Deck 13: Sourcing Equity Capital Globally

Question 1

Investment banking services include WHICH of the following?

A) advising when a security should be cross-listed
B) preparation of stock prospectuses
C) help to determine the price of the issue
D) all of the above

Answer 1

all of the above

Question 2

The stock exchange with the greatest value of shares traded is ________.

A) NYSE
B) Tokyo
C) Nasdaq
D) London

Answer 2

NYSE

Question 3

By cross listing and selling its shares on a foreign stock exchange a firm typically tries to accomplish which of the following?

A) improve the liquidity of its existing shares
B) increase its share price
C) increase the firm's visibility
D) all of the above

Answer 3

all of the above

Question 4

ADRs cannot be exchanged for the underlying shares of the foreign stock, therefore, arbitrage cannot keep the prices in line with the foreign price of the stock.

Question 5

ADRs that are created at the request of a foreign firm wanting its shares traded in the United States are ________.

A) facilitated
B) unfacilitated
C) sponsored
D) unsponsored

Question 6

Most firms raise their initial capital in foreign markets.

Question 7

Level II ADRs must meet

A) U.S. GAAP standards.
B) home country accounting standards.
C) both U.S. GAAP and home country standards.
D) none of the above.

Question 8

An unsponsored ADR may be initiated without the approval of the foreign firm with the underlying stock.

Question 9

The choice of when and how to source equity globally is usually aided early on by the advice of

A) an investment banker.
B) your stock broker.
C) a commercial banker.
D) an underwriter.

Question 10

Level ________ is the easiest standard to satisfy for issuing ADRs.

A) 144a
B) III
C) II
D) I

Question 11

Level I ADRs trade primarily

A) on the New York Stock Exchange.
B) on the American Stock Exchange.
C) over the counter or pink sheets.
D) Level I ADRs typically do not trade at all, but instead are privately issued and held until maturity.

Question 12

ADRs are considered an effective way for firms to improve the liquidity of their stock, especially if the home market is small and illiquid.

Question 13

Level III ADR commitment applies to

A) firms that want to list existing shares on the NYSE.
B) banks issuing foreign mutual funds.
C) ADR issues of under $25,000.
D) the sale of a new equity issued in the United States.

Question 14

Who pays the costs of creating a sponsored ADR?

A) the foreign firm whose stocks underlie the ADR
B) the U.S. bank creating the ADR
C) both the U.S. bank and the foreign firm
D) the SEC since they require the regulation

Question 15

In order, the largest stock exchanges in the world based on market capitalization of the securities traded there are ________.

A) London, NYSE, and Nasdaq
B) NYSE, Nasdaq, and London
C) Nasdaq, NYSE, and London
D) Tokyo, NYSE, and London

Question 16

Each ADR represents ________ of the shares of the underlying foreign stock.

A) a multiple
B) 100
C) 1
D) ADRs have nothing to do with foreign stocks.

Question 17

________ are negotiable certificates issued by a bank to represent the underlying shares of stock, which are held in trust at a foreign custodian bank.

A) Negotiable CDs
B) International mutual funds
C) Depositary receipts
D) Eurodeposits

Question 18

Which of the following is the typical order of sourcing capital abroad?

A) An international bond issue, then cross listing the outstanding issues on other exchanges, then an international bond issue in the target market.
B) An international bond issue in the target market then cross listing the outstanding issues on other exchanges, then an international bond issue.
C) An international bond issue, then an international bond issue in the target market, then cross listing the outstanding issues on other exchanges.
D) Cross listing the outstanding issues on other exchanges, then an international bond issue, then an international bond issue in the target market.

Question 19

Depositary receipts traded outside the United States are called ________ depositary receipts.

A) Euro
B) Global
C) American
D) None of the above

Question 20

Which of the following is NOT an advantage of ADRs to U.S. shareholders?

