Question 1

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

Accepted Answer

The seniority of debt obligations to equity claims is the most important factor in making debt less expensive than equity. This means that in the event of bankruptcy, debt holders have a higher priority of being paid back compared to equity holders. This reduces the risk for lenders, making debt a less risky investment option and ultimately less expensive than equity.

Question 2

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 payment in dollars, we first need to convert the euro amount to dollars using the exchange rate:

Initial loan: €1,000,000 x $1.40/€ = $1,400,000
Value of loan at end of year: €1,000,000 x $1.35/€ = $1,350,000

The interest payment can then be calculated by multiplying the loan amount by the interest rate:

Interest payment: $1,350,000 x 0.055 = $74,250

Therefore, the correct answer is choice C.

Question 3

Most firms raise their initial capital in foreign markets.

Accepted Answer

Most firms typically raise their initial capital in their home country, rather than in foreign markets.

Question 4

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 authors did not identify financial distress as a variable that needs modification in the domestic theory of optimal financial structures for multinational enterprises.

Question 5

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

Accepted Answer

By cross listing on a foreign stock exchange, a firm can improve the liquidity of its existing shares by making them available to a larger pool of investors, which can potentially increase demand and increase the share price. Additionally, cross listing can increase the firm's visibility to investors in the foreign market, potentially attracting more investment and attention. Therefore, all of the options A, B, and C are correct.

Question 6

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

Accepted Answer

The choice of when and how to source capital globally involves complex financial decisions that require specialized knowledge and expertise. An investment banker can provide valuable advice and guidance on the most effective strategies for raising capital, including the identification of potential investors and the structuring of financial products. Investment bankers can also help manage the risk and complexity associated with global capital markets, ensuring that their clients make informed and strategic decisions.

Question 7

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

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. This is because it allows the company to access a wider pool of investors and raise significant amounts of funds.

Question 8

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

Accepted Answer

Debt is less costly than equity because interest payments made on debt are tax deductible, reducing the overall cost of borrowing. The tax deductibility of interest is the correct answer.

Question 9

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 most like small domestic U.S. firms in that they must rely on internally generated funds and bank borrowing. Large U.S. MNEs have worldwide markets and sources of financing, which is not necessarily the case for MNEs in countries with small markets. Therefore, option B is not correct. Option C implies that MNEs in these countries have a strong niche market in the U.S., which is not necessarily true. Option D is too general and does not provide a correct answer.

Question 10

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

Accepted Answer

MNEs are less vulnerable to country-specific risks due to their international diversification. This allows them to have more stable cash flows and therefore support higher debt ratios. Thus, option C is correct.

Question 11

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 12

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 13

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 is no one optimal capital structure, rather there is a range that is optimal for each individual company depending on its specific circumstances. This range typically falls between 30% and 60% debt to total value ratio. Therefore, option C is the best choice as it reflects this widely accepted view.

Question 14

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

Accepted Answer

All of the above factors can influence a firm's optimal capital structure. The industry in which a firm operates can affect its access to different types of capital and the level of risk it faces. The volatility of sales and operating income can impact a firm's ability to make debt payments and therefore the level of debt it can carry. The collateral value of assets can affect a lender's willingness to extend credit or the cost of borrowing. Therefore, a firm's optimal capital structure will depend on these and other factors unique to its specific situation.

Question 15

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 16

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 17

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 18

Investment banking services include which of the following?

Accepted Answer

Investment banking services involve advising companies on a variety of financial activities, including cross-listing securities, preparing a stock prospectus, and determining the price of an issue. Therefore, all of the given options are part of investment banking services.

Question 19

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

Accepted Answer

The financial theory of optimal capital structure is closely associated with the work of economists Franco Modigliani and Merton Miller, who developed the Modigliani-Miller theorem in 1958. This theorem states that in a perfect market, the value of a firm is independent of its capital structure, meaning that the market value of a levered firm is equal to the market value of an unlevered firm.

Question 20

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.

Quiz 14: Funding the Multinational Firm

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

Most firms raise their initial capital in foreign markets.

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?

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

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

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.

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

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

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

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?

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 .

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 first step sourcing capital abroad?

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

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

Investment banking services include which of the following?

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

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