Question 1

Relatively high costs of capital are more likely to occur in ________.

Accepted Answer

A)  highly illiquid domestic securities markets 
B)  highly liquid domestic securities markets 
C)  unsegmented domestic securities markets 
D)  none of the above 
A)  highly illiquid domestic securities markets 
B)  highly liquid domestic securities markets 
C)  unsegmented domestic securities markets 
D)  none of the above

Question 2

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 ________.

Accepted Answer

A)  relatively low cost of capital 
B)  relatively high cost of capital 
C)  relatively average cost of capital 
D)  cost of capital that we cannot estimate from this question 
A)  relatively low cost of capital 
B)  relatively high cost of capital 
C)  relatively average cost of capital 
D)  cost of capital that we cannot estimate from this question

Question 3

________ 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.

Accepted Answer

A)  Systematic 
B)  Unsystematic 
C)  Total 
D)  Diversifiable 
A)  Systematic 
B)  Unsystematic 
C)  Total 
D)  Diversifiable

Question 4

LipTea Incorporated purchases raw materials and has processing plants around the world.
The standard deviation of the firm's equity returns is 1.2 times as great as the market's standard deviation of returns. If the correlation of LipTea's returns with the market's is 0.80, what is the systematic risk of the firm?

Accepted Answer

A)  1.50 
B)  1.20 
C)  0.96 
D)  There is not enough information to answer this question. 
A)  1.50 
B)  1.20 
C)  0.96 
D)  There is not enough information to answer this question.

Question 5

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

Accepted Answer

A)  the risk-free rate of interest 
B)  the expected rate of return on the market portfolio 
C)  the marginal tax rate 
D)  All are important components of the CAPM. 
A)  the risk-free rate of interest 
B)  the expected rate of return on the market portfolio 
C)  the marginal tax rate 
D)  All are important components of the CAPM.

Question 6

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

Accepted Answer

A)  the fact that the increase in the correlation of returns between the market and the firm is less than the increase in the standard deviation of returns of the firm. 
B)  the fact that the decrease in the correlation of returns between the market and the firm is greater than the increase in the standard deviation of returns of the firm. 
C)  the reduction in the correlation of returns between the firm and the market is less than the increase in the variability of returns caused by factors such as asymmetric information, foreign exchange risk, and the like. 
D)  none of the above. Systematic risk is less for MNEs than for their domestic counterparts. 
A)  the fact that the increase in the correlation of returns between the market and the firm is less than the increase in the standard deviation of returns of the firm. 
B)  the fact that the decrease in the correlation of returns between the market and the firm is greater than the increase in the standard deviation of returns of the firm. 
C)  the reduction in the correlation of returns between the firm and the market is less than the increase in the variability of returns caused by factors such as asymmetric information, foreign exchange risk, and the like. 
D)  none of the above. Systematic risk is less for MNEs than for their domestic counterparts.

Question 7

Capital market imperfections leading to financial market segmentation include

Accepted Answer

A)  political risks 
B)  corporate governance differences 
C)  regulatory barriers 
D)  All of the above. 
A)  political risks 
B)  corporate governance differences 
C)  regulatory barriers 
D)  All of the above.

Question 8

The MNE can ________ its ________ by gaining access to markets that are more liquid and/or less segmented than its own.

Accepted Answer

A)  increase; MCC 
B)  decrease; MCC 
C)  maintain; MRR 
D)  none of the above 
A)  increase; MCC 
B)  decrease; MCC 
C)  maintain; MRR 
D)  none of the above

Question 9

The beginning share price for a security over a three-year period was $50. Subsequent year-end prices were $62, $58 and $64. The arithmetic average annual rate of return and the geometric average annual rate of return for this stock was

Accepted Answer

A)  9.30% and 8.78% respectively. 
B)  9.30% and 7.89% respectively. 
C)  9.30% and 7.03% respectively. 
D)  9.30% and 6.37% respectively. 
A)  9.30% and 8.78% respectively. 
B)  9.30% and 7.89% respectively. 
C)  9.30% and 7.03% respectively. 
D)  9.30% and 6.37% respectively.

Question 10

Generally speaking the equity risk premium relative to Bills is greater than the relative equity risk premium to Bonds in most well-established national financial markets.

Accepted Answer

A) True 
 B)False

Question 11

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.

Accepted Answer

A) True 
 B)False

Question 12

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

Accepted Answer

A)  less than 
B)  greater than 
C)  equal to 
D)  greater than or equal to 
A)  less than 
B)  greater than 
C)  equal to 
D)  greater than or equal to

Question 13

Until 1981 Danish equity securities were taxed at a capital gains rate of 50% for securities held for over two years, and at a speculative gains rate of 75% for securities held for under two years. This led to market segmentation caused by ________.

Accepted Answer

A)  taxation 
B)  political risk 
C)  asymmetric information 
D)  financial risk 
A)  taxation 
B)  political risk 
C)  asymmetric information 
D)  financial risk

Question 14

The primary goal of both domestic and international portfolio managers is

Accepted Answer

A)  to maximize return for a given level of risk, or minimize risk for a given level of return. 
B)  minimize the number of unique securities held in their portfolio. 
C)  maximize their wacc. 
D)  all of the above. 
A)  to maximize return for a given level of risk, or minimize risk for a given level of return. 
B)  minimize the number of unique securities held in their portfolio. 
C)  maximize their wacc. 
D)  all of the above.

Question 15

Which of the following statements is NOT true regarding MNEs when compared to purely domestic firms?

