Deck 10: Long-Term Financing

Question 1

MNCs face some issues in arranging financing that domestic organizations do not face.One of these issues is that MNCs:

A)deal in a variety of foreign currencies and MNCs incur losses when those foreign currencies are converted into the home currency of the MNC.
B)are subject to competition in foreign countries that is different than the competition faced by domestic firms.
C)are vulnerable to political and economic situations in the countries where they operate,and these situations can adversely affect the cash flow of an MNC.
D)cannot borrow money domestically as easily as domestic organizations can borrow money domestically.

Answer 1

are vulnerable to political and economic situations in the countries where they operate,and these situations can adversely affect the cash flow of an MNC.

Question 2

A bond issued outside of the U.S.in the local currency is considered to be a:

A)foreign bond.
B)Eurobond.
C)domestic bond.
D)ninja bond.

Answer 2

foreign bond.

Question 3

A syndicated loan that is denominated in JPY and which involves entities in more than one country is popularly called a:

A)yen loan.
B)Yankee bond.
C)ninja loan.
D)foreign bond.

Answer 3

ninja loan.

Question 4

Why are Eurobonds rarely rated by well-known security rating firms?

A)Firms issuing Eurobonds typically have very high credit ratings which suggest that their bonds carry very low credit risks.
B)Eurobonds can be issued by any entity anywhere,so rating the credit risk of Eurobonds cannot be done reliably.
C)Securities rating firms generally do not operate in Europe.
D)Eurobonds are rated by the European financial markets and,therefore,rating by security rating firms is not necessary.

Question 5

A ________________ is a USD-denominated bond issued in the United States.

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

Question 6

Some of the factors that may cause MNCs to approach financing differently than domestic firms approach financing are:

A)currency rates,interest rates,and inflation rates.
B)their locations,number of employees,and credit rating.
C)their size,knowledge,and diversity.
D)exchange rates,political risk,and economic risk.

Question 7

Why are Eurobonds becoming more popular ways for MNCs to borrow money?

A)Eurobonds are popular in Europe and a large number of potential lenders live in Europe.
B)Eurobonds offer a large and more varied pool of investors than other bonds.
C)Eurobonds are denominated in EUR and EUR is the currency of most of Europe.
D)Eurobonds are closely regulated by the financial markets in Europe.

Question 8

A bond issued in a country in a currency other than the currency of the country where it is issued is considered to be a:

A)foreign bond.
B)Eurobond.
C)domestic bond.
D)ninja bond.

Question 9

One of the first decisions that an MNC has to make when considering financing is whether to pursue:

A)internal financing or external financing.
B)debt financing or internal financing.
C)public financing or private financing.
D)equity financing or internal financing.

Question 10

Why have U.S.firms preferred to finance their operations through public debt markets rather than through bank loans?

A)Bank loans are less flexible and more public than public debt markets.
B)Bank loans are generally limited in amount and cost more than public debt markets.
C)Bank loans are more difficult to obtain and cost more than public debt markets.
D)Bank loans are subject to many more regulations than public debt markets.

Question 11

Bank loans typically take the form of either:

A)debt or equity.
B)unsecured or secured loans.
C)installment or balloon loans.
D)term loans or lines-of-credit.

Question 12

One characteristic that distinguishes MNCs from domestic organizations and that makes MNCs better risks than domestic organizations is that:

A)MNCs are better organized than domestic organizations.
B)domestic organizations are not as high-profile as MNCs.
C)MNCs are more in touch with markets than domestic organizations.
D)MNCs have diversified portfolios of cash flow.

Question 13

The two kinds of financing that MNCs seek in international markets are:

A)short-term and long-term.
B)debt and equity.
C)short-term debt and long-term equity.
D)long-term debt and short-term equity.

Question 14

Traditionally,the primary source of financing for firms has been:

A)bank loans.
B)the sale of securities.
C)the issuance of bonds.
D)transactions in currency markets.

Question 15

A short-term loan to a firm that is to be repaid when the firm obtains long-term financing or raises funds through issuing equity is called a:

A)temporary loan.
B)bridge loan.
C)stop-gap loan.
D)turn-around loan.

Question 16

What are "keiretsus"?

