Exam 13: The Global Cost and Availability of Capital

One of the elegant beauties of international equity markets is that over the last 100 or so years, the average market risk premium is almost identical across major industrial countries.

Despite the theoretical elegance of this hypothesis, empirical studies have come to the opposite conclusion.Despite the favorable effect of international diversification of cash flows, bankruptcy risk was only about the same for MNEs as for domestic firms. However, MNEs faced higher costs for each of the following EXCEPT:

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

The capital asset pricing model (CAPM)is an approach:

Capital market imperfections leading to financial market segmentation include:

Which of the following is NOT a contributing factor to the segmentation of capital 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.

Which of the following is NOT a portfolio diversification technique used by portfolio managers?

A global portfolio is an index of all the securities in the world, whereas a world portfolio represents those securities actually available to an investor.

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

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

Relatively high costs of capital are more likely to occur in:

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?

Use of the International CAPM (ICAPM)assures that the WACC will be lower than if a purely domestic market portfolio had been used in the estimation of the cost of equity.

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

The CAPM has now become very widely accepted in global business as the preferred method of calculating the cost of equity for a firm. As a result of this, there is now little debate over what numerical values should be used in its application.

The after-tax cost of debt is found by:

Which of the following is NOT a contributing factor to the segmentation of capital markets?

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