Exam 17: Multinational Capital Structure and Cost of Capital

Based on the CAPM, the ____ the beta of a project, the ____ the required rate of return on that project.

Which of the following is a corporate characteristic that may affect an MNC's capital structure decision?

The term "local capital structure" is used in the text to represent the:​

Assume a subsidiary is forced to borrow in excess of the MNC's optimal capital structure. Also assume that the parent company reduces its debt financing by an offsetting amount. Under this scenario, the cost of capital for the MNC overall could not have changed.

One argument for why subsidiaries should be wholly owned by the MNC parent is that parent ownership avoids a potential conflict of interest between the:

An MNC's "global" capital structure is:

An MNC's capital represents all of the following except its proceeds received from:

If the parent ____ the debt of the subsidiary, the subsidiary's borrowing capacity might be ____.

Assume that the risk-free interest rate in the United States is the same as that in Country M. Assume that the government of Country M is more likely to rescue local firms that experience financial problems. Other things being equal, Country M's firms are likely to use a ____ degree of financial leverage than U.S. firms. If a firm based in Country M has the same degree of financial leverage and the same operating characteristics as a U.S. firm, its cost of capital will likely be ____ than that of the U.S. firm.​

To the extent that individual economies are ____ each other, net cash flows from a portfolio of subsidiaries should exhibit ____ variability, which may reduce the probability of bankruptcy.​

There is an advantage to using equity rather than debt financing because dividend payments are tax deductible.

A firm's cost of ____ reflects an opportunity cost: what the existing shareholders could have earned if they had received the earnings as dividends and invested the funds themselves.

An MNC's cost of capital may differ from that of domestic firms because of the MNC's access to international capital markets, its exposure to exchange rate risk, and other characteristics.

It is always advantageous to use foreign debt to finance a foreign project, particularly in developing countries.

Based on the factors that influence a country's cost of capital, the cost of capital in less developed countries is likely to be ____ than in the United States and ____ than in Japan.​

Capital asset pricing theory would most likely suggest that the MNC's cost of capital is lower than that of domestic firms.

Which of the following is not a source of equity for an MNC?

The cost of an MNC's capital can be measured as the cost of its debt plus the cost of its equity, with appropriate weights applied to reflect the percentages of debt and equity.

An MNC may deviate from its target capital structure in each country where financing is obtained, yet still achieve its target capital structure on a consolidated basis.

​Assume that an MNC has very stable cash flows and uses very little debt. Its cost of debt should be: