Exam 17: Multinational Cost of Capital and Capital Structure

There is an advantage to using equity rather than debt financing because dividend payments are tax deductible.

One argument for why subsidiaries should be only partly-owned by the parent is:

Other things being equal, countries with relatively ____ populations and ____ inflation are more likely to have a low cost of capital.

Based on the CAPM, the ____ the beta of a project, the ____ the required rate of return on that project.

Zoro Corporation has a beta of 2.0. The risk-free rate of interest is 5%, and the return on the stock market overall is expected to be 13%. What is the required rate of return on Zoro stock?

An MNC's cost of capital may differ from that of domestic firms because of their access to international capital markets, their exposure to exchange rate risk, and other characteristics.

If a parent company backs the debt of a foreign subsidiary, the borrowing capacity of the parent might be reduced as creditors are not willing to provide as many funds to the parent if those funds may possibly be needed to rescue a parent's subsidiary.

In the United States, government rescues are not as common as in other countries. Assuming that this is expected to continue in the future, the risk premium on a given level of debt would be higher for U.S. firms than for firms of other countries, everything else being equal.

Since the cost of funds can vary among markets, the MNC's access to the international capital markets may allow it to attract funds at a lower cost than that paid by domestic firms.

The term "global capital structure" is used in the text to represent the:

Most MNCs obtain equity funding:

Which of the following is least likely to influence an MNC's capital structure?

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

Which of the following is not a host country characteristic than can affect an MNC's capital structure decision?

According to the text, MNCs can:

Assume that the risk-free interest rate in the U.S. is the same as that in Country M. Assume that the government of Country M is more likely to rescue local firms that experience financial problems. Other things being equal, Country M's firms are likely to use a ____ degree of financial leverage than U.S. firms. If a firm based in Country M had the same degree of financial leverage and the same operating characteristics as a U.S. firm, its cost of capital would be ____ than that of the U.S. firm.

When MNCs pursue international projects that have a high potential for return, but also increase their risk, this increases the return to the bondholders that provided credit to the MNCs.

Other things being equal, the financial leverage of MNCs will be higher if the governments of their home countries are ____ likely to rescue them (in the event of failure), and if their home countries are ____ likely to experience a recession.

The term "local target capital structure" is used in the text to represent the:

The ____ the MNC's cost of capital, the ____ will be a project's net present value for its proposed project with a given set of expected cash flows.