Exam 17: Multinational Cost of Capital and Capital Structure

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

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

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.

Which of the following is not a factor that favorably affects an MNC's cost of capital, according to your text?

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

According to the text, MNCs can:

It is always advantageous to use foreign debt to finance a foreign project, particularly in developing countries.

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.

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

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.

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

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

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

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

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

The term "global" target capital structure for an MNC represents the MNC's capital structure:

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?

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.

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.

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