Exam 13: The Global Cost and Availability of Capital

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

Other things equal,an increase in the firm's tax rate will increase the WACC for a firm that has both debt and equity financing.

Portfolio theory assumes that investors are risk-averse.This means that investors:

Reasons that firms may find themselves with relatively high costs of capital include:

Most observers believe that for better or for worse,we have achieved a global market for securities.Discuss the major changes in the international markets of securities: during the 1980s,during the 1990s and the current conditions.

Surprisingly,empirical studies find that MNEs have a higher level of systematic risk than their domestic counterparts.

A well-diversified portfolio has about ________ of the risk of the typical individual stock.

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

In general the geometric mean will be ________ the arithmetic mean for a series of returns.

Instruction 13.1: 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?

Which of the following statements is NOT true regarding beta?

Since the 1980s and 1990s,segmentation in global financial markets has been reduced.As a result of this,the correlation among securities markets has increased,thereby reducing,but not eliminating,the benefits of international portfolio diversification.

The weighted average cost of capital (WACC)is:

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

The capital asset pricing model (CAPM)is an approach:

Firms acquire debt in either the form of loans from commercial banks,or by selling new common stock.

Instruction 13.1: 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 an average price of €60/share,how many shares of stock will the investor be able to purchase?

What are the components of the weighted average cost of capital (WACC)and how do they differ for an MNE compared to a purely domestic firm?

Empirical tests of market efficiency fail to show that most major national markets are reasonably efficient.

A fully diversified domestic portfolio has a beta of: