Exam 17: Multinational Cost of Capital and Capital Structure

In general, MNCs probably prefer to use ____ foreign debt when their foreign subsidiaries are subject to potentially ____ local currencies.

It is probably easier to estimate the cost of equity than it is to estimate the cost of debt.

In general, MNCs probably prefer to use ____ foreign debt when their foreign subsidiaries are subject to ____ local interest rates.

____ are beneficial because they may reduce transaction costs. However, MNCs may not be able to obtain all the funds that they need.

An MNC may deviate from its target capital structure in each country where financing is obtained, yet still achieve its target capital structure on a consolidated basis.

When assuming that investors in the U.S. are most concerned with their exposure to the U.S. stock market, it is acceptable to use the U.S. market when measuring a U.S.-based MNC's project's beta.

Capital asset pricing theory would most likely suggest that the MNC's cost of capital is lower than that of domestic firms.

Assume a subsidiary is forced to borrow in excess of the MNC's optimal capital structure. Also assume that the parent company reduces its debt financing by an offsetting amount. Under this scenario, the cost of capital for the MNC overall could not have changed.

The lower a project's beta, the ____ is the project's ____ risk.

An MNC may deviate from its target capital structure in each country where financing is obtained, yet still achieve its target capital structure on a consolidated basis.

According to the text, there is evidence that the debt ratios (debt/capital) of MNCs based in:

Which of the following is not a reason provided in the text regarding why the cost of debt can vary across countries?

Country differences, such as differences in the risk-free interest rate and differences in risk premiums across countries, can cause the cost of capital to vary across countries.

Because increased external financing by a foreign subsidiary reduces the external financing needed by the parent, such an action will not affect the overall MNC's cost of capital.

Which of the following factors is not expected to generally have a favorable impact on the firm's cost of capital according to the text?

The cost of capital incurred by U.S.-based MNCs is primarily driven by the global stock market volatility.

Assume the following information for Pexi Co., a U.S.-based MNC that needs funding for a project in Germany: U.S. risk-free rate = 4% German risk-free rate = 5% Risk premium on dollar-denominated debt provided by U.S. creditors = 3% Risk premium on euro-denominated debt provided by German creditors = 4% Beta of project = 1.2 Expected U.S. market return = 10% U.S. corporate tax rate = 30% German corporate tax rate = 40% What is Pexi's cost of dollar-denominated equity?

The capital asset pricing model suggests that the required return on a firm's stock is a positive function of:

Assume that an MNC has very stable cash flows and uses very little debt. Its cost of debt should be:

When a country's risk-free rate rises, the cost of equity to an MNC in that country _____, and the cost of debt to an MNC in that country ____, other things held constant.