Exam 12: Global Cost and Availability of Capital

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.

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

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

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

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

Which of the following does not constitute a benefit to the investor of diversifying internationally?

If a firm's expected returns are more volatile than the expected return for the market portfolio, it will have a beta less than 1.0.

LipTea Incorporated purchases raw materials and has processing plants around the world. The firm has an average pretax cost of debt of 8%, an average tax rate of 40%, and an international equity beta of 1.2. If the risk-free rate of return is anticipated to be 4% and the return to the international market portfolio to be 12%, what is LipTea's after-tax cost of equity?

Systematic risk

Efficient capital markets

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

Which of the following is generally unnecessary in measuring the cost of debt?

The capital asset pricing model (CAPM) is an approach

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

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

The weighted average cost of capital (WACC) is

Ready Supply Co. has a cost of debt of 8%. The risk-free rate of interest is 3% and the expected return on the market portfolio is 10%. If the firm has a beta of 0.90 and an effective tax rate of 30% with a capital structure that is 40% debt and 60% equity, what is the firm's weighted average cost of capital?

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

Internationally diversified portfolios often have a lower rate of return and almost always have a higher level of portfolio risk than their domestic counterparts.

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 pretax 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?