Exam 17: Multinational Cost of Capital and Capital Structure

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

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.

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.

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

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.

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?

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

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

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.

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

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

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.

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

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

According to your text, which of the following is not a factor that increases an MNC's cost of capital?

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

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.

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.

Capital asset pricing theory suggests that ____ risk of projects can be ignored and that ____ is relevant.

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.