A)Keiretsus are Japanese banks that specialize in financing Japanese firms.
B)Keiretsus are large Japanese firms that consume most of the bank financing that is available in Japan.
C)Keiretsus are large industry groups in Japan that are supported by specific banks that provide financing and monitoring services to entities within the group.
D)Keiretsus are large Japanese banks that lend primarily to foreign firms.

Question 17

MNCs face _________________ and _____________________ that can make their cash flows vulnerable that are not faced by domestic firms.

A)country risk and currency risk
B)political risk and economic risk
C)competition and criminal activities
D)declining asset value and rising inflation

Question 18

What is a revolver?

A)A revolver is a loan that allows a firm to draw money when it is needed,up to a specified amount,and then to repay the loan in part or in full and then draw additional money from the loan later.
B)A revolver is a loan that is continually renewed and never actually paid off by the borrower.
C)A revolver is a loan made by a government agency that requires continual investment by the borrower in the country where the loan is made.
D)A revolver is a loan fund that is made to an industry group that allows any member of the industry group to draw money when it is needed and then to repay the loan so that others in the industry group can borrow from the loan fund.

Question 19

MNCs tend to be relatively large organizations,and their size gives them two advantages in accessing financial markets.These advantages are that:

A)lenders seek them out and offer them loans,and potential competitors try to avoid competing directly with them.
B)they do not often need much money from the financial markets,and,when they do need money,they can borrow at below-market rates.
C)they can take advantage of economies of scale,and their large fixed asset basis reduces risk to lenders.
D)they can seek financing anywhere in the world,and they can insist on the best interest rates available.

Question 20

How does a syndicate affect the interest rate that an MNC can expect to pay for a loan?

A)Since syndicates pool resources to make loans,each participant in the syndicate assumes less risk related to the loan,and lower risk usually results in a lower interest rate on the loan.
B)Since syndicates are government-sponsored institutions,they can obtain funds at less cost than other institutions,so they can loan money to MNCs at a lower interest rate.
C)Since there is a significant cost involved in forming a syndicate,the interest rates charged by syndicates on the loans they make are higher to compensate for the increased costs.
D)Since syndicates loan money to MNCs,the interest rates that they charge are the same interest rates that the MNC could obtain from any other source of funds.

Question 21

By considering the cost of debt and the cost of equity of a firm and weighing each cost according to the proportion that each occupies in the firm's capital structure,the _______________________ can be determined.

A)weighted discount rate
B)average cost of debt and equity
C)weighted average cost of capital
D)cost of capital

Question 22

A firm's financing activities have two primary objectives:

A)access to capital markets and low cost of capital.
B)raising as much capital as possible at the lowest possible cost.
C)funding all of its projects and being as profitable as possible.
D)keeping borrowing to a minimum and keeping costs as low as possible.

Question 23

What is a seasoned offer?

A)A seasoned offer is an offer of a new issue of securities in an established firm.
B)A seasoned offer is an offer of a new issue of securities that has features and rights that are superior to existing stock in a firm.
C)A seasoned offer is the first offer of securities that is made to the public.
D)A seasoned offer is the offer of securities by a firm that have previously been offered by the firm and then repurchased by the firm.

Question 24

Eurobonds have coupons that pay __________________,while U.S.domestic bonds have coupons that pay _____________________________.

A)twice each year;once each year
B)at different times each year;at the same time every year
C)once each year;twice each year
D)at the same time every year;at different times each year

Question 25

At what point in the development of an entity is venture capital financing usually provided?

A)the start-up stage
B)the stage at which an established firm offers a new product line
C)the stage at which the original founders of the entity leave the entity
D)when the entity first encounters financial distress

Question 26

An attraction of internal equity is that _____________________ but a disadvantage is that _____________________________.

A)earnings are increased;dividends to stockholders are reduced
B)the cost of internal equity is very low;earnings are reduced
C)the cost of internal equity is very low;regulatory approval is necessary for the use of internal equity
D)the cost of internal equity is very low;dividends to stockholders are reduced

Question 27

How does a venture capital firm usually end its involvement with a firm in which it has invested?

A)The venture capital firm usually sells its interest in the firm back to the firm.
B)The venture capital firm usually arranges an initial public offering that results in the venture capital firm selling its ownership in the firm.
C)The venture capital firm usually simply donates its interest in the firm back to the firm.
D)The venture capital firm usually sells its interest in the firm to another venture capital firm.

