Question 1

Surprisingly,empirical studies find that MNEs have a higher level of systematic risk than their domestic counterparts.

Accepted Answer

A) True 
 B)False  True

Question 2

The after-tax cost of debt is found by:

Accepted Answer

A)  dividing the before-tax cost of debt by (1 - the corporate tax rate). 
B)  subtracting (1 - the corporate tax rate) from the before-tax cost of debt. 
C)  multiplying the before-tax cost of debt by (1 - the corporate tax rate). 
D)  subtracting the corporate tax rate from the before-tax cost of debt. 
A)  dividing the before-tax cost of debt by (1 - the corporate tax rate). 
B)  subtracting (1 - the corporate tax rate) from the before-tax cost of debt. 
C)  multiplying the before-tax cost of debt by (1 - the corporate tax rate). 
D)  subtracting the corporate tax rate from the before-tax cost of debt. C

Question 3

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

Accepted Answer

A)  a forecast of future interest rates 
B)  the proportions of the various classes of debt a firm proposes to use 
C)  the corporate income tax rate 
D)  All of the above are necessary for measuring the cost of debt. 
A)  a forecast of future interest rates 
B)  the proportions of the various classes of debt a firm proposes to use 
C)  the corporate income tax rate 
D)  All of the above are necessary for measuring the cost of debt. D

Question 4

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 5

Use the information to answer the following question(s).
In September 2009 a U.S. investor chooses to invest $500,000 in German equity securities at a then current spot rate of $1.30/euro. At the end of one year the spot rate is $1.35/euro.
-Refer to Instruction 13.1.At the end of the year the investor sells his stock that now has an average price per share of €57.What is the investor's average rate of return after converting the stock back into dollars?

Accepted Answer

A)  -1.35% 
B)  5.0% 
C)  -5.0% 
D)  -7.24% 
A)  -1.35% 
B)  5.0% 
C)  -5.0% 
D)  -7.24%

Question 6

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

Accepted Answer

A) True 
 B)False

Question 7

When estimating an average corporate after-tax cost of capital,the component cost of equity is multiplied by (1-t)to allow for the tax-deductibility of dividend payments.

Accepted Answer

A) True 
 B)False

Question 8

________ 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 9

If a firm lies within a country with ________ or ________ domestic capital markets,it can achieve lower global cost and greater availability of capital with a properly designed and implemented strategy to participate in international capital markets.

Accepted Answer

A)  liquid; segmented 
B)  liquid; large 
C)  illiquid; segmented 
D)  large; illiquid 
A)  liquid; segmented 
B)  liquid; large 
C)  illiquid; segmented 
D)  large; illiquid

Question 10

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 8.58% 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 8.58% respectively. 
B)  9.30% and 7.89% respectively. 
C)  9.30% and 7.03% respectively. 
D)  9.30% and 6.37% respectively.

Question 11

Capital market segmentation is a financial market imperfection caused mainly by government constraints,institutional practices,and investor perceptions.List and explain three imperfections.

Accepted Answer

The following are the most important imp

Question 12

Unsystematic risk:

Accepted Answer

A)  is the remaining risk in a well-diversified portfolio. 
B)  is measured with beta. 
C)  can be diversified away. 
D)  all of the above 
A)  is the remaining risk in a well-diversified portfolio. 
B)  is measured with beta. 
C)  can be diversified away. 
D)  all of the above

Question 13

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

Accepted Answer

A)  the firm's wacc will also be inaccurate. 
B)  the firm may not be using the proper interest rate to estimate NPV. 
C)  the firm may incorrectly accept or reject projects based on decisions made using the cost of capital computed with an incorrect cost of equity. 
D)  All of the above are true. 
A)  the firm's wacc will also be inaccurate. 
B)  the firm may not be using the proper interest rate to estimate NPV. 
C)  the firm may incorrectly accept or reject projects based on decisions made using the cost of capital computed with an incorrect cost of equity. 
D)  All of the above are true.

Question 14

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 15

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:

Accepted Answer

A)  agency costs. 
B)  political risk. 
C)  asymmetric information. 
D)  In fact, each of these costs were higher for the MNE than for the domestic firm. 
A)  agency costs. 
B)  political risk. 
C)  asymmetric information. 
D)  In fact, each of these costs were higher for the MNE than for the domestic firm.

Question 16

Portfolio theory assumes that investors are risk-averse.This means that investors:

Accepted Answer

A)  cannot be induced to make risky investments. 
B)  prefer more risk to less for a given return. 
C)  will accept some risk, but not unnecessary risk. 
D)  All of the above are true. 
A)  cannot be induced to make risky investments. 
B)  prefer more risk to less for a given return. 
C)  will accept some risk, but not unnecessary risk. 
D)  All of the above are true.

