Exam 17: Multinational Cost of Capital and Capital Structure

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.

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

Most MNCs obtain equity funding:

According to the text, the cost of debt:

Normally, each subsidiary of an MNC will issue its own stock where it does business.

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

Werner Corporation has a target capital structure that consists of 40% debt and 60% equity. Werner can borrow at an interest rate of 10%. Also, Werner has determined its cost of equity to be 14%. Werner's tax rate is 40%. What is Werner's weighted average cost of capital?

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

An argument for MNCs to have a debt-intensive capital structure is:

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.

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, the cost of capital for an international project will:

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?

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

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

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.

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

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

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