A) Transfer of ownership is done in the U.S. in accordance with U.S. laws.
B) In the event of the death of the shareholder, the estate does not go through a foreign court.
C) Settlement for trading is generally faster in the United States.
D) All of the above are advantages of ADRs.

Question 21

Which of the following were NOT identified by the authors as an alternative instrument to source equity in global markets?

A) sale of a directed public share issue to investors in a target market
B) private placements under SEC rule 144a
C) sale of shares to private equity funds
D) all of the above

Question 22

Strategic alliances are normally formed by firms that expect to gain synergies from which of the following?

A) economies of scale
B) economies of scope
C) complementary marketing
D) all of the above

Question 23

Transaction costs for trading equity securities as measured by the bid-ask spreads are lowest on which exchange?

A) NYSE
B) Nasdaq
C) London
D) Tokyo

Question 24

Another school of thought about the worldwide trend toward fuller and more standardized disclosure rules is that the cost of U.S. level equity capital disclosure

A) chases away potential listers of equity.
B) is an onerous costly burden.
C) leads to fewer foreign firms cross listing in U.S. equity markets.
D) all of the above.

Question 25

Empirical evidence has found that on average public firms that have been privatized by issuing public equity have

A) lowered capital investment levels.
B) decreased efficiency.
C) expanded their employment.
D) all of the above.

Question 26

According to the U.S. school of thought, the worldwide trend toward fuller and more standardized disclosure rules should ________ the cost of equity capital.

A) increase
B) decrease
C) have no impact on
D) none of the above

Question 27

In addition to gaining liquidity, which of the following could also be considered a legitimate reason for cross-listing equity?

A) enhance a firm's local image
B) become more familiar with the local financial community
C) get better local press coverage
D) all of the above

Question 28

SEC rule 144A permits institutional buyers to trade privately placed securities without the previous holding periods restrictions and without requiring SEC registration.

Question 29

Empirical evidence shows that new issues of equity by domestic firms in the U.S. market typically has a ________ stock price reaction and new equity issues in the U.S. markets by foreign firms with segmented domestic markets have a ________ stock price reaction.

A) negative; negative
B) positive; negative
C) negative; positive
D) positive; positive

Question 30

Empirical evidence has found that on average public firms that have been privatized by issuing public equity have

A) improved profitability.
B) higher debt levels.
C) lower real sales.
D) all of the above.

Question 31

The authors note empirical evidence that shows cross-listing foreign shares of stock on U.S. exchanges has a positive stock price effect. ________ for the listing of ADRs.

A) There is no stock price reaction
B) There is a negative stock price reaction
C) There is a positive stock price reaction
D) None of the above is true.

Question 32

Which one of the following characteristics does NOT contribute to overall market liquidity?

A) Significant market making activities.
B) Reduced transaction costs.
C) Effective crisis management.
D) All of the above contribute to efficient markets.

Question 33

The number of foreign firms traded on the London exchange is ________ than the number traded on the NYSE, and the costs of listing and disclosure in London are ________ those for the NYSE.

A) less than; less than
B) less than; greater than
C) greater than; less than
D) greater than; greater than

Question 34

A ________ is defined as one that is targeted at investors in a single country and underwritten in whole or part by investment institutions from that country.

A) SEC rule 144a placement
B) directed public share issue
C) Euroequity public issue
D) strategic alliance

Question 35

Private equity funds (PEF) differ from traditional venture capital (VC) funds in that

A) VC operate mainly in lesser-developed countries while PEF do not.
B) VC typically invest in family business whereas PEF do not.
C) VC is almost unavailable to emerging markets while PEF capital is available.
D) all of the above are true.

Question 36

The term "euro" as used in the euro equity market implies

A) the issuers are located in Europe.
B) the investors are located in Europe.
C) both A and B.
D) none of the above.

Question 37

The least liquid stock markets as identified by the authors offer little liquidity for their own domestic firms, and are of little value to foreign firms.

