Deck 14: Financial Structure and International Debt

Question 1

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.

Answer 1

False

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 appreciates against the dollar from $1.40/euro at the time the loan was made to $1.45/euro 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) euro 1,529,750
C) $1,055,000
D) $1,477,000

Answer 2

$1,529,750

Question 3

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

Answer 3

False

Question 4

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 5

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

Question 6

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 7

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 8

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 9

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) euro 60,000

Question 10

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 11

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/euro at the time the loan was made to $1.35/euro 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) euro 74,250
C) $74,250
D) $77,000

Question 12

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

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

Question 13

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 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/euro at the time the loan was made to $1.35/euro 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) euro 1,424,250
D) $1,424,250

Question 15

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/euro at the time the loan was made to $1.45/euro 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 16

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 17

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

Question 18

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/euro at the time the loan was made to $1.45/euro 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 19

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 20

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 21

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 22

Of the following, which is NOT considered to be an advantage to MNEs of having a financial structure adhere to local debt norms?

A) A localized financial structure reduces criticism of foreign subsidiaries that have previously used a different capital structure.
B) A localized financial structure helps management evaluate return on equity investment relative to local competitors in the same industry.
C) MNE have a competitive advantage over the locals, thus by using the local capital structure, the MNE is even stronger.
D) All of the above are noted as advantages to having a localized capital structure.

Question 23

Obtaining local currency debt obligations is particularly attractive to an MNE if the subsidiary has

A) substantial accounts payable in the local currency.
B) substantial financial obligations in foreign currency units.
C) substantial accounts receivable in the local currency.
D) all of the above.

Question 24

Of the following, which is NOT considered to be a disadvantage to MNEs of having a financial structure adhere to local debt norms?

A) Why adhere to local standards if, as an MNE, the firm has important competitive advantages relating to capital structure?
B) Adhering to local standards may push the MNE consolidated financial ratios out of the optimal range.
C) A localized financial structure makes it difficult for management to compare operating results with those of local competitors.
D) All of the above are noted as disadvantages to having a localized capital structure.

Question 25

Of the following, which is NOT identified by the authors as a country-specific environmental variable key to determining debt ratios?

A) historical development
B) taxation
C) corporate governance
D) All of the above are key variables identified by the authors.

Question 26

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

Question 27

Of the following, which is NOT an external source of financing for the foreign subsidiary?

A) borrowing from sister subsidiaries
B) borrowing from commercial banks in the parent country
C) selling new stock to local shareholders
D) All of the above are external sources of financing for the foreign subsidiary.

Question 28

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

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

Question 29

The MNE in an effort to minimize the cost of external funds should choose ________ funds to minimize ________.

A) internal; debt financing
B) internal; taxes and political risk
C) external; debt financing
D) external; taxes and political risk

Question 30

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 31

Of the following, which is NOT an internal source of financing for the foreign subsidiary?

A) equity in the form of cash from the parent firm
B) equity in the form of real goods from the parent
C) debt in the form of loans from the same commercial bank used by the parent
D) All of the above are internal sources of financing for the foreign subsidiary.

Question 32

The modern Eurodollar market has been operating since ________.

A) post-WWI
B) the great depression of the 1930s
C) post-WWII
D) the mid 1970s when the Bretton Woods standard of fixed currency exchange rates was eliminated.

Question 33

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 34

General Motors has agreed to a syndicated eurocredit loan with the following terms: A revolving loan of $100,000,000 with an up-front fee of 2% of the principal and an interest rate of LIBOR plus 75 basis points. If the payments are made every six months and the current LIBOR rate is 4.00%, what is the effective annual cost of this loan?

A) 4.75%
B) 4.85%
C) 4.95%
D) 4.00%

Question 35

If an MNE needed to obtain, outside of its domestic market, medium-term credit with an established secondary market it would most likely pursue ________.

A) international bank loans
B) syndicated credits
C) some type of euronote
D) the international bond market

Question 36

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 37

Of the following, which is NOT identified by the authors as a country-specific environmental variable key to determining debt ratios?

