Deck 16: Foreign Direct Investment and Cross-Border Acquisitions

Question 1

Calculate the debt-to-total-market-value ratio that would result in XYZ having a weighted average cost of capital of 9.3%.

A)35%
B)40%
C)45%
D)50%

Answer 1

D

Question 2

A major factor in determining the optimal capital structure is

A)the trade-off between the interest rate costs of debt and the possible bankruptcy costs associated with equity
B)the trade-off between the tax advantage of debt and the possible bankruptcy costs associated with equity
C)the trade-off between the tax advantage of debt and the possible bankruptcy costs associated with debt
D)the trade-off between the interest rate costs of equity and the possible bankruptcy costs associated with equity

Answer 2

C

Question 3

Capital structure refers to all of the following except:

A)Right-hand side the corporate balance sheet
B)A description of how the company is financed
C)The debt-equity ratio
D)What assets the firm has

Answer 3

D

Question 4

In the Capital Asset Pricing Model (CAPM),the term Beta, ,is:

A)a measure of systematic risk inherent in a security
B)calculated as the "covariance of future returns between a specific security and the market portfolio" divided by the "variance of returns of the market portfolio"
C)a and b
D)none of these

Question 5

Which of the following represents all the potential costs of the cross-border listings of stocks?

A)(i), (ii), and (iii)
B)(ii), (iv), and (vi)
C)(i), (iii), (v), and (vii)
D)(iv), (v), (vi), and (vii)

Question 6

Assume that the risk-free rate of return is 4%,and the expected return on the market portfolio is 10%.If the systematic risk inherent in the stock of ABC Corporation is 1.80,using the Capital Asset Pricing Model (CAPM)calculate the expected return of ABC.

A)14.0%
B)14.8%
C)16.0%
D)16.8%

Question 7

Systematic risk refers to:

A)the diversifiable (company specific) risk of an asset
B)the nondiversifiable market risk of an asset
C)economic and political risk
D)the risk that can be hedged

Question 8

Which of the following statements is not true about the pricing-to-market phenomenon?

A)It is due to legal restrictions imposed on foreigners
B)It may lead to dual pricing
C)It occurs only when the restrictions are binding
D)Foreigners will always pay a premium for shares if legal restrictions are imposed on foreigners

Question 9

Which of the following statements is correct?

A)If international financial markets are integrated, the market portfolio in the CAPM formula represents the world market portfolio.
B)If international financial markets are integrated, the market portfolio in the CAPM formula represents the domestic market portfolio.
C)If international financial markets are divided, the market portfolio in the CAPM formula represents the domestic market portfolio.
D)If international financial markets are divided, the market portfolio in the CAPM formula represents the world market portfolio.

Question 10

If XYZ's debt-to-total-market-value ratio is 40%,then its weighted average cost of capital,K,is:

A)8%
B)9%
C)10%
D)12%

Question 11

The cost of capital is:

A)the minimum rate of return an investment project must generate in order to pay its financing costs
B)the minimum rate of return an investment project must generate in order to pay its financing costs plus a reasonable profit
C)the maximum rate of return an investment project must generate in order to pay its financing costs
D)the maximum rate of return an investment project must generate in order to pay its financing costs plus a reasonable profit

Question 12

For a firm that has both debt and equity in its capital structure,its financing cost can be represented by the weighted average cost of capital that is computed by:

A)weighing the pre-tax borrowing cost of the firm and the cost of equity capital, using the debt as the weight
B)weighing the after-tax borrowing cost of the firm and the cost of equity capital, using the capital structure ratio as the weight
C)
D)b and c

Question 13

Which of the following factors is not important when a firm chooses its subsidiary's financial structure?

A)Corporate tax rates
B)Value-added taxes
C)Political risk
D)Cost of capital

Question 14

Which of the following represents all the potential benefits of the cross-border listings of stocks?

A)(i), (ii), and (iii)
B)(ii), (iv), and (vi)
C)(i), (iii), (v), and (vii)
D)(iv), (v), (vi), and (vii)

Question 15

"When in Rome do as the Romans do" best describes which approach to a subsidiary's financial structure?

A)conform to the parent company's norm
B)conform to the local norm of the country where the subsidiary operates
C)vary judiciously
D)vary randomly

Question 16

Assume that the risk-free rate of return is 4%,and the expected return on the market portfolio is 10%.If the expected return of ABC is 12% the firm's beta calculate using the Capital Asset Pricing Model (CAPM).

A)1
B)1.25
C)1.33
D)1.5

Question 17

If ABC's debt-to-equity ratio is 1: 1,then its weighted average cost of capital,K,is:

A)5%
B)5.75%
C)6.75%
D)10%

Question 18

Calculate the debt-to-total-market-value ratio that would result in ABC having a weighted average cost of capital of 7.5%.

A)28%
B)38%
C)46%
D)50%

Question 19

The cost of equity capital is:

A)the expected return on the firm's stock that investors require
B)frequently estimated by using the Capital Asset Pricing Model (CAPM)
C)generally considered to be a linear function of the systematic risk inherent in the security
D)all of these

Question 20

Which one of the following is not an approach to determine a subsidiary's financial structure:

A)conform to the parent company's norm
B)conform to the local norm of the country where the subsidiary operates
C)vary judiciously
D)vary randomly

Question 21

What are the potential benefits of cross-listing shares on a foreign stock exchange?

Question 22

What are the alternative financial structures for a subsidiary?
Which of the alternatives is the best?

Question 23

Assume that XYZ Corporation is a leveraged company with a cost of capital of 10%.The before-tax cost of borrowing is 5% and the marginal tax rate is 30%.
a)If XYZ's debt-to-total-market-value ratio is 40%,what is its weighted average cost of capital,WACC?
b)Calculate the debt-to-total-market-value ratio that would result in XYZ having a weighted average cost of capital of 9.3%.

Question 24

Assume that ABC Corporation is a leveraged company with the following information.Its marginal income tax rate is 35%,its average income tax rate is 25%,and its before tax-cost of borrowing is 6%.The firm's domestic beta is 1.2 and its world market beta is 1.The domestic market return is 10% and the world market return is 11%.The risk-free rate is 4%.The firm's debt-to-equity ratio is 1:
3.Determine the firm's weighted average cost of capital if capital markets are segmented.

Question 25

Assume that A-Plus Corporation is a leveraged company with a marginal income tax rate of 30%,an average income tax rate of 25%,and before tax-cost of borrowing of 5%.The firm's domestic beta is 1.4 and its world market beta is 0.8.The domestic market return is 12% and the world market return is 14%.The risk-free rate is 4%.The firm's debt-to-equity ratio is 1:
3.Determine the firm's weighted average cost of capital if capital markets are integrated.