Question 1

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

Accepted Answer

The MNE should support higher debt ratios than a purely domestic firm because their cash flows are more stable due to international diversification. MNEs have operations and cash flows from multiple countries, which can offset the risks in a particular country or region. This reduces the overall risk to the MNE's cash flows, allowing them to take on more debt.

Question 2

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

Accepted Answer

Modigliani and Miller are widely regarded as the pioneers of the financial theory of optimal capital structure. They developed the theory in their seminal paper "The Cost of Capital, Corporation Finance and the Theory of Investment" published in 1958, which argued that in a world without taxes or bankruptcy costs, the value of a firm is independent of its financing decisions. This work laid the foundation for modern capital structure theory and has had a significant influence on subsequent research in the field.

Question 3

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

Accepted Answer

MNEs situated in countries with small illiquid and segmented markets are more likely to resemble small domestic U.S. companies as they also have limited access to external financing and must rely on internally generated funds and bank borrowing. Large U.S. MNEs have access to worldwide markets and sources of financing, making them a less comparable option. The statement about a strong niche market in the U.S. does not directly relate to the question.

Question 4

Most firms raise their initial capital in foreign markets.

Accepted Answer

While some firms may choose to raise their initial capital in foreign markets, it is not true that most firms do so. Many firms tend to raise their initial capital through domestic sources such as loans, personal savings, or investments from local investors.

Question 5

Investment banking services include which of the following?

Accepted Answer

Investment banking services include all of the above-mentioned services such as advising when a security should be cross-listed, preparation of stock prospectuses, and help to determine the price of the issue.

Question 6

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)?

Accepted Answer

To calculate the interest paid, we need to multiply the borrowed amount in euros by the interest rate. 
Interest paid = 1,000,000 euros x 5.50% = 55,000 euros
To convert euros to dollars at the end of the first year, we divide the amount in euros by the exchange rate: 
55,000 euros ÷ 1.35 $/€ = $74,250
Therefore, the correct answer is C, $74,250.

Question 7

Which of the following is the typical first step sourcing capital abroad?

Accepted Answer

The answer of Which of the following is the typical...

Question 8

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

Accepted Answer

All three factors can influence a firm's optimal capital structure. The industry in which a firm operates can affect its access to different types of financing and the typical leverage ratios for firms in that industry. The volatility of a firm's sales and operating income can affect its ability to make debt payments in the short term, making it more or less risky to take on debt. The collateral value of a firm's assets can affect the cost and availability of secured debt financing. Therefore, firms should consider all three factors when determining their optimal capital structure.

Question 9

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

Accepted Answer

C) is correct because it reflects a common strategy where companies first issue bonds in less prestigious or smaller markets to test the waters or build a reputation, then move on to issue bonds in their target or more prestigious markets, and finally issue a eurobond to access a wider international market.

Question 10

The ultimate step sourcing capital abroad would be to place a directed equity issue in a prestigious target market or a euroequity issue in global equity markets.

Accepted Answer

This statement is true. Placing a directed equity issue in a prestigious target market or a euroequity issue in global equity markets is considered the ultimate step in sourcing capital abroad as it provides access to a larger pool of investors and can significantly increase a company's exposure and credibility in the global market.

Question 11

Sourcing capital abroad usually follows a logic path. List in sequential order three corporate strategies in internationalizing the cost of capital.

Accepted Answer

The answer of Sourcing capital abroad usually follows a logic...

Question 12

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

Accepted Answer

An investment banker typically has the expertise and knowledge to offer advice on when and how to source capital globally. They can provide guidance on various funding options such as equity, debt, or a combination of both. Investment bankers can also help companies connect with potential investors and manage the process of issuing securities.

Question 13

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

Accepted Answer

All the options listed (increased agency costs, increased probability of financial distress due to fixed interest payments, and alternative tax shields) are factors that can offset the tax advantage of using debt as a source of financing.

Question 14

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 ________.

Accepted Answer

The cost of capital typically decreases as a firm increases its use of debt financing due to the tax benefits of debt. However, beyond a certain point, the cost of capital increases as the firm takes on more debt, due to the increased risk of default.

Question 15

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

Accepted Answer

Most financial theorists believe that there isn't one specific point for optimal capital structure but rather a range. The debt to total value ratio varies based on the industry, market conditions, and other factors. However, the commonly cited range is 30%-60%, making choice C the best answer.

Question 16

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?

Accepted Answer

The interest for the first year is calculated as $1,000,000 * 6.00% = $60,000.

Question 17

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

Accepted Answer

Cross listing and selling shares on a foreign stock exchange can have multiple benefits for a firm. By improving its liquidity, the firm may see an increase in demand for its shares which can lead to an increase in share price. Additionally, being listed on a foreign exchange can increase visibility for the firm, potentially attracting new investors and expanding its global reach. Therefore, all of the above options (improve liquidity, increase share price, increase visibility) are possible outcomes of cross listing on a foreign stock exchange.

Question 18

Which of the following were NOT identified by the authors as a variable that needs to be modified in the domestic theory of optimal financial structures to accommodate the case of the multinational enterprise?

Accepted Answer

The answer of Which of the following were NOT identified...

Question 19

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

Accepted Answer

The seniority of debt obligations to equity claims means that in the event of bankruptcy or liquidation, debt holders are paid off before equity holders. This increased level of security for debt holders makes debt less risky than equity, which in turn makes it less expensive.

Question 20

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

Accepted Answer

The tax deductibility of interest payments allows for a reduction in the taxable income of a company, which ultimately lowers the cost of debt. This is because the government essentially subsidizes a portion of the interest payments made by the borrower. In contrast, there is no tax deductibility of dividends or equity, and while depreciation is tax deductible, it does not directly impact the cost of debt.

Quiz 14: Funding the Multinational Firm

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

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

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

Most firms raise their initial capital in foreign markets.

Investment banking services include which of the following?

Which of the following is the typical first step sourcing capital abroad?

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

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

The ultimate step sourcing capital abroad would be to place a directed equity issue in a prestigious target market or a euroequity issue in global equity markets.

Sourcing capital abroad usually follows a logic path. List in sequential order three corporate strategies in internationalizing the cost of capital.

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

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

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 .

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

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?

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

Which of the following were NOT identified by the authors as a variable that needs to be modified in the domestic theory of optimal financial structures to accommodate the case of the multinational enterprise?

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

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