Deck 17: International Capital Structure and the Cost of Capital

Question 1

In the notation of the book,K = (1 - $\lambda$ )K_l + $\lambda$ (1 - $\tau$ )i Which of the following are correct?

A)The weighted average cost of capital for a levered firm is K
B)The tax rate is $\tau$
C)The after-tax cost of debt capital is i
D)All of the above

Answer 1

The weighted average cost of capital for a levered firm is K

Question 2

Solve for the weighted average cost of capital:

A)8.67%
B)8.00%
C)7.60%
D)7.33%
E)7.14%

Answer 2

B

Question 3

In the notation of the book,K = (1 - $\lambda$ )K_l + $\lambda$ (1 - $\lambda$ )i Which of these are correct?

A)The debt-to-equity ratio is $\lambda$
B)The tax rate is $\tau$
C)The after-tax cost of debt capital is i
D)All of the above

Answer 3

The tax rate is $\tau$

Question 4

Solve for the weighted average cost of capital:

A)8.67%
B)8.00%
C)7.60%
D)7.33%
E)7.14%

Question 5

Solve for the weighted average cost of capital:

A)7.00%
B)6.89%
C)6.73%
D)6.67%
E)6.57%

Question 6

Solve for the weighted average cost of capital:

A)7.00%
B)6.89%
C)6.73%
D)6.67%
E)6.57%

Question 7

In the notation of the book,K = (1 - $\lambda$ )K_l + $\lambda$ (1 - $\tau$ )i Which of the following are correct?

A)The debt-to-equity ratio is $\lambda$
B)The cost of equity capital for a levered firm is K
C)The pre-tax cost of debt capital is i
D)All of the above

Question 8

At the optimal capital structure,

A)K = (1 - $\lambda$ )K_l + $\lambda$ (1 - $\tau$ )i will be minimized.
B)The debt-equity ratio will be equal to the debt-to-value ratio.
C)K = (1 - $\lambda$ )K_l + $\lambda$ (1 - $\tau$ )i will be maximized.
D)None of the above

Question 9

Solve for the weighted average cost of capital:

A)7.00%
B)6.89%
C)6.73%
D)6.67%
E)6.57%

Question 10

In the notation of the book,K = (1 - $\lambda$ )K_l + $\lambda$ (1 - $\tau$ )i Which of the following are correct?

A)The debt-to-total market value ratio is $\lambda$
B)The tax rate is i
C)The after-tax cost of debt capital is i
D)All of the above

Question 11

Solve for the weighted average cost of capital:

A)8.67%
B)8.00%
C)7.60%
D)7.33%
E)7.14%

Question 12

In the notation of the book,K = (1 - $\lambda$ )K_l + $\lambda$ (1 - $\tau$ )i Which of the following are correct?

A)The debt-to-equity ratio is $\lambda$
B)The cost of equity capital for a levered firm is K_l
C)The after-tax cost of debt capital is i
D)All of the above

Question 13

Solve for the weighted average cost of capital:

A)7.00%
B)6.89%
C)6.73%
D)6.67%
E)6.57%

Question 14

Solve for the weighted average cost of capital:

A)8.67%
B)8.00%
C)7.60%
D)7.33%
E)7.14%

Question 15

The cost of capital is

A)the minimum rate of return an investment project must generate in order to pay its financing costs.
B)the minimum rate of return an investment project must generate in order to pay its financing costs plus a reasonable profit.
C)the maximum rate of return an investment project must generate in order to pay its financing costs.
D)the maximum rate of return an investment project must generate in order to pay its financing costs plus a reasonable profit.

