Question 1

What do theory and empirical evidence say about capital structure and the cost of capital for MNEs versus their domestic counterparts?

Accepted Answer

In theory, MNEs should be able to suppor

Question 2

The CAPM has now become very widely accepted in global business as the preferred method of calculating the cost of equity for a firm. As a result of this, there is now little debate over what numerical values should be used in its application.

Accepted Answer

A) True 
 B)False

Question 3

Use the information to answer the following question(s).
In September 2009 a U.S. investor chooses to invest $500,000 in German equity securities at a then current spot rate of $1.30/euro. At the end of one year the spot rate is $1.35/euro.
-Refer to Instruction 13.1. At the end of the year the investor sells his stock that now has an average price per share of €57. What is the investor's average rate of return before converting the stock back into dollars?

Accepted Answer

A)  5.0% 
B)  -3.0% 
C)  -5.0% 
D)  3.0% 
A)  5.0% 
B)  -3.0% 
C)  -5.0% 
D)  3.0%

Question 4

Which of the following is NOT a key variable in the equation for the capital asset pricing model?

Accepted Answer

A)  the risk-free rate of interest 
B)  the expected rate of return on the market portfolio 
C)  the marginal tax rate 
D)  All are important components of the CAPM. 
A)  the risk-free rate of interest 
B)  the expected rate of return on the market portfolio 
C)  the marginal tax rate 
D)  All are important components of the CAPM.

Question 5

The opportunity set of projects is typically smaller for MNEs than for purely domestic firms because international markets are typically specialized niches.

Accepted Answer

A) True 
 B)False

Question 6

According to your authors, diversifying cash flows internationally may help MNEs reduce the variability of cash flows because:

Accepted Answer

A)  of a lack of competition among international firms. 
B)  of an offset to cash flow variability caused by exchange rate variability. 
C)  returns are not perfectly correlated between countries. 
D)  none of the above 
A)  of a lack of competition among international firms. 
B)  of an offset to cash flow variability caused by exchange rate variability. 
C)  returns are not perfectly correlated between countries. 
D)  none of the above

Question 7

Increasing the number of securities in a portfolio reduces the unsystematic risk but not the systematic risk.

Accepted Answer

A) True 
 B)False

Question 8

Empirical studies indicate that MNEs have higher costs of capital than purely domestic firms. This could be due to higher levels of:

Accepted Answer

A)  political risk. 
B)  exchange rate risk. 
C)  agency costs. 
D)  all of the above 
A)  political risk. 
B)  exchange rate risk. 
C)  agency costs. 
D)  all of the above

Question 9

International diversification benefits may induce investors to demand foreign securities.

Accepted Answer

A) True 
 B)False

Question 10

A U.S. investor makes an investment in Britain and earns 14% on the investment while the British pound appreciates against the U.S. dollar by 8%. What is the investor's total return?

Accepted Answer

A)  22.00% 
B)  23.12% 
C)  6.00% 
D)  4.88% 
A)  22.00% 
B)  23.12% 
C)  6.00% 
D)  4.88%

Question 11

Capital market imperfections leading to financial market segmentation include:

Accepted Answer

A)  asymmetric information between domestic and foreign-based investors. 
B)  high securities transaction costs. 
C)  foreign exchange risks. 
D)  all of the above 
A)  asymmetric information between domestic and foreign-based investors. 
B)  high securities transaction costs. 
C)  foreign exchange risks. 
D)  all of the above

Question 12

If the addition of a foreign security to the portfolio of the investor decreases the expected return for a given level of risk, then the security adds value to the portfolio.

Accepted Answer

A) True 
 B)False

Question 13

The difference between the expected (or required) return for the market portfolio and the risk-free rate of return is referred to as:

Accepted Answer

A)  beta. 
B)  the geometric mean. 
C)  the market risk premium. 
D)  the arithmetic mean. 
A)  beta. 
B)  the geometric mean. 
C)  the market risk premium. 
D)  the arithmetic mean.

Question 14

Capital market segmentation is a financial market imperfection caused mainly by:

Accepted Answer

A)  government constraints. 
B)  institutional practices. 
C)  investor perceptions. 
D)  all of the above 
A)  government constraints. 
B)  institutional practices. 
C)  investor perceptions. 
D)  all of the above

Question 15

Because of the international diversification of cash flows, the risk of bankruptcy for MNEs is significantly lower than that for purely domestic firms.

Accepted Answer

A) True 
 B)False

Question 16

Capital market segmentation is a financial market imperfection caused mainly by government constraints, institutional practices, and investor perceptions.

Accepted Answer

A) True 
 B)False

Question 17

Capital market imperfections leading to financial market segmentation include:

Accepted Answer

A)  political risks. 
B)  corporate governance differences. 
C)  regulatory barriers. 
D)  all of the above 
A)  political risks. 
B)  corporate governance differences. 
C)  regulatory barriers. 
D)  all of the above

Question 18

Theoretically, most MNEs should be in a position to support higher ________ than their domestic counterparts because their cash flows are diversified internationally.

Accepted Answer

A)  equity ratios 
B)  debt ratios 
C)  temperatures 
D)  none of the above 
A)  equity ratios 
B)  debt ratios 
C)  temperatures 
D)  none of the above

Question 19

A MNE's marginal cost of capital is constant for considerable ranges in its capital budget, but this statement cannot be made for most domestic firms.