Question 17

The weighted average cost of capital (WACC)is:

Accepted Answer

A)  the required rate of return for all of a firm's capital investment projects. 
B)  the required rate of return for a firm's average risk projects. 
C)  not applicable for use by MNE. 
D)  equal to 13%. 
A)  the required rate of return for all of a firm's capital investment projects. 
B)  the required rate of return for a firm's average risk projects. 
C)  not applicable for use by MNE. 
D)  equal to 13%.

Question 18

Increasing the number of securities in a portfolio reduces the unsystematic risk but not the systematic risk.

Accepted Answer

A) True 
 B)False

Question 19

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

Accepted Answer

A)  political risk. 
B)  exchange rate risk. 
C)  agency costs. 
D)  all of the above 
A)  political risk. 
B)  exchange rate risk. 
C)  agency costs. 
D)  all of the above

Question 20

An internationally diversified portfolio:

Accepted Answer

A)  should result in a portfolio with a lower beta than a purely domestic portfolio. 
B)  has the same overall risk shape as a purely domestic portfolio. 
C)  is only about 12% as risky as the typical individual stock. 
D)  all of the above 
A)  should result in a portfolio with a lower beta than a purely domestic portfolio. 
B)  has the same overall risk shape as a purely domestic portfolio. 
C)  is only about 12% as risky as the typical individual stock. 
D)  all of the above

Surprisingly,empirical studies find that MNEs have a higher level of systematic risk than their domestic counterparts.

The after-tax cost of debt is found by:

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

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.

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

When estimating an average corporate after-tax cost of capital,the component cost of equity is multiplied by (1-t)to allow for the tax-deductibility of dividend payments.

________ 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.

If a firm lies within a country with or domestic capital markets,it can achieve lower global cost and greater availability of capital with a properly designed and implemented strategy to participate in international capital markets.

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:

Capital market segmentation is a financial market imperfection caused mainly by government constraints,institutional practices,and investor perceptions.List and explain three imperfections.

Unsystematic risk:

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

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

Portfolio theory assumes that investors are risk-averse.This means that investors:

The weighted average cost of capital (WACC)is:

Increasing the number of securities in a portfolio reduces the unsystematic risk but not the systematic risk.

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

An internationally diversified portfolio:

Multinational Financial Management: Opportunities and Challenges

The International Monetary System

The Balance of Payments

Financial Goals and Corporate Governance

The Foreign Exchange Market

International Parity Conditions

Foreign Currency Derivatives: Futures and Options

Interest Risk and Swaps

Foreign Exchange Rate Determination

Transaction Exposure

Translation Exposure

Operating Exposure

Raising Equity and Debt Globally

Multinational Tax Management

International Trade Finance

Foreign Direct Investment and Political Risk

Multinational Capital Budgeting and Cross-Border Acquisitions

Filters

Exam 13: The Global Cost and Availability of Capital

Surprisingly,empirical studies find that MNEs have a higher level of systematic risk than their domestic counterparts.

The after-tax cost of debt is found by:

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

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.

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

When estimating an average corporate after-tax cost of capital,the component cost of equity is multiplied by (1-t)to allow for the tax-deductibility of dividend payments.

________ 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.

If a firm lies within a country with ________ or ________ domestic capital markets,it can achieve lower global cost and greater availability of capital with a properly designed and implemented strategy to participate in international capital markets.

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:

Capital market segmentation is a financial market imperfection caused mainly by government constraints,institutional practices,and investor perceptions.List and explain three imperfections.

Unsystematic risk:

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

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

Portfolio theory assumes that investors are risk-averse.This means that investors:

The weighted average cost of capital (WACC)is:

Increasing the number of securities in a portfolio reduces the unsystematic risk but not the systematic risk.

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

An internationally diversified portfolio:

Multinational Financial Management: Opportunities and Challenges

The International Monetary System

The Balance of Payments

Financial Goals and Corporate Governance

The Foreign Exchange Market

International Parity Conditions

Foreign Currency Derivatives: Futures and Options

Interest Risk and Swaps

Foreign Exchange Rate Determination

Transaction Exposure

Translation Exposure

Operating Exposure

Raising Equity and Debt Globally

Multinational Tax Management

International Trade Finance

Foreign Direct Investment and Political Risk

Multinational Capital Budgeting and Cross-Border Acquisitions

Filters

If a firm lies within a country with or domestic capital markets,it can achieve lower global cost and greater availability of capital with a properly designed and implemented strategy to participate in international capital markets.