Question 16

Solve for the weighted average cost of capital:

A)8.67%
B)8.00%
C)7.60%
D)7.33%
E)7.14%

Question 17

Solve for the weighted average cost of capital:

A)8.67%
B)8.00%
C)7.60%
D)7.33%
E)7.14%

Question 18

Solve for the weighted average cost of capital:

A)7.00%
B)6.89%
C)6.73%
D)6.67%
E)6.57%

Question 19

For a firm that has both debt and equity in its capital structure,its financing cost can be represented by the weighted average cost of capital that is computed by

A)weighing the pre-tax borrowing cost of the firm and the cost of equity capital, using the debt as the weight.
B)weighing the after-tax borrowing cost of the firm and the cost of equity capital, using the debt as the weight.
C)K = (1 - $\lambda$ )K_l + $\lambda$ (1 - $\lambda$ )i where:
D)b) and c)

Question 20

Solve for the weighted average cost of capital:

A)8.67%
B)8.00%
C)7.60%
D)7.33%
E)7.14%

Question 21

Solve for the weighted average cost of capital:

A)7.00%
B)6.89%
C)6.73%
D)6.67%
E)6.57%

Question 22

Find the debt-to-value ratio for a firm with a debt-to-equity ratio of 4.

A)3/4
B)7/9
C)4/5
D)9/11
E)5/6

Question 23

Find the debt-to-value ratio for a firm with a debt-to-equity ratio of 1.

A)⅓
B)½
C)3/5
D)⅔
E)5/7

Question 24

Find the debt-to-value ratio for a firm with a debt-to-equity ratio of 2½.

A)⅓
B)½
C)3/5
D)⅔
E)5/7

Question 25

Find the debt-to-value ratio for a firm with a debt-to-equity ratio of 2.

A)⅓
B)½
C)3/5
D)⅔
E)5/7

Question 26

Find the debt-to-value ratio for a firm with a debt-to-equity ratio of ½.

A)⅓
B)½
C)3/5
D)⅔
E)5/7

Question 27

Solve for the weighted average cost of capital:

A)7.00%
B)6.89%
C)6.73%
D)6.67%
E)6.57%

Question 28

Find the debt-to-equity ratio for a firm with a debt-to-total-value ratio of ½.

A)1
B)2
C)3
D)4
E)5

Question 29

Solve for the weighted average cost of capital:

A)7.00%
B)6.89%
C)6.73%
D)6.67%
E)6.57%

Question 30

Solve for the weighted average cost of capital:

A)8.67%
B)8.00%
C)7.60%
D)7.33%
E)7.14%

Question 31

Solve for the weighted average cost of capital:

A)7.00%
B)6.89%
C)6.73%
D)6.67%
E)6.57%

Question 32

Solve for the weighted average cost of capital:

A)7.00%
B)6.89%
C)6.73%
D)6.67%
E)6.57%

Question 33

Find the debt-to-value ratio for a firm with a debt-to-equity ratio of 3½.

A)3/4
B)7/9
C)4/5
D)9/11
E)5/6

Question 34

Find the debt-to-value ratio for a firm with a debt-to-equity ratio of 5.

A)3/4
B)7/9
C)4/5
D)9/11
E)5/6

Question 35

Find the debt-to-value ratio for a firm with a debt-to-equity ratio of 4 ½.

A)3/4
B)7/9
C)4/5
D)9/11
E)5/6

Question 36

Solve for the weighted average cost of capital:

A)8.67%
B)8.00%
C)7.60%
D)7.33%
E)7.14%

Question 37

Find the debt-to-value ratio for a firm with a debt-to-equity ratio of 3.

A)3/4
B)7/9
C)4/5
D)9/11
E)5/6

Question 38

Solve for the weighted average cost of capital:

A)8.67%
B)8.00%
C)7.60%
D)7.33%
E)7.14%

Question 39

Find the debt-to-value ratio for a firm with a debt-to-equity ratio of 1½.

A)⅓
B)½
C)3/5
D)⅔
E)5/7

Question 40

Find the debt-to-equity ratio for a firm with a debt-to-total-value ratio of ⅔.

