Deck 14: The Global Cost and Availability of Capital

Question 1

Systematic risk

A)is the standard deviation of a security's return.
B)is measured with beta.
C)is measured with standard deviation.
D)none of the above

Answer 1

is measured with beta.

Question 2

The after-tax cost of debt is found by

A)dividing the before-tax cost of debt by (1 - the corporate tax rate).
B)subtracting (1 - the corporate tax rate)from the before-tax cost of debt.
C)multiplying the before-tax cost of debt by (1 - the corporate tax rate).
D)subtracting the corporate tax rate from the before-tax cost of debt.

Answer 2

multiplying the before-tax cost of debt by (1 - the corporate tax rate).

Question 3

A national securities market is segmented if the required rate of return on securities in that market differs from comparable securities traded in other, unsegmented markets.

Answer 3

True

Question 4

A firm whose equity has a beta of 1.0

A)has greater systematic risk than the market portfolio.
B)stands little chance of surviving in the international financial market place.
C)has less systematic risk than the market portfolio.
D)None of the above is true.

Question 5

In general the geometric mean will be ________ the arithmetic mean for a series of returns.

A)less than
B)greater than
C)equal to
D)greater than or equal to

Question 6

Relatively high costs of capital are more likely to occur in ________.

A)highly illiquid domestic securities markets
B)highly liquid domestic securities markets
C)unsegmented domestic securities markets
D)none of the above

Question 7

The difference between the expected (or required)return for the market portfolio and the risk-free rate of return is referred to as ________.

A)beta
B)the geometric mean
C)the market risk premium
D)the arithmetic mean

Question 8

If a firm lies within a country with ________ or ________ domestic capital markets, it can achieve lower global cost and greater availability of capital with a properly designed and implemented strategy to participate in international capital markets.

A)liquid; segmented
B)liquid; large
C)illiquid; segmented
D)large; illiquid

Question 9

The capital asset pricing model (CAPM)is an approach

A)to determine the price of equity capital.
B)used by marketers to determine the price of saleable product.
C)can be applied only to domestic markets.
D)none of the above

Question 10

If a company fails to accurately predict it's cost of equity, then

A)the firm's wacc will also be inaccurate.
B)the firm may not be using the proper interest rate to estimate NPV.
C)the firm my incorrectly accept or reject projects based on decisions made using the cost of capital computed with an incorrect cost of equity.
D)All of the above are true.

Question 11

The beginning share price for a security over a three-year period was $50. Subsequent year-end prices were $62, $58 and $64. The arithmetic average annual rate of return and the geometric average annual rate of return for this stock was

A)9.30% and 8.58% respectively.
B)9.30% and 7.89% respectively.
C)9.30% and 7.03% respectively.
D)9.30% and 6.37% respectively.

Question 12

Which of the following is NOT a key variable in the equation for the capital asset pricing model?

A)The risk-free rate of interest.
B)The expected rate of return on the market portfolio.
C)The marginal tax rate.
D)All are important components of the CAPM.

Question 13

Which of the following is NOT a contributing factor to the segmentation of capital markets?

A)Lack of transparency.
B)Asymmetric availability of information.
C)Insider trading.
D)All of the above are contributing factors.

Question 14

Which of the following is generally unnecessary in measuring the cost of debt?

A)a forecast of future interest rates
B)the proportions of the various classes of debt a firm proposes to use
C)the corporate income tax rate
D)All of the above are necessary for measuring the cost of debt.

Question 15

________ risk is a function of the variability of expected returns of the firm's stock relative to the market index and the measure of correlation between the expected returns of the firm and the market.

A)Systematic
B)Unsystematic
C)Total
D)Diversifiable

Question 16

Other things equal, an increase in the firm's tax rate will increase the WACC for a firm that has both debt and equity financing.

Question 17

Which of the following is NOT a contributing factor to the segmentation of capital markets?

A)Excessive regulatory control.
B)Perceived political risk.
C)Anticipated foreign exchange risk.
D)All of the above are contributing factors.

Question 18

Other things equal, a firm that must obtain its long-term debt and equity in a highly illiquid domestic securities market will probably have a ________.

A)relatively low cost of capital
B)relatively high cost of capital
C)relatively average cost of capital
D)cost of capital that we cannot estimate from this question

Question 19

Reasons that firms may find themselves with relatively high costs of capital include:

A)The firms reside in emerging countries with undeveloped capital markets.
B)The firms are too small to easily gain access to their own national securities market.
C)The firms are family owned and they choose not to access public markets and lose control of the firm.
D)all of the above

Question 20

The weighted average cost of capital (WACC)is

A)the required rate of return for all of a firm's capital investment projects.
B)the required rate of return for a firm's average risk projects.
C)not applicable for use by MNE.
D)equal to 13%.

Question 21

Internationally diversified portfolios often have a lower rate of return and almost always have a higher level of portfolio risk than their domestic counterparts.

