Question 1

Which of the following does NOT fit in a list of potential sources of capital for foreign direct investment?

Accepted Answer

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 
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

Question 2

Discount rates on new investments should reflect the discount rates on the firm's existing assets and the firm's existing debt-equity mix.

Accepted Answer

A) True 
 B)False

Question 3

The yield to maturity on a junk bond ________ investors' required return.

Accepted Answer

A)  equals 
B)  overstates 
C)  preempts 
D)  understates 
E)  None of the above 
A)  equals 
B)  overstates 
C)  preempts 
D)  understates 
E)  None of the above

Question 4

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?

Accepted Answer

A)  6% 
B)  9% 
C)  12% 
D)  15% 
E)  18% 
A)  6% 
B)  9% 
C)  12% 
D)  15% 
E)  18%

Question 5

Empirical studies of the capital structure of corporations in the United States have generally agreed that leverage increases with each of the following EXCEPT

Accepted Answer

A)  fixed assets 
B)  advertising and research/development expenditures 
C)  nondebt tax shields 
D)  growth opportunities 
E)  firm size 
A)  fixed assets 
B)  advertising and research/development expenditures 
C)  nondebt tax shields 
D)  growth opportunities 
E)  firm size

Question 6

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.

Accepted Answer

A) True 
 B)False

Question 7

The total risk of a foreign investment is likely to be greater than similar domestic investments.

Accepted Answer

A) True 
 B)False

Question 8

On balance, market segmentation hurts the multinational corporation more than the domestic corporation.

Accepted Answer

A) True 
 B)False

Question 9

Erb, Harvey, and Viskanta ["Political Risk, Financial Risk and Economic Risk," Financial Analysts Journal, 1996] 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 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. 
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.

Question 10

International sources of funding for foreign investment projects include each of a) through d) EXCEPT

Accepted Answer

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. 
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.

Question 11

Each of a) through d) can be valued as a separate side effect EXCEPT

Accepted Answer

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 
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

Question 12

Foreign political risks increase the variability of outcomes on foreign investment projects.

Accepted Answer

A) True 
 B)False

Question 13

In perfect and integrated financial markets, multinational corporations are able to achieve diversification benefits that cannot be replicated by individual investors or portfolio managers.

Accepted Answer

A) True 
 B)False

Question 14

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.

Accepted Answer

A) True 
 B)False

Question 15

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.

Accepted Answer

A) True 
 B)False

Question 16

Factors contributing to financial market segmentation include each of the following EXCEPT

Accepted Answer

A)  different investor expectations 
B)  different legal, political, or tax systems 
C)  informational barriers 
D)  rational investors 
E)  transactions costs 
A)  different investor expectations 
B)  different legal, political, or tax systems 
C)  informational barriers 
D)  rational investors 
E)  transactions costs

Question 17

If financial markets are perfect and there are no taxes, then corporate financial policy is vitally important to the firm's stakeholders.

Accepted Answer

A) True 
 B)False

Question 18

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

Accepted Answer

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 
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

Question 19

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.

Accepted Answer

A) True 
 B)False

Question 20

In integrated financial markets, nominal rates of return on equivalent assets are equal.

Accepted Answer

A) True 
 B)False

Exam 14: Multinational Capital Structure and Cost of Capital

Which of the following does NOT fit in a list of potential sources of capital for foreign direct investment?

Discount rates on new investments should reflect the discount rates on the firm's existing assets and the firm's existing debt-equity mix.

The yield to maturity on a junk bond ________ investors' required return.

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?

Empirical studies of the capital structure of corporations in the United States have generally agreed that leverage increases with each of the following EXCEPT

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.

The total risk of a foreign investment is likely to be greater than similar domestic investments.

On balance, market segmentation hurts the multinational corporation more than the domestic corporation.

Erb, Harvey, and Viskanta ["Political Risk, Financial Risk and Economic Risk," Financial Analysts Journal, 1996] found which of the following?

International sources of funding for foreign investment projects include each of a) through d) EXCEPT

Each of a) through d) can be valued as a separate side effect EXCEPT

Foreign political risks increase the variability of outcomes on foreign investment projects.

In perfect and integrated financial markets, multinational corporations are able to achieve diversification benefits that cannot be replicated by individual investors or portfolio managers.

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.

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.

Factors contributing to financial market segmentation include each of the following EXCEPT

If financial markets are perfect and there are no taxes, then corporate financial policy is vitally important to the firm's stakeholders.

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

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.

In integrated financial markets, nominal rates of return on equivalent assets are equal.

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