Question 1

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.

Accepted Answer

A) True 
 B)False  False

Question 2

Despite the theoretical elegance of this hypothesis, empirical studies have come to the opposite conclusion.Despite the favorable effect of international diversification of cash flows, bankruptcy risk was only about the same for MNEs as for domestic firms. However, MNEs faced higher costs for each of the following EXCEPT:

Accepted Answer

A)  agency costs.
B)  political risk.
C)  asymmetric information.
D)  In fact, each of these costs were higher for the MNE than for the domestic firm. D

Question 3

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

Accepted Answer

A) True 
 B)False  False

Question 4

The capital asset pricing model (CAPM)is an approach:

Accepted Answer

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

Question 5

Capital market imperfections leading to financial market segmentation include:

Accepted Answer

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

Question 6

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

Accepted Answer

A)  excessive regulatory control
B)  perceived political risk
C)  anticipated foreign exchange risk
D)  All of the above are contributing factors.

Question 7

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.

Accepted Answer

A) True 
 B)False

Question 8

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

Accepted Answer

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 9

A global portfolio is an index of all the securities in the world, whereas a world portfolio represents those securities actually available to an investor.

Accepted Answer

A) True 
 B)False

Question 10

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

Accepted Answer

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

Question 11

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

Accepted Answer

A) True 
 B)False

Question 12

Relatively high costs of capital are more likely to occur in:

Accepted Answer

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

Question 13

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?

Accepted Answer

The answer of What are the components of the weighted...

Question 14

Use of the International CAPM (ICAPM)assures that the WACC will be lower than if a purely domestic market portfolio had been used in the estimation of the cost of equity.

Accepted Answer

A) True 
 B)False

Question 15

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.

Accepted Answer

A) True 
 B)False

Question 16

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

Accepted Answer

A) True 
 B)False

Question 17

The CAPM has now become very widely accepted in global business as the preferred method of calculating the cost of equity for a firm. As a result of this, there is now little debate over what numerical values should be used in its application.

Accepted Answer

A) True 
 B)False

Question 18

The after-tax cost of debt is found by:

Accepted Answer

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.

Question 19

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

Accepted Answer

A)  lack of transparency
B)  asymmetric availability of information
C)  insider trading
D)  All of the above are contributing factors.

Question 20

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

Accepted Answer

A) True 
 B)False

Exam 13: The Global Cost and Availability of Capital

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.

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

The capital asset pricing model (CAPM) is an approach:

Capital market imperfections leading to financial market segmentation include:

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

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.

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

A global portfolio is an index of all the securities in the world, whereas a world portfolio represents those securities actually available to an investor.

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

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

Relatively high costs of capital are more likely to occur in:

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?

Use of the International CAPM (ICAPM)assures that the WACC will be lower than if a purely domestic market portfolio had been used in the estimation of the cost of equity.

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.

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

The CAPM has now become very widely accepted in global business as the preferred method of calculating the cost of equity for a firm. As a result of this, there is now little debate over what numerical values should be used in its application.

The after-tax cost of debt is found by:

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

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