Deck 14: Raising Equity and Debt Globally

Question 1

One of the most important factors in making debt less expensive than equity is:

A)the tax deductibility of depreciation.
B)the tax deductibility of equity.
C)the tax deductibility of dividends.
D)the tax deductibility of interest.

Answer 1

the tax deductibility of interest.

Question 2

The choice of when and how to source capital 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.

Answer 2

an investment banker.

Question 3

Which financial economists are most closely associated with the financial theory of optimal capital structure?

A)Modigliani and Miller
B)Fama, Fisher, Jensen, and Roll
C)Black and Scholes
D)Markowitz and Sharpe

Answer 3

Modigliani and Miller

Question 4

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 in less prestigious markets, then an international bond issue in the target market, and ultimately a eurobond issue
D)cross listing the outstanding issues on other exchanges, then an international bond issue, then an international bond issue in the target market

Question 5

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

Question 6

In theory, the MNE should support ________ debt ratios than a purely domestic firm because their cash flows are ________.

A)lower; more stable due to international diversification
B)lower; less stable due to international diversification
C)higher; more stable due to international diversification
D)higher; less stable due to international diversification

Question 7

TropiKana Inc., a U.S firm, has just borrowed euro 1,000,000 to make improvements to an Italian fruit plantation and processing plant. If the interest rate is 5.50% per year and the Euro appreciates against the dollar from $1.40/€ at the time the loan was made to $1.45/€ at the end of the first year, how much interest will TropiKana pay at the end of the first year (rounded)?

A)$55,000
B)$79,750
C)$77,000
D)$37,931

Question 8

TropiKana Inc., a U.S firm, has just borrowed euro 1,000,000 to make improvements to an Italian fruit plantation and processing plant. If the interest rate is 5.50% per year and the Euro appreciates against the dollar from $1.40/€ at the time the loan was made to $1.45/€ at the end of the first year, how much interest and principle will TropiKana pay at the end of the first year if they repay the entire loan plus interest (rounded)?

A)$1,529,750
B)€1,529,750
C)$1,055,000
D)$1,477,000

Question 9

TropiKana Inc., a U.S firm, has just borrowed euro 1,000,000 to make improvements to an Italian fruit plantation and processing plant. If the interest rate is 5.50% per year and the Euro appreciates against the dollar from $1.40/€ at the time the loan was made to $1.45/€ at the end of the first year, what is the before tax cost of capital if the firm repays the entire loan plus interest (rounded)?

A)1.73%
B)5.50%
C)10.50%
D)9.27%

Question 10

TropiKana Inc., a U.S firm, has just borrowed $1,000,000 to make improvements to an Italian fruit plantation and processing plant. If the interest rate is 6.00% per year, how much interest will they pay in the first year?

A)$6,000
B)$60,000
C)$600,000
D)€60,000

Question 11

For most firms, the cost of capital decreases to a low point as the firm ________ debt financing. At some point beyond this optimal level, the cost of capital increases as the amount of debt ________.

A)decreases; increases
B)decreases; decreases
C)increases; increases
D)increases; decreases

Question 12

MNEs situated in countries with small illiquid and segmented markets are most like:

A)small domestic U.S. firms in that they must rely on internally generated funds and bank borrowing.
B)large U.S. MNEs in that they are all MNEs and have worldwide markets and sources of financing.
C)small domestic U.S. firms in that they have a strong niche market in the U.S.
D)None of the above is true.

Question 13

Which of the following is NOT a factor offsetting the tax advantage of debt as a source of financing?

A)increased agency costs
B)increased probability of financial distress (bankruptcy)due to fixed interest payments
C)alternative tax shields to those supplied by interest payments
D)All of the above offset the tax advantage of debt as a source of financing.

Question 14

TropiKana Inc., a U.S firm, has just borrowed euro 1,000,000 to make improvements to an Italian fruit plantation and processing plant. If the interest rate is 5.50% per year and the Euro depreciates against the dollar from $1.40/€ at the time the loan was made to $1.35/€ at the end of the first year, how much interest and principle will TropiKana pay at the end of the first year if they repay the entire loan plus interest (rounded)?

A)$1,477,000
B)$1,055,000
C)€1,424,250
D)$1,424,250

Question 15

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

Question 16

One of the most important factors in making debt less expensive than equity is:

A)the seniority of equity obligations to debt claims.
B)the tax deductibility of dividends.
C)the tax deductibility of equity.
D)the seniority of debt obligations to equity claims.

Question 17

TropiKana Inc., a U.S firm, has just borrowed euro 1,000,000 to make improvements to an Italian fruit plantation and processing plant. If the interest rate is 5.50% per year and the Euro depreciates against the dollar from $1.40/€ at the time the loan was made to $1.35/€ at the end of the first year, how much interest will TropiKana pay at the end of the first year (rounded)?