A) agency costs
B) government regulations
C) the existence of a viable corporate bond market
D) All of the above are key variables identified by the authors.

Question 38

Internal sources of funds for a foreign subsidiary of a MNE may come from the parent company but not from a sister subsidiary. Funding from sister subsidiaries are considered external funding.

Question 39

If we accept the MNE objective of minimizing the consolidated cost of capital then

A) the subsidiary's cost of capital is relevant only to the extent that it affects this overall goal.
B) the objective of minimizing the cost of capital for each individual subsidiary may not be appropriate.
C) the value of the MNE as a whole should be maximized.
D) all of the above.

Question 40

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

Question 41

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 42

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 43

Which of the following is NOT a factor in the development and continuation of the Eurobond market?

A) the absence of regulatory interference
B) less stringent disclosure requirements
C) favorable tax status
D) All of the above are factors in the Eurobond market.

Question 44

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 45

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 46

There is much debate about whether an MNE should consider individual country norms, known as localization, when attempting to optimize the consolidated capital structure and minimize the firm's cost of capital. Provide arguments for the advantages and disadvantages of localization of capital structure for subsidiaries. Do you think MNEs should localize the capital structure of their subsidiaries? Why/why not?

Question 47

The United States has a smaller percentage of the total worldwide government and corporate bond market than Japan and the countries of "Euro land."

Question 48

Which of the following is NOT true regarding Euro-Medium-Term notes (EMTNs) when compared to typical long-term bonds?

A) The EMTN is a facility allowing continuous issuance over a short period of time.
B) EMTN coupon payments are on set calendar dates regardless of the date of issue.
C) EMTNs are relatively small, often with totals of $5 million or less.
D) All of the above are true.

Question 49

Seine River Insurance Company plans to issue $5,000,000 of Euro-commercial paper with a 90-day maturity discounted to yield 4.00% per annum. What will be the immediate proceeds to Seine River Insurance?

A) $4,807,692
B) euro 4,807,692
C) $4,950,495
D) $5,000,000

Question 50

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 51

Madison Finance Inc., has borrowed £75,000 at an interest rate of 5% to be repaid in one year. If the current spot rate is $1.90/£ and the pound appreciates in value against the U.S. dollar by 2% over the next year, what is the effective cost of this loan to Madison?

A) 7.10%
B) 7.00%
C) 5.00%
D) None of the above

Question 52

Which of the following is NOT a factor critical to the success of project financing?

A) separability of the project from its investors
B) long-lived and capital intensive singular projects
C) cash flow predictability from third part commitments
D) All of the above are critical factors for project financing.

Question 53

A ________ is a bond that is underwritten by an international syndicate of banks and sold exclusively in countries other than the one whose currency it is denominated.

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

Question 54

A MNE that borrows long-term in a foreign currency

A) may obtain a lower effective cost of debt.
B) might be better off borrowing dollars at a higher interest rate.
C) may gain or lose because of transaction exposure.
D) all of the above.

Question 55

Under Islam, which of the following practices is not permitted a Muslim?

A) making money from money
B) speculation and gambling
C) earning interest
D) All of the above are not permitted for a Muslim.

Question 56

A large U.S. MNE is looking to raise capital in Europe. The company wishes to avoid many of the regulatory constraints found in an issue of debt in the U.S. markets, wants to attract foreign investors, but also wants the issue to be denominated in dollars. The firm should issue a ________.

A) foreign bond
B) domestic bond
C) Eurobond
D) Eurodollar

Question 57

Project financing is the arrangement of financing for very large individual long-term capital projects.

Question 58

Which of the following statements about equity carve-outs is true?
I. An equity carve-out is the sale of a minority equity interest in a subsidiary of 20% or less.
II. A purpose of equity carve-outs is to raise equity capital without risking loss of control.
III. Popular myth would have one believe that carve-outs increase share price and the equity capital base without sacrificing control.

A) I only.
B) I and II.
C) II and III.
D) I, II, and III.