Deck 14: Raising Equity and Debt Globally

Question 1

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?

A)Financial Distress
B)Availability of capital
C)Diversification of cash flows
D)Foreign exchange risk

Answer 1

Financial Distress

Question 2

Most firms raise their initial capital in foreign markets.

Answer 2

False

Question 3

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

Answer 3

increases;increases

Question 4

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 5

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 6

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.

Question 7

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

Question 8

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 9

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 10

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

A)an international bond issue placed on a more prestigious foreign market
B)an international bond issue in the eurobond market
C)an international bond issue placed on a less prestigious foreign market
D)issue equity in one of the less prestigious markets to attract the attention of international investors first

Question 11

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 12

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 13

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 14

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 15

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.

Question 16

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 17

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 18

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 19

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.

Question 20

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

Question 21

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 22

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 23

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

A)Euroequity issue
B)Strategic Partner/Alliance
C)shares sold to a specific market or exchange
D)seasoned offering

Question 24

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 25

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 US based MNEs.

Question 26

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

Question 27

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 28

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

A)25%.
B)35%.
C)45%.
D)55%.

Question 29

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 30

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

Question 31

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 32

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 33

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 34

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

Question 35

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:

A)gaining name recognition
B)reducing the compliance costs
C)gaining visibility
D)preparing the market for an issuance

Question 36

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 37

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 38

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 39

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 40

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 41

A euroequity issue is an initial public offering of euro denominated securities.

Question 42

Depositary Receipts intra-market trades account for more than 90% of all DR trading today.

Question 43

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 44

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 45

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 46

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 47

________ 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 48

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 49

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

Question 50

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

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

Question 51

List and discuss three public pathway strategies for a MNE for raising equity capital outside its home market.

Question 52

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 53

Once a firm has "gone public," it is open to a considerably higher level of public scrutiny.

Question 54

Which of the following is a characteristic of an euroequity issue?

A)an initial public offering of euro denominated securities
B)the issuers are located in Europe
C)the investors are located in Europe
D)is an offering on multiple exchanges in multiple countries at the same time

Question 55

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

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

Question 56

A distinction about the publicly traded firm's shares is that they raise capital with the daily rise and fall of their share prices.

Question 57

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 58

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 59

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 60

Which of the following high profile euroequity issue was NOT also a privatization?

A)British Telecommunications
B)Gucci
C)YPF Sociedad Anónima
D)Telefonos de Mexico

Question 61

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

Question 62

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 63

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 64

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

Question 65

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 66

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 67

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 68

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

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

Question 69

One of the benefits of investing in Global Registered Shares (GRS)is that GRS allow to invest in foreign companies without foreign exchange risk.

Question 70

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

Question 71

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 72

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 73

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 74

Private equity funds are best known for buying control of private owned firms,taking them publicly,improving management,and then reselling them after one to three years.

Question 75

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 76

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 77

List and describe three differences and advantages of Global Registered Shares (GRS)over American Depositary Receipts (ADRs).

Question 78

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 79

Private equity funds appear to have a longer time horizon than traditional venture capital funds.

Question 80

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