Exam 17: Multinational Cost of Capital and Capital Structure

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?

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.

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.

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.

Capital asset pricing theory would most likely suggest that the MNC's cost of capital is lower than that of domestic firms.

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

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.

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

Assume a subsidiary is forced to borrow in excess of the MNC's optimal capital structure. Also assume that the parent company reduces its debt financing by an offsetting amount. Under this scenario, the cost of capital for the MNC overall could not have changed.

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

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