Question 38

The Tokyo exchange is the number one choice of firms looking to gain liquidity by cross-listing their equity securities.

Question 39

For the most part, U.S. SEC disclosure requirements are ________ stringent than other, non-U.S. equity market rules.

A) more
B) less
C) as equally
D) none of the above

Question 40

Your authors note several empirical studies that have found

A) no share price effect for foreign firms that cross-list on major U.S. exchanges.
B) a positive share price effect for foreign firms that cross-list on major U.S. exchanges.
C) a negative share price effect for foreign firms that cross-list on major U.S. exchanges.
D) none of the above.

Question 41

Economic studies have found that international cross-listing of securities across financial markets resulted in ________ abnormal returns that were ________ for firms resident in emerging markets with a low level of legal barriers to capital flows than for firms resident in developed countries.

A) positive; greater
B) positive; smaller
C) negative; greater
D) negative; smaller

Question 42

Wallet Drug Company has just recently raised money abroad for the first time in the history of the firm. Prior to the recent equity issue abroad, the firm had a D/V ratio of 40%, an effective tax rate of 30%, a before-tax cost of debt of 9%, and a domestic beta of 1.3. The expected return on the market portfolio was 13% and the risk-free rate was 5%. After the equity issue, Wallet Drug has a D/V ratio of 50%, their after-tax cost of debt has not changed, nor has the effective tax rate, the firm's international beta is 1.0, the expected return on the market portfolio is only 12%, and the risk-free rate is still 5%. What is the change in the firm's WACC after the international equity issue?

A) 2.61%
B) 1.74%
C) 0.63%
D) There is no change in the firm's WACC.

Question 43

The reason more foreign firms do not sell equity securities in the U.S. and list on the NYSE is because of

A) the threat of confiscation.
B) detailed U.S. disclosure rules.
C) the relative inefficiency of U.S. equity markets.
D) the foreign exchange risk of listing in U.S. dollars.

Question 44

Wallet Drug Company has just recently raised money abroad for the first time in the history of the firm. Prior to the recent equity issue abroad, the firm had a D/V ratio of 40%, an effective tax rate of 30%, a before-tax cost of debt of 9%, and a domestic beta of 1.3. The expected return on the market portfolio was 13% and the risk-free rate was 5%. After the equity issue, Wallet Drug has a D/V ratio of 50%, their after-tax cost of debt has not changed, nor has the effective tax rate, the firm's international beta is 1.0, the expected return on the market portfolio is only 12%, and the risk-free rate is still 5%. What is the firm's new cost of equity after the international issue?

A) 9.15%
B) 11.76%
C) 12.00 %
D) 15.40%

Question 45

Which of the following is NOT a barrier to cross listing shares?

A) Fixed income securities such as bonds are not traded in the subject market.
B) investor relations
C) disclosure requirements
D) All are barriers to cross listing shares.

Question 46

Given the following information, what is the cost of equity for the Teevox Corporation? Expected return in the domestic market is 12%, the risk-free rate of return is 4%, the firm's beta is 1.1, and the required return on debt for the firm is 7%.

A) 12.00%
B) 10.00%
C) 8.80%
D) 7.70%

Question 47

Japan has low median stock prices but more than 50% of the world's highest priced shares of stock.

Question 48

The expected return on equities is greater than the expected return on debt in part because

A) debt securities are serviced prior to equity securities.
B) interest payments to bondholders are generally made only if the firm makes a profit.
C) only a small portion of return to equity comes from increased capital appreciation.
D) none of the above.

Question 49

The sale of a security to a small set of qualified institutional buyers is called a

A) depositary receipt.
B) private placement.
C) fixed income security.
D) none of the above.

Question 50

Which of the following is NOT a motivation for the use of ADRs?

A) to reduce liquidity and increase the profitability of the firm
B) to reduce a firm's visibility and avoid political scrutiny
C) to increase share price by overcoming mis-pricing in a segmented and illiquid home market
D) All of the above are motivations to use ADRs.