Accepted Answer

A) True 
 B)False

Question 20

The geometric mean will, in all but a few extreme circumstances, yield a larger return than the arithmetic mean return.

Accepted Answer

A) True 
 B)False

What do theory and empirical evidence say about capital structure and the cost of capital for MNEs versus their domestic counterparts?

The CAPM has now become very widely accepted in global business as the preferred method of calculating the cost of equity for a firm. As a result of this, there is now little debate over what numerical values should be used in its application.

Which of the following is NOT a key variable in the equation for the capital asset pricing model?

The opportunity set of projects is typically smaller for MNEs than for purely domestic firms because international markets are typically specialized niches.

According to your authors, diversifying cash flows internationally may help MNEs reduce the variability of cash flows because:

Increasing the number of securities in a portfolio reduces the unsystematic risk but not the systematic risk.

Empirical studies indicate that MNEs have higher costs of capital than purely domestic firms. This could be due to higher levels of:

International diversification benefits may induce investors to demand foreign securities.

A U.S. investor makes an investment in Britain and earns 14% on the investment while the British pound appreciates against the U.S. dollar by 8%. What is the investor's total return?

Capital market imperfections leading to financial market segmentation include:

If the addition of a foreign security to the portfolio of the investor decreases the expected return for a given level of risk, then the security adds value to the portfolio.

The difference between the expected (or required) return for the market portfolio and the risk-free rate of return is referred to as:

Capital market segmentation is a financial market imperfection caused mainly by:

Because of the international diversification of cash flows, the risk of bankruptcy for MNEs is significantly lower than that for purely domestic firms.

Capital market segmentation is a financial market imperfection caused mainly by government constraints, institutional practices, and investor perceptions.

Capital market imperfections leading to financial market segmentation include:

Theoretically, most MNEs should be in a position to support higher ________ than their domestic counterparts because their cash flows are diversified internationally.

A MNE's marginal cost of capital is constant for considerable ranges in its capital budget, but this statement cannot be made for most domestic firms.

The geometric mean will, in all but a few extreme circumstances, yield a larger return than the arithmetic mean return.

Multinational Financial Management: Opportunities and Challenges

The International Monetary System

The Balance of Payments

Financial Goals and Corporate Governance

The Foreign Exchange Market

International Parity Conditions

Foreign Currency Derivatives: Futures and Options

Interest Risk and Swaps

Foreign Exchange Rate Determination and Intervention

Transaction Exposure

Translation Exposure

Operating Exposure

Funding the Multinational Firm

Multinational Tax Management

International Trade Finance

Foreign Direct Investment and Political Risk

Multinational Capital Budgeting and Cross-Border Acquisitions

Filters

Exam 13: Global Cost and Availability of Capital

What do theory and empirical evidence say about capital structure and the cost of capital for MNEs versus their domestic counterparts?

The CAPM has now become very widely accepted in global business as the preferred method of calculating the cost of equity for a firm. As a result of this, there is now little debate over what numerical values should be used in its application.

Which of the following is NOT a key variable in the equation for the capital asset pricing model?

The opportunity set of projects is typically smaller for MNEs than for purely domestic firms because international markets are typically specialized niches.

According to your authors, diversifying cash flows internationally may help MNEs reduce the variability of cash flows because:

Increasing the number of securities in a portfolio reduces the unsystematic risk but not the systematic risk.

Empirical studies indicate that MNEs have higher costs of capital than purely domestic firms. This could be due to higher levels of:

International diversification benefits may induce investors to demand foreign securities.

A U.S. investor makes an investment in Britain and earns 14% on the investment while the British pound appreciates against the U.S. dollar by 8%. What is the investor's total return?

Capital market imperfections leading to financial market segmentation include:

If the addition of a foreign security to the portfolio of the investor decreases the expected return for a given level of risk, then the security adds value to the portfolio.

The difference between the expected (or required) return for the market portfolio and the risk-free rate of return is referred to as:

Capital market segmentation is a financial market imperfection caused mainly by:

Because of the international diversification of cash flows, the risk of bankruptcy for MNEs is significantly lower than that for purely domestic firms.

Capital market segmentation is a financial market imperfection caused mainly by government constraints, institutional practices, and investor perceptions.

Capital market imperfections leading to financial market segmentation include:

Theoretically, most MNEs should be in a position to support higher ________ than their domestic counterparts because their cash flows are diversified internationally.

A MNE's marginal cost of capital is constant for considerable ranges in its capital budget, but this statement cannot be made for most domestic firms.

The geometric mean will, in all but a few extreme circumstances, yield a larger return than the arithmetic mean return.

Multinational Financial Management: Opportunities and Challenges

The International Monetary System

The Balance of Payments

Financial Goals and Corporate Governance

The Foreign Exchange Market

International Parity Conditions

Foreign Currency Derivatives: Futures and Options

Interest Risk and Swaps

Foreign Exchange Rate Determination and Intervention

Transaction Exposure

Translation Exposure

Operating Exposure

Funding the Multinational Firm

Multinational Tax Management

International Trade Finance

Foreign Direct Investment and Political Risk

Multinational Capital Budgeting and Cross-Border Acquisitions

Filters