Exam 17: Multinational Cost of Capital and Capital Structure

According to the CAPM, the required rate of return on stock is a positive function of all of the following, except:

According to the text, the cost of debt:

In general, a firm ____ exposed to exchange rate fluctuations will usually have a ____ distribution of possible cash flows in future periods.

Capital asset pricing theory would most likely suggest that the cost of capital is generally ____ for ____.

The capital asset pricing model (CAPM) suggests that the required return on a firm's stock is a positive function of the risk-free rate of interest and the market rate of return and a negative function of the stock's beta.

The capital asset pricing theory is based on the premise that:

The U.S. risk-free rate is currently 3%. The expected U.S. market return is 10%. Solso, Inc. is considering a project that has a beta of 1.2. What is the cost of dollar-denominated equity?

Because their economies have lower growth, the cost of debt in industrialized countries is much higher than the cost of debt in many less developed countries.

An MNC's size, its access to international capital markets, and international diversification are unfavorable to an MNC's cost of capital.

If an MNC's cash flows are more stable, it can probably handle more debt than an MNC with erratic cash flows.

According to the text, an MNC's "global" target capital structure is:

Assume the following information for Brama 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 Brama's after-tax cost of dollar-denominated debt?

The ____ an MNC, the ____ its cost of capital is likely to be.

A firm's cost of ____ reflects an opportunity cost: what the existing shareholders could have earned if they had received the earnings as dividends and invested the funds themselves.

Based on the factors that influence a country's cost of capital, the cost of capital in less developed countries is likely to be ____ than that of the U.S. and ____ than that of Japan.

One argument for why subsidiaries should be wholly-owned by the parent is that the potential conflict of interests between the MNC's ____ is avoided.

To the extent that individual economies are ____ each other, net cash flows from a portfolio of subsidiaries should exhibit ____ variability, which may reduce the probability of bankruptcy.

The MNC's cost of equity is unrelated to the local risk-free rate.

An MNC can obtain equity by all of the following except:

If the parent ____ the debt of the subsidiary, the subsidiary's borrowing capacity might be ____.