Accepted Answer

A)  MNEs tend to rely more on short and intermediate term debt. 
B)  MNEs have greater foreign exchange risk. 
C)  MNEs have greater costs of asymmetric information. 
D)  MNEs have higher agency costs. 
A)  MNEs tend to rely more on short and intermediate term debt. 
B)  MNEs have greater foreign exchange risk. 
C)  MNEs have greater costs of asymmetric information. 
D)  MNEs have higher agency costs.

Question 16

The WACC is usually used as the risk-adjusted required rate of return for new projects that are of the same average risk as the firm's existing projects.

Accepted Answer

A) True 
 B)False

Question 17

The optimal capital budget

Accepted Answer

A)  occurs where the marginal cost of capital equals the marginal rate of return of the opportunity set of projects. 
B)  is typically larger for purely domestic firms than for MNEs. 
C)  is an illusion found only in international finance textbooks. 
D)  none of the above. 
A)  occurs where the marginal cost of capital equals the marginal rate of return of the opportunity set of projects. 
B)  is typically larger for purely domestic firms than for MNEs. 
C)  is an illusion found only in international finance textbooks. 
D)  none of the above.

Question 18

What do theory and empirical evidence say about capital structure and the cost of capital for MNEs versus their domestic counterparts?

Accepted Answer

In theory, MNEs should be able to suppor

Question 19

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?

Accepted Answer

A)  7.75% 
B)  8.38% 
C)  12.24% 
D)  There is not enough information to answer this question. 
A)  7.75% 
B)  8.38% 
C)  12.24% 
D)  There is not enough information to answer this question.

Question 20

________ is the ability to buy or sell assets quickly without affecting their price.

Accepted Answer

A)  FOREX 
B)  Profitability 
C)  Liquidity 
D)  Time value of money 
A)  FOREX 
B)  Profitability 
C)  Liquidity 
D)  Time value of money

Relatively high costs of capital are more likely to occur in ________.

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 ________.

________ 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.

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

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

Capital market imperfections leading to financial market segmentation include

The MNE can its by gaining access to markets that are more liquid and/or less segmented than its own.

The beginning share price for a security over a three-year period was $50. Subsequent year-end prices were $62, $58 and $64. The arithmetic average annual rate of return and the geometric average annual rate of return for this stock was

Generally speaking the equity risk premium relative to Bills is greater than the relative equity risk premium to Bonds in most well-established national financial markets.

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.

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

Until 1981 Danish equity securities were taxed at a capital gains rate of 50% for securities held for over two years, and at a speculative gains rate of 75% for securities held for under two years. This led to market segmentation caused by ________.

The primary goal of both domestic and international portfolio managers is

Which of the following statements is NOT true regarding MNEs when compared to purely domestic firms?

The WACC is usually used as the risk-adjusted required rate of return for new projects that are of the same average risk as the firm's existing projects.

The optimal capital budget

What do theory and empirical evidence say about capital structure and the cost of capital for MNEs versus their domestic counterparts?

________ is the ability to buy or sell assets quickly without affecting their price.

Globalization and the Multinational Enterprise

Financial Goals and Corporate Governance

The International Monetary System

The Balance of Payments

The Foreign Exchange Market

International Parity Conditions

Foreign Exchange Rate Determination and Forecasting

Foreign Currency Derivatives

Transaction Exposure

Operating Exposure

Translation Exposure

Sourcing Equity Capital Globally

Financial Structure and International Debt

Interest Rate and Currency Swaps

International Portfolio Theory and Diversification

Foreign Direct Investment Theory and Strategy

Political Risk Assessment and Management

Multinational Capital Budgeting

International Trade Finance

Multinational Tax Management

Working Capital Management

Filters

Exam 12: Global Cost and Availability of Capital

Relatively high costs of capital are more likely to occur in ________.

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 ________.

________ 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.

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

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

Capital market imperfections leading to financial market segmentation include

The MNE can ________ its ________ by gaining access to markets that are more liquid and/or less segmented than its own.

The beginning share price for a security over a three-year period was $50. Subsequent year-end prices were $62, $58 and $64. The arithmetic average annual rate of return and the geometric average annual rate of return for this stock was

Generally speaking the equity risk premium relative to Bills is greater than the relative equity risk premium to Bonds in most well-established national financial markets.

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.

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

Until 1981 Danish equity securities were taxed at a capital gains rate of 50% for securities held for over two years, and at a speculative gains rate of 75% for securities held for under two years. This led to market segmentation caused by ________.

The primary goal of both domestic and international portfolio managers is

Which of the following statements is NOT true regarding MNEs when compared to purely domestic firms?

The WACC is usually used as the risk-adjusted required rate of return for new projects that are of the same average risk as the firm's existing projects.

The optimal capital budget

What do theory and empirical evidence say about capital structure and the cost of capital for MNEs versus their domestic counterparts?

________ is the ability to buy or sell assets quickly without affecting their price.

Globalization and the Multinational Enterprise

Financial Goals and Corporate Governance

The International Monetary System

The Balance of Payments

The Foreign Exchange Market

International Parity Conditions

Foreign Exchange Rate Determination and Forecasting

Foreign Currency Derivatives

Transaction Exposure

Operating Exposure

Translation Exposure

Sourcing Equity Capital Globally

Financial Structure and International Debt

Interest Rate and Currency Swaps

International Portfolio Theory and Diversification

Foreign Direct Investment Theory and Strategy

Political Risk Assessment and Management

Multinational Capital Budgeting

International Trade Finance

Multinational Tax Management

Working Capital Management

Filters

The MNE can its by gaining access to markets that are more liquid and/or less segmented than its own.