A)1
B)2
C)3
D)4
E)5

Question 41

Find the weighted average cost of capital for a firm that has a debt-to-equity ratio of 2,a tax rate of 40%,a levered cost of equity of 12% and an after-tax cost of debt of 9%.

A)7.6%
B)7.968%
C)10%
D)none of the above

Question 42

The common stock of Kansas City Power and Light has a beta of 0.80.The Treasury bill rate is 4 percent and the market risk premium is 8 percent.KCP&L is in the 34% tax bracket.What is their cost of equity capital?

A)12.0%
B)10.4%
C)7.20%
D)6.4%
E)8.22%

Question 43

Find the debt-to-equity ratio for a firm with a debt-to-total-value ratio of ¾.

A)1
B)2
C)3
D)4
E)5

Question 44

A reduced cost of equity capital increases the firm's value

A)through revaluation of the firm's existing cash flows from existing projects.
B)through increased investment as more projects become positive NPVs.
C)both a) and b)
D)none of the above

Question 45

The market risk premium

A)can be defined by the difference between the expected market return and the risk-free rate.
B)is the reward for bearing nondiversifiable risk.
C)is the slope of the security market line.
D)can be expressed as .
E)all of the above are correct.

Question 46

The cost of equity capital is

A)the expected return on the firm's stock that investors require.
B)frequently estimated by using the Capital Asset Pricing Model (CAPM).
C)generally considered to be a linear function of the systematic risk inherent in the security.
D)all of the above

Question 47

Using the notation of the text,the CAPM states:

A)
B)
C)
D)None of the above

Question 48

Find the debt-to-equity ratio for a firm with a debt-to-total-value ratio of 5/6.

A)1
B)2
C)3
D)4
E)5

Question 49

Find the weighted average cost of capital for a firm that has a debt-to-equity ratio of 1½,a tax rate of 34%,a levered cost of equity of 12% and an after-tax cost of debt of 8%.

A)9.6%
B)7.968%
C)14%
D)none of the above

Question 50

Find the weighted average cost of capital for a firm that has a debt-to-equity ratio of 2,a tax rate of 40%,a levered cost of equity of 12% and a pre-tax cost of debt of 9%.

A)7.6%
B)7.968%
C)10%
D)none of the above

Question 51

Find the weighted average cost of capital for a firm that has a debt-to-equity ratio of 1½,a tax rate of 34%,a levered cost of equity of 12% and a pre-tax cost of debt of 10%.

A)9.6%
B)7.968%
C)8.76%
D)none of the above

Question 52

The firm's tax rate is 34%.The firm's pre-tax cost of debt is 8%; the firm's debt-to-equity ratio is 4; the risk-free rate is 3%; the beta of the firm's common stock is 1.5; the market risk premium is 9%.What is the firm's cost of equity capital?

A)33.33%
B)10.85%
C)13.12%
D)16.50%
E)None of the above

Question 53

A value-maximizing firms would

A)undertake an investment project as long as the IRR exceeds the NPV.
B)undertake an investment project as long as the IRR is less than the cost of capital.
C)undertake an investment project as long as the IRR exceeds the cost of capital.
D)none of the above

Question 54

Compute the debt-to-equity ratio for a firm that has a debt-to-value ratio of 60%.

A)1/3
B)2/5
C)3/2
D)2/3
E)None of the above

Question 55

Systematic risk refers to

A)the diversifiable (company specific) risk of an asset.
B)the nondiversifiable (market) risk of an asset.
C)economic and political risk.
D)the risk that can be hedged.

Question 56

Compute the debt-to-total-value ratio for a firm that has a debt-to-equity ratio of 2.

A)1/3
B)2/5
C)3/2
D)2/3
E)None of the above

Question 57

The firm's tax rate is 34%.The firm's pre-tax cost of debt is 8%; the firm's debt-to-equity ratio is 4; the risk-free rate is 3%; the beta of the firm's common stock is 1.5; the market risk premium is 9%.Calculate the weighted average cost of capital.

