Exam 17: Multinational Cost of Capital and Capital Structure

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.

One argument for why subsidiaries should be whollyowned by the parent is that:

In general,a firm __________ exposed to exchange rate fluctuations will usually have a ___________ distribution of possible cash flows in future periods.

Capital asset pricing theory would most likely suggest that the cost of capital is generally ________ for _________.

In general,MNCs probably prefer to use ____________ foreign debt when their foreign subsidiaries are subject to ___________ local interest rates.

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

Assume the following information for Pexi Co.,a U.S.-based MNC that is considering obtaining funding for a project in Germany: U.S.risk-free rate = 4% German risk-free rate = 5% Risk premium on dollar-denominated debt provided by U.S.creditors = 3% Risk premium on euro-denominated debt provided by German creditors = 4% Beta of project = 1.2 Expected U.S.market return = 10% U.S.corporate tax rate = 30% German corporate tax rate = 40% What is Pexi's cost of dollar-denominated debt

In general,MNCs probably prefer to use ____________ foreign debt when their foreign subsidiaries are subject to potentially ___________ local currencies.

If an MNC's cash flows are more stable,it can probably handle more debt than an MNC with erratic cash flows.

When assuming that financial markets are segments,it is acceptable to use the U.S.market when measuring a U.S.-based MNC's project's beta.