Question 1

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)?

Accepted Answer

First, calculate the interest: 1,000,000 * 5.5% = 55,000 euros. Then, add the interest to the principal to get the total amount due in euros: 1,000,000 + 55,000 = 1,055,000 euros. Finally, convert this amount to dollars using the new exchange rate: 1,055,000 * $1.45/€ = $1,529,750.

Question 2

A multinational firm that proceeds to raise capital outside of its domestic market is ultimately in search of an issuance - the IPO or SPO. But often issuances must be preceded by listings, in which the shares are traded on an exchange and, therefore, in a specific country market. The listing serves the following purposes EXCEPT:

Accepted Answer

Listings do not necessarily reduce compliance costs, as companies must still comply with the regulations and requirements of the exchange on which they are listed. The other options are all valid purposes for a listing.

Question 3

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

Accepted Answer

Financial theory does not provide a single optimal capital structure for domestic firms. The optimal capital structure can vary depending on the specific characteristics and needs of each individual firm.

Question 4

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.

Accepted Answer

The optimal capital structure for a firm depends on a variety of factors such as industry, business model, market conditions, and growth opportunities. Therefore, there is a range rather than a specific ratio of debt to equity that would be optimal for a firm within an industry.

Question 5

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.

Accepted Answer

Borrowing foreign currency-denominated bonds exposes the borrower to currency risk, as changes in the value of the home currency relative to the foreign currency can affect the borrower's ability to repay the debt.

Question 6

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.

Accepted Answer

When a firm borrows in a foreign currency, it incurs the foreign interest rate plus the change in exchange rate, which increases the effective borrowing costs. This is due to the fact that when the exchange rate changes, the amount of domestic currency necessary to repay the borrowed amount also changes.

Question 7

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.

Accepted Answer

MNEs have access to a larger pool of investors and capital markets, which allows them to more easily maintain their desired debt ratio even when raising new capital. This advantage is not typically available to domestic firms.

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, what is the before tax cost of capital if the firm repays the entire loan plus interest (rounded)?

Accepted Answer

To calculate the before tax cost of capital, we need to calculate the total interest paid by the firm in Euros and then convert it to dollars at the end of the first year using the new exchange rate.

The total interest paid by the firm is:
Interest = Principal x Rate = €1,000,000 x 5.50% = €55,000

At the end of the first year, the firm needs to convert this interest payment from Euros to dollars using the new exchange rate of $1.45/€:
Interest in USD = €55,000 x $1.45/€ = $79,750

The total repayment by the firm in dollars is:
Repayment in USD = €1,000,000 x $1.45/€ = $1,450,000

The before tax cost of capital is the total cost of the loan in dollars divided by the initial amount borrowed in dollars, expressed as a percentage:
Before tax cost of capital = (Interest in USD + Principal in USD) / Principal in USD x 100%
Before tax cost of capital = ($79,750 + $1,000,000) / $1,000,000 x 100%
Before tax cost of capital = 9.27%

Therefore, the answer is D) 9.27%.

Question 9

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

Accepted Answer

Strategic alliances are formed with the aim of gaining synergies, which can come from multiple sources such as economies of scale and scope, as well as complementary marketing strategies. Therefore, option D, which includes all of the above, is the best answer.

Question 10

The public pathway to raise equity capital outside of its home market includes the following EXCEPT:

Accepted Answer

Strategic Partner/Alliance is not a public pathway to raise equity capital; it involves private agreements between companies for collaboration, not public equity offerings.

Question 11

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.

Accepted Answer

Portfolio diversification is a proven method to reduce risk as it spreads the investment across different assets and companies, and their cash flows are not perfectly correlated. The same reasoning applies to MNEs that diversify into international markets, as they reduce their overall risk by investing in different regions and currencies.

Question 12

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)?

Accepted Answer

Step 1: Convert the loan amount from euro to dollars at the time the loan was made:
$1,000,000/1.40 = €714,285.71

Step 2: Calculate the interest payable at the end of the first year:
Interest = €714,285.71 x 5.50% = €39,285.71

Step 3: Convert the interest from euro to dollars using the exchange rate at the end of the first year:
€39,285.71 x 1.35 = $53,142.86

Step 4: Calculate the total amount payable at the end of the first year:
Total amount payable = €714,285.71 + €39,285.71 = €753,571.42

Step 5: Convert the total amount payable from euro to dollars using the exchange rate at the end of the first year:
€753,571.42 x 1.35 = $1,017,142.86

Therefore, the total amount of principle and interest TropiKana will pay at the end of the first year is $1,017,142.86, which is closest to option D ($1,424,250 has not been obtained in the calculation and is not a possible answer).

Question 13

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

Accepted Answer

The domestic theory of optimal capital structure assumes that a firm operates in one country and faces domestic taxes and regulations. For MNEs, they operate in multiple countries and face different tax rates, regulations and market conditions which require a modified theory of optimal capital structure that considers the cross-border factors.

Question 14

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

Accepted Answer

The term "euro" in the context of the euro equity market does not necessarily imply that the issuers or investors are located in Europe. It refers to any currency that is deposited outside its country of origin. Thus, euro equities can be issued by companies from any country, and the investors can also be from anywhere in the world.

Question 15

In theory multinational firms are in a better position than domestic firms to support higher debt ratios.

Accepted Answer

This is because multinational firms have access to a wider range of financing options, including international debt markets, and may also operate in countries with lower borrowing costs. Additionally, they may have higher levels of diversification and economies of scale, which can help to mitigate the risks associated with higher debt levels.

Question 16

In theory multinational firms are in a better position than domestic firms to support higher debt ratios. Provide an argument as to why this could be true and discuss the empirical research findings about U.S.-based MNEs.

Accepted Answer

The answer of In theory multinational firms are in a...

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 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)?

Accepted Answer

The answer of TropiKana Inc., a U.S firm, has just...

Question 18

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.

Accepted Answer

The definition given in the question matches that of a directed public share issue, which is targeted at investors in a specific country and underwritten by investment institutions from that country. SEC rule 144a placement refers to a specific type of private placement in the US, Euroequity public issue refers to a public offering in Europe, and strategic alliance refers to a partnership between two or more companies.

Question 19

The initial issuance of shares by a company in an IPO typically represents no more than:

Accepted Answer

The initial issuance of shares by a company in an IPO typically represents no more than 25% of the total outstanding shares. This is to maintain the control of the company with the existing shareholders and to avoid dilution of ownership. However, there may be exceptions where companies may offer a higher percentage of shares during the IPO.

Question 20

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.

Accepted Answer

Capital structure ratios that are similar to those found in the United States and United Kingdom are seen as more attractive to international investors, as these ratios are more familiar and widely used in global financial markets. Adhering to these ratios can make it easier for firms to attract investment and raise capital in international markets.

Quiz 14: Funding the Multinational Firm