A)33.33%
B)8.09%
C)9.02%
D)16.5%
E)None of the above

Question 58

Corporations are becoming multinational not only in the scope of their business activities but also in their capital structure

A)by raising funds from domestic as well as government sources.
B)by raising funds from foreign as well as domestic sources.
C)this trend reflects not only a conscious effort on the part of firms to raise the cost of capital by international sourcing of funds but also the ongoing liberalization and deregulation of international financial markets that make them accessible for many firms.
D)both b) and c)

Question 59

Find the debt-to-equity ratio for a firm with a debt-to-total-value ratio of 4/5.

A)1
B)2
C)3
D)4
E)5

Question 60

Micro Spinoffs,Inc.,issued 20-year debt one year ago today at par value with a coupon rate of 9 percent,paid annually.Today,the debt is selling at $1,050.If the firm's tax rate is 34%,what is its after-tax cost of debt?

A)9%
B)8.46%
C)5.94%
D)5.58%
E)None of the above

Question 61

In the Capital Asset Pricing Model (CAPM),the term Beta, $\beta$ ,is

A)a measure of systematic risk inherent in a security.
B)calculated as the "covariance of future returns between a specific security and the market portfolio" divided by the "variance of returns of the market portfolio".
C)both a) and b)
D)none of the above

Question 62

Assume that XYZ Corporation is a leveraged company with the following information: Calculate the debt-to-total-market-value ratio that would result in XYZ having a weighted average cost of capital of 9.3%.

A)35%
B)40%
C)45%
D)50%

Question 63

The following is an outline of certain potential benefits as well as costs associated with the cross-border listings of stocks: (i)- the company can expand its potential investor base
(ii)- issues involving the disclosure and listing requirements
(iii)- creates a secondary market for the company's shares
(iv)- volatility spillover from the overseas markets
(v)- liquidity
(vi)- control of the company by foreigners
(vii)- enhances the visibility of the company's name and its products in foreign marketplaces
Which of the following represent all the potential benefits of the cross-border listings of stocks?

A)(i), (ii), and (iii)
B)(ii), (iv), and (vi)
C)i), (iii), (v), and (vii)
D)(iv), (v), (vi), and (vii)

Question 64

Suppose the domestic U.S.beta of IBM is 1.0,that is ,and that the expected return on the U.S.market portfolio is percent,and that the U.S.T-bill rate is 6 percent.If the world beta measure of IBM is then we can say

A)That if the U.S.markets are fully integrated with the rest of the world, IBM's cost of equity capital would be 20% lower than if U.S.markets were segmented.
B)That if the U.S.markets are fully integrated with the rest of the world, IBM's cost of equity capital would be 10% lower than if U.S.markets were segmented.
C)That if the U.S.markets are fully integrated with the rest of the world, IBM's cost of equity capital would be one-third lower than if U.S.markets were segmented.
D)None of the above

Question 65

For most countries and most firms,the domestic country beta

A)can be no lower than its world beta.
B)is normally much smaller than the world beta.
C)is normally much much higher than the world beta.
D)is exactly equal to the world beta.

Question 66

Assume that XYZ Corporation is a levered company with the following information: If XYZ's debt-to-total-market-value ratio is 40%,then its weighted average cost of capital,K,is:

A)8%
B)9%
C)10%
D)12%

Question 67

In the real world,does the cost of capital differ among countries?

A)Yes
B)No
C)None of the above

Question 68

A firm may cross-list its share to

A)establish a broader investor base for its stock.
B)establish name recognition in foreign capital markets, thus paving the way for the firm to source new equity and debt capital from investors in different markets.
C)expose the firm's name to a broader investor and consumer groups.
D)all of the above

Question 69

Suppose that the British stock market is integrated with the rest of the world and Stansfield Company has made its shares tradable internationally via cross-listing on the NYSE.Using the CAPM and a risk-free rate of 5%,estimate the equity cost of capital for Stansfield.

