Deck 14: Funding the Multinational Firm

Question 1

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.

Answer 1

the seniority of debt obligations to equity claims.

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)?

A) $55,000
B) €74,250
C) $74,250
D) $77,000

Answer 2

$74,250

Question 3

Most firms raise their initial capital in foreign markets.

Answer 3

False

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?

A) financial distress
B) availability of capital
C) diversification of cash flows
D) foreign exchange risk

Question 5

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 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

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 8

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 9

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 10

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 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?

A) $6,000
B) $60,000
C) $600,000
D) €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 ________.

A) decreases; increases
B) decreases; decreases
C) increases; increases
D) increases; decreases

Question 13

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 14

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 15

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 16

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

Question 17

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 18

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 19

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 20

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 21

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 22

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 23

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.

Question 24

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 25

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 26

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

Question 27

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 28

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 29

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 30

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

Question 31

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 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, 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 33

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 34

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 35

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 36

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 37

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 38

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

Question 39

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 40

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 41

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

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

Question 42

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

Question 43

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 44

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 45

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 46

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

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

Question 47

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 48

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

Question 49

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 50

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 51

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

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

Question 52

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

Question 53

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 54

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 55

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 56

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

Question 57

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 58

________ 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 59

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 60

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

Question 61

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 62

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

Question 63

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 64

Private equity funds differ from traditional venture capital funds. List and discuss three differences between them.

Question 65

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 66

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

Question 67

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 68

By cross-listing shares on a foreign exchange, you can expect:

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 69

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 70

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 71

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 72

Which of the following was 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 73

The least liquid stock markets offer little liquidity for their own domestic firms, and are of little value to foreign firms.

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

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 76

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 77

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 78

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

Question 79

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 80

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

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