A)$55,000
B)€74,250
C)$74,250
D)$77,000

Question 18

Most firms raise their initial capital in foreign markets.

Question 19

Most financial theorists believe that the optimal capital structure is a ________ with a debt to total value ratio somewhere around ________.

A)point; 50%
B)point; 25%
C)range; 30%-60%
D)range; 10%-40%

Question 20

Not all firms have the same optimal capital structure. Factors that might influence a firm's capital structure include:

A)the industry in which it operates.
B)the volatility of its sales and operating income.
C)the collateral value of its assets.
D)all of the above

Question 21

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 22

Financial practice suggests that there is a range for an optimal capital structure for a firm within an industry rather than a specific optimal ratio of debt to equity.

Question 23

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 24

________ 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 25

When a firm borrows in a foreign currency, the effective cost is the foreign interest rate plus an adjustment for changes in the exchange rate.

Question 26

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 27

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 28

Portfolio diversification of domestic firms reduces risk because cash flows are not perfectly correlated. The same reasoning is often argued for MNEs diversifying into international markets.

Question 29

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 30

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 31

Financial theory has at last provided us with a single optimal capital structure for domestic firms.

Question 32

A significant advantage of borrowing foreign currency-denominated bonds is that the borrower need not worry about relative changes in the value of the home currency.

Question 33

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 34

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

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

Question 35

The stock exchange with the greatest value of shares traded is:

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

Question 36

In part because of access to global markets, MNEs are better able than their domestic counterparts to maintain their desired debt ratio even when raising new capital.

Question 37

The domestic theory of optimal capital structure does not need to be modified for MNEs.

Question 38

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 39

For firms to raise capital in international markets, it is more important to adhere to capital structure ratios similar to those found in the United States and United Kingdom than to those in the firm's home country.

Question 40

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

Question 41

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 are alternatives to source equity instruments.

Question 42

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 43

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 44

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

Question 45

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 46

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 47

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 48

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 49

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

A)VC operates mainly in lesser-developed countries while PEF do not.
B)VC typically invests 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 50

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

Question 51

A/An ________ 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 52

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

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

Question 53

Because of stringent SEC rules, American companies typically do not find foreign disclosure rules to be overly onerous.

Question 54

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 55

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

A)more stringent than
B)less stringent than
C)equally stringent to
D)none of the above

Question 56

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 57

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 58

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 59

The combined impact of a new equity issue undertaken simultaneously with a cross-listing has a more favorable impact on stock price than cross-listing alone.

Question 60

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 61

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 62

Eurocurrencies are NOT the same as the euro developed for the common European currency.

Question 63

A ________ is a bond underwritten by a syndicate from a single country, sold within in that country, denominated in that country's currency, but the issuer is from outside that country.

A)foreign bond
B)Eurobond
C)domestic bond
D)none of the above

Question 64

Eurobanks are:

A)banks where Eurocurrencies are deposited.
B)major world banks that conduct a Eurocurrency business in addition to normal banking activities.
C)financial intermediaries that simultaneously bid for time deposits in and make loans in a currency other than that of the currency of where it is located.
D)All of the above are descriptions of a Eurobank.

Question 65

The Euro-medium-term-note (EMTN)has filled a substantial niche market in global financing. What are the distinguishing characteristics of the EMTN and why is it such a popular form of financing for MNEs?

Question 66

Eurocredits are:

A)bank loans to MNEs and others denominated in a currency other than that of the country where the bank is located.
B)typically variable rate and tied to the LIBOR.
C)usually for maturities of six months or less.
D)All of the above are true.

Question 67

In general, which has the shorter maturity and is more appropriate for funding short-term inventory needs?

A)commercial paper
B)Euro-Medium-Term notes (EMTNs)
C)the international bond market
D)all of the above

Question 68

Of the following, which was NOT cited by the authors as a valuable function provided by the Eurocurrency market?

A)Eurocurrency deposits are an efficient and convenient money market device for holding excess corporate liquidity.
B)Eurocurrency deposits are a tool used by the Federal Reserve to regulate the money supply of countries that peg their currency against the U.S. dollar.
C)The Eurocurrency market is a major source of short-term bank loans to finance corporate working capital needs.
D)All of the above were cited by the authors.

Question 69

________ are domestic currencies of one country on deposit in a second country.

A)LIBORs
B)Eurocurrencies
C)Federal funds
D)Discount window deposits

Question 70

Foreign bonds sold in the United States are nicknamed "Yankee bonds," foreign bonds sold in Japan are called "Samurai bonds." What are foreign bonds sold in the United Kingdom nicknamed?

A)"Union Jacks"
B)"Royalty"
C)"Bulldogs"
D)"Churchill's"

Question 71

Moody's rates international bonds at the request of the issuer with the stipulation that Moody's will publish the ratings even if the ratings are unfavorable.

Question 72

The Eurocurrency market continues to thrive because it is a large international money market relatively free of governmental regulation and interference.