A)12%
B)10.60%
C)6.60%
D)None of the above

Question 70

Recent studies suggest that agency costs of managerial discretion are lower in Japan than in the United States.This suggests that

A)the cost of capital can be lower in Japan than in the United States, but only if international financial markets are not fully integrated.
B)the cost of capital can be lower in Japan than in the United States, even if international financial markets are fully integrated.
C)the cost of capital will be higher in Japan than in the United States, even if international financial markets are fully integrated.
D)none of the above

Question 71

Assume that the risk-free rate of return is 4%,and the expected return on the market portfolio is 10%.If the systematic risk inherent in the stock of ABC Corporation is 1.80,using the Capital Asset Pricing Model (CAPM)calculate the expected return of ABC.

A)14.0%
B)14.8%
C)16.0%
D)16.8%

Question 72

The following is an outline of certain potential benefits as well as costs associated with the cross-border listings of stocks: (i)- the company can expand its potential investor base
(ii)- issues involving the disclosure and listing requirements
(iii)- creates a secondary market for the company's shares
(iv)- volatility spillover from the overseas markets
(v)- liquidity
(vi)- control of the company by foreigners
(vii)- enhances the visibility of the company's name and its products in foreign marketplaces
Which of the following represent all the potential costs of the cross-border listings of stocks?

A)(i), (ii), and (iii)
B)(ii), (iv), and (vi)
C)(i), (iii), (v), and (vii)
D)(iv), (v), (vi), and (vii)

Question 73

In the graph,

A)K^l and K^g represent, respectively, the cost of capital under international and local capital structures; IRR represents the internal rate of return on investment projects; I^l and I^g represent, respectively, the optimal investment outlays under the alternative capital structures.
B)K^l and K^g represent, respectively, the cost of capital under local and international capital structures; IRR represents the internal rate of return on investment projects; I^l and I^g represent the optimal investment outlays under the alternative capital structures.
C)None of the above

Question 74

For a firm confronted with a fixed schedule of possible new investments,any policy that lowers the firm's cost of capital will increase the profitable capital expenditures the firm takes on and increase the wealth of the firm's shareholders.One such policy is

A)internationalizing the firm's capital budgeting opportunities.
B)internationalizing the firm's cost of capital.
C)investing in riskier projects financed with debt.
D)none of the above

Question 75

Suppose that the firm's cost of capital can be reduced from K^l under the local capital structure to K^g under an internationalized capital structure.The take-away lesson from the graph is that

A)The firm can then increase its profitable investment outlay from I^l to I^g, contributing to the firm's value.
B)A reduced cost of capital increases the firm's value not only through increased investments in new projects but also through revaluation of the cash flows from existing projects.
C)K^l and K^g represent, respectively, the cost of capital under local and international capital structures; IRR represents the internal rate of return on investment projects; I^l and I^g represent the optimal investment outlays under the alternative capital structures.
D)All of the above

Question 76

Suppose that the British stock market is segmented from the rest of the world.Using the CAPM and a risk-free rate of 5%,estimate the equity cost of capital for Stansfield.

A)14%
B)12%
C)9%
D)None of the above

Question 77

Compute the domestic country beta of Stansfield Bicycles as well as its world beta.

A)1.00 and 0.80 respectively
B)0.80 and 0.00 respectively
C)4.50 and 4.00 respectively
D)None of the above

Question 78

Assume that XYZ Corporation is a leveraged company with the following information: If XYZ's debt-to-total-market-value ratio is 40%,then its weighted average cost of capital,K,is:

A)8%
B)9%
C)10%
D)12%

Question 79

Studies suggest that international capital markets are not segmented anymore

A)and are therefore fully integrated.
B)but are not as yet fully integrated.
C)so cross-listing of shares will not lower a firm's cost of capital.
D)none of the above

Question 80

The formula for beta is:

A)
B)
C)
D)