Question 51

Which of the following are not contributing factors to the dominance of the London and New York Stock exchanges?

A) ready access to capital
B) many highly qualified workers
C) good infrastructure
D) all are contributing factors

Question 52

Wallet Drug Company has just recently raised money abroad for the first time in the history of the firm. Prior to the recent equity issue abroad, the firm had a D/V ratio of 40%, an effective tax rate of 30%, a before-tax cost of debt of 9%, and a domestic beta of 1.3. The expected return on the market portfolio was 13% and the risk-free rate was 5%. After the equity issue, Wallet Drug has a D/V ratio of 50%, their after-tax cost of debt has not changed, nor has the effective tax rate, the firm's international beta is 1.0, the expected return on the market portfolio is only 12%, and the risk-free rate is still 5%. What was the firm's WACC prior to the issue of new common stock abroad?

A) 9.15%
B) 11.76%
C) 13%
D) 15.4%

Question 53

An MNE may cross list its shares on a foreign stock exchange so that it can

A) create a secondary market so that shares may be used to compensate top local managers.
B) create a secondary market so that shares can be used to acquire local firms.
C) increase the firm's visibility to its customers and employees.
D) accomplish all of the above.

Question 54

An advantage to American Depositary Receipts (ADRs) over Global Registered Shares (GRSs) is

A) ADRs are able to be traded on equity exchanges around the world in a variety of currencies.
B) ADRs can theoretically be "traded with the sun" following markets as they open and close around the world.
C) ADRs can be traded electronically and lack any type of specialized forms like those used with GRSs.
D) None of the above, these are all advantages to trading GRSs.

Question 55

Which of the following are not contributing factors to the dominance of the London and New York Stock exchanges?

A) attractive tax environments
B) low levels of corruption
C) attractive regulatory environments
D) all are contributing factors

Question 56

Negotiable certificates issued by a U.S. bank in the United States to represent the underlying shares of stock, which are held in a trust at a custodian bank in a foreign country, are called ________.

A) SDRs
B) FDRs
C) ADRs
D) IOUs

Question 57

Which of the following are not contributing factors to the dominance of the London and New York Stock exchanges?

A) location
B) English as the primary language
C) low levels of corruption
D) all are contributing factors

Question 58

Which of the following is not a contributing factor to an individual equity's liquidity?

A) depth of capital availability
B) crisis management capabilities of the market itself
C) the degree to which the company is actually known and followed in the market
D) all of the above

Question 59

Cross border trading of some Canadian company securities in the U.S. preceded the development of Global Registered Shares (GRSs) by several decades.

Question 60

The largest equity market in the world as measured by market value or annual stock turnover is in ________.

A) Germany
B) the United States
C) Japan
D) Britain

Question 61

Contrary to many of the firms that trade financial securities and derivatives in their markets, the world's financial exchanges are splitting into smaller more specialized units rather than merging into larger exchanges.

Question 62

What are the two schools of thought regarding the worldwide trend toward increased financial disclosure by publicly traded firms. Explain which school of thought you hold to and why.

Question 63

The Sarbanes-Oxley Act in the U.S. has encouraged more and more international firms to list their securities in the US and pulled firms away from London.

Question 64

ADRs are a popular investment tool for many U.S. investors. In recent years several alternatives for investing in foreign equity securities have become available for U.S. investors, yet ADRs remain popular. Define what an ADR is and provide at least three examples of the advantages they may hold over alternative foreign investment vehicles for U.S. investors.

Question 65

As measured by valued traded, the largest equity market is still located in the United States, but the largest derivatives markets are now located in Europe.

Question 66

On the global financial scene, the term ________ is used to signify the end of of market ownership by a small, privileged group of "seat owners."

A) globalization
B) demutualization
C) institutionalization
D) diversification