Exam 12: 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.

The optimal financial structure of multinational firms could differ from that of domestic firms because of

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

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

Several years ago the Danish equity market prohibited ownership of foreign securities thus few institutional analysts outside of Denmark bothered to follow Danish equity securities.This particular fact led to market segmentation due to ________.

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?

LipTea Incorporated purchases raw materials and has processing plants around the world. The firm finances 30% of its assets with debt and 70% with equity,has a 30% average tax rate,and can issue bonds at a pre-tax rate of 7%.Their standard deviation of returns is roughly 1.50 times as great as the market's returns,and has a correlation with the market of 0.45. If the risk-free rate of return is 5% and the expected return on the international market portfolio is 14%,what is the firm's WACC?

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.

Other things equal,a firm that must obtain its long-term debt and equity in a highly illiquid domestic securities market will probably have a ________.

LipTea Incorporated purchases raw materials and has processing plants around the world. They also have an international market for their product. Because of their presence in so many countries LipTea has the ability to raise capital around the world in several different markets.LipTea is truly an MNE. If the firm has an average pre-tax cost of debt of 8%,a cost of equity of 13%,and an average tax rate of 40%,what is their after-tax cost of debt?

Which of the following is NOT a key variable in the weighted average cost of capital (WACC)equation?

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

Johnson Fuel Systems has a weighted average cost of capital of 7.35%. Estimate Johnson's cost of equity given the following information: The firm's effective tax rate is 25%,they have an equal mix of debt and equity,the required return on the market portfolio is 9%,Johnson has a before-tax cost of debt of 6%,and the risk-free rate of return is 3%.

Which of the following is NOT a key variable in the weighted average cost of capital (WACC)equation?

The after-tax cost of debt is found by

If all capital markets are fully integrated,securities of comparable expected return and risk should have the same required rate of return in each national market after adjusting for ________.

Systematic risk

Empirical research has found that systematic risk for MNEs is greater than that for their domestic counterparts.This could be due to

A national securities market is segmented if the required rate of return on securities in that market differs from comparable securities traded in other,unsegmented markets.

________ risk is a function of the variability of expected returns of the firm's stock relative to the market index and the measure of correlation between the expected returns of the firm and the market.