Exam 12: The Global Cost and Availability of Capital

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?

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 were

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

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?

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%.

Capital market segmentation is a financial market imperfection caused mainly by

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

If a company fails to accurately predict it's cost of equity, then

LipTea Incorporated purchases raw materials and has processing plants around the world. The firm has an average pre-tax cost of debt of 8%, an average tax rate of 40%, and an international equity beta of 1.2. The risk-free rate of return is anticipated to be 4% and the return to the international market portfolio to be 12%. If the firm finances 40% with debt and 60% with equity, what is the after-tax WACC?

What motivates portfolio investors to purchase and hold foreign securities in their portfolio?

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

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

Empirical studies show that neither mature domestic firms nor MNEs are typically willing to assume the higher agency costs or bankruptcy risk associated with higher MCCs and capital budgets.

A firm whose equity has a beta of 1.0

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

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

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?

According to your authors, diversifying cash flows internationally may help MNEs reduce the variability of cash flows because

________ 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.

A MNEs marginal cost of capital is constant for considerable ranges in its capital budget, but this statement cannot be made for most domestic firms.