Question 22

According to your authors, diversifying cash flows internationally may help MNEs reduce the variability of cash flows because

A)of a lack of competition among international firms.
B)of an offset to cash flow variability caused by exchange rate variability.
C)returns are not perfectly correlated between countries.
D)none of the above

Question 23

Which of the following is NOT a portfolio diversification technique used by portfolio managers?

A)Diversify by type of security.
B)Diversify by the size of capitalization of the securities held.
C)Diversify by country.
D)All of the above are diversification techniques.

Question 24

The primary goal of both domestic and international portfolio managers is

A)to maximize return for a given level of risk, or minimize risk for a given level of return.
B)minimize the number of unique securities held in their portfolio.
C)maximize their WACC.
D)all of the above

Question 25

A MNEs marginal cost of capital is constant for considerable ranges in its capital budget, but this statement cannot be made for most domestic firms.

Question 26

If all capital markets are fully integrated, securities of comparable expected return and risk should have the same required rate of return in each national market after adjusting for ________.

A)time of day and language requirements
B)political risk and time lags
C)foreign exchange risk and political risk
D)foreign exchange risk and the spot rate

Question 27

Capital market imperfections leading to financial market segmentation include

A)asymmetric information between domestic and foreign-based investors.
B)high securities transaction costs.
C)foreign exchange risks.
D)all of the above

Question 28

If a firm's expected returns are more volatile than the expected return for the market portfolio, it will have a beta less than 1.0.

Question 29

Empirical research has found that systematic risk for MNEs is greater than that for their domestic counterparts. This could be due to

A)the fact that the increase in the correlation of returns between the market and the firm is less than the increase in the standard deviation of returns of the firm.
B)the fact that the decrease in the correlation of returns between the market and the firm is greater than the increase in the standard deviation of returns of the firm.
C)the reduction in the correlation of returns between the firm and the market is less than the increase in the variability of returns caused by factors such as asymmetric information, foreign exchange risk, and the like.
D)none of the above. Systematic risk is less for MNEs than for their domestic counterparts.

Question 30

One of the elegant beauties of international equity markets is that over the last 100 or so years, the average market risk premium is almost identical across major industrial countries.

Question 31

The WACC is usually used as the risk-adjusted required rate of return for new projects that are of the same average risk as the firm's existing projects.

Question 32

What are the components of the weighted average cost of capital (WACC)and how do they differ for an MNE compared to a purely domestic firm?

Question 33

The authors refer to companies that have access to a ________ as MNEs, and firms without such access are identified as ________.

A)global cost and availability of capital; domestic firms.
B)large domestic capital market; geographically challenged.
C)world financial markets; antiquated.
D)none of the above

Question 34

The MNE can ________ its ________ by gaining access to markets that are more liquid and/or less segmented than its own.

A)increase; MCC
B)decrease; MCC
C)maintain; MRR
D)none of the above

Question 35

Theoretically, most MNEs should be in a position to support higher ________ than their domestic counterparts because their cash flows are diversified internationally.

A)equity ratios
B)debt ratios
C)temperatures
D)none of the above

Question 36

Capital market segmentation is a financial market imperfection caused mainly by ________.

A)government constraints
B)institutional practices
C)investor perceptions
D)all of the above

Question 37

Empirical tests of market efficiency fail to show that most major national markets are reasonably efficient.

Question 38

Capital market imperfections leading to financial market segmentation include

A)political risks.
B)corporate governance differences.
C)regulatory barriers.
D)all of the above

Question 39

The optimal capital budget

A)occurs where the marginal cost of capital equals the marginal rate of return of the opportunity set of projects.
B)is typically larger for purely domestic firms than for MNEs.
C)is an illusion found only in international finance textbooks.
D)none of the above

Question 40

Which of the following statements is NOT true regarding MNEs when compared to purely domestic firms?

A)MNEs tend to rely more on short and intermediate term debt.
B)MNEs have greater foreign exchange risk.
C)MNEs have greater costs of asymmetric information.
D)MNEs have higher agency costs.

Question 41

Because of the international diversification of cash flows, the risk of bankruptcy for MNEs is significantly lower than that for purely domestic firms.

Question 42

Empirical studies indicate that WACC for an MNE is higher than for their domestic competitors. Reasons cited for this increased cost include all of the following EXCEPT:

A)agency costs.
B)foreign exchange risk.
C)political risk.
D)All of the above are cited as reasons for an MNE's increased WACC.

Question 43

The opportunity set of projects is typically smaller for MNEs than for purely domestic firms because international markets are typically specialized niches.

Question 44

Empirical studies indicate that MNEs have a lower debt/capital ratio than domestic counterparts, indicating that MNEs have a lower cost of capital.

Question 45

What do theory and empirical evidence say about capital structure and the cost of capital for MNEs versus their domestic counterparts?

Question 46

Empirical studies indicate that MNEs have higher costs of capital than purely domestic firms. This could be due to higher levels of ________.

A)political risk
B)exchange rate risk
C)agency costs
D)all of the above