeneous business risk classes 
D)  perpetual cash flows 
E)  rational investors

Question 14

Empirical studies find that financial market liberalizations tend to ______.

Accepted Answer

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 
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

Question 15

Which of a) through d) would not be a good candidate for project finance?

Accepted Answer

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. 
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.

Question 16

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:

Accepted Answer

A)  A and B 
B)  A and C 
C)  B and C 
D)  B and D 
E)  C and D 
A)  A and B 
B)  A and C 
C)  B and C 
D)  B and D 
E)  C and D

Question 17

The corporate cost of debt can be approximated by ______.

Accepted Answer

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 
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

Question 18

Most countries specify that transfer prices be set at ______.

Accepted Answer

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 
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

Question 19

The value of a foreign investment depends on the way it is financed.

Accepted Answer

A) True 
 B)False

Question 20

A consequence of the perfect market assumptions is that a firm's cost of capital is independent of its capital structure.

Accepted Answer

A) True 
 B)False

Exam 14: Multinational Capital Structure and Cost of Capital

Empirical studies find that emerging market returns tend to have ??______.

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.

Capital structure refers to the relative proportion of monetary and real assets in the firm.

Agency costs arise from conflicts of interest between the various institutional owners of the firm's equity.

Bekaert and Harvey ["Foreign Speculators and Emerging Equity Markets," Journal of Finance, 2000] found which of the following?

The cost of capital for a project in Spain should ______.

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.

Rajan and Zingales [ "What Do We Know about Capital Structure? Some Evidence from International Data," 1995] found that leverage increases with ______.

Which of a) through d) is true?

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.

For investments in developed economies, the security market line is still the most popular method for identifying equity required returns.

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.

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

Empirical studies find that financial market liberalizations tend to ______.

Which of a) through d) would not be a good candidate for project finance?

The corporate cost of debt can be approximated by ______.

Most countries specify that transfer prices be set at ______.

The value of a foreign investment depends on the way it is financed.

A consequence of the perfect market assumptions is that a firm's cost of capital is independent of its capital structure.

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