Question 28

If a firm's projects are risky,its cost of capital will:

A)be lower.
B)not be affected.
C)be higher.
D)reflect the potential profit from those projects.

Question 29

A __________________ is a bond that stipulates that coupon payments will be made in one specified currency and that the principal repayment will be made in another specified currency.

A)split-payment bond
B)multiple-currency bond
C)flexible-payment bond
D)dual-currency bond

Question 30

The all-in cost of debt differs from the cost of debt in that:

A)the all-in cost of debt includes the cost of all of the firm's debt rather than the cost of any single debt.
B)the all-in cost of debt is the cost of debt plus debt issuance costs.
C)the cost of debt and the all-in cost of debt are equal.
D)the all-in cost of debt includes the cost of debt that the firm has already repaid.

Question 31

The primary attraction of the Eurobond market is that:

A)it is in Europe where there are more opportunities for financing operations.
B)more investors are interested in Eurobonds than in any other kind of financing vehicle.
C)it offers flexible financing opportunities and minimal regulation.
D)it offers flexible financing opportunities and low costs.

Question 32

Debt is often considered to be generally less expensive than equity because:

A)debt costs less to acquire than equity.
B)the transactions costs associated with debt are generally less than those associated with equity.
C)dividends are tax-deductible.
D)interest payments on debt are tax-deductible and reduce the payor's taxable income.

Question 33

The cost of equity can be inferred by using the capital asset pricing model which:

A)estimates that cost of equity as being approximately to cost of debt.
B)calculates the cost of equity by applying the discount rate to the amount of equity being raised.
C)estimates the cost of equity as approximately the average of the cost of equity over the last year.
D)calculates the cost of equity as the risk-free rate of return plus the risk premium.

Question 34

How does listing existing shares of an MNC on multiple markets assist the MNC in raising capital?

A)Listing existing stock on multiple markets does not assist the MNC in raising capital because existing funds have already been sold by the MNC.
B)Listing existing stock on multiple markets makes that stock available to more investors.
C)Listing existing stock on multiple markets means that the MNC's stock is more desirable.
D)Listing existing stock on multiple markets does not provide new financing for the MNC but does expand the potential buyers of later issues of new stock.

Question 35

Coupon frequency on floating rate notes can result in:

A)multiple interest rates being paid on coupons during a year if interest rates change.
B)stability of coupon payments despite changes in the interest rates.
C)the issuing firm being unable to sell the debt instruments because of uncertainty in coupon payments.
D)higher issuance cost of the underlying debt instruments.

Question 36

The cost of equity is more difficult to determine than the cost of debt because:

A)cash flows to equity-holders is not contractually set,so when that cash flow will take place is not certain.
B)the discount rate used to determine cost of equity is not set as it is in determining the cost of debt.
C)the transaction costs of issuing equity are not as easy to determine as the transaction costs of issuing debt.
D)the cost of equity is subject to more contingencies than the cost of debt.

Question 37

The cost of debt to a firm is equivalent to:

A)the yield from the investors' perspective.
B)the firm's cost of capital.
C)the firm's tax rate.
D)the yield of its long-term debt.

Question 38

What is a shelf registration?

A)A shelf registration is an arrangement whereby a firm agrees to a series of loans from a syndicate that will be made over a short period of time and then repaid over a longer period of time.
B)A shelf registration is a process by which a firm is allowed to issue any number of securities without specific approval so long as the total amount of securities does not exceed a prescribed amount.
C)A shelf registration allows a firm to issue securities in several countries at the same time.
D)A shelf registration allows a firm to obtain approval for a specified range of securities to be issued at a later date rather than having to register and have approved each security at the time it is issued.

Question 39

The difference between the amount of money that a firm has borrowed and the amount of money,in principle and interest payments,the firm has promised to pay to its lenders is:

A)equal to the firm's total cost of capital.
B)the firm's cost of debt.
C)always less than the firm's cost of capital.
D)always more than the firm's cost of capital.

Question 40

What is the primary drawback of external equity?

A)External equity is expensive because it obligates the firm to pay dividends to shareholders.
B)Issuing additional shares of stock reduces the earnings per share of the company and usually the value of its shares of stock.
C)External equity is a complex and risky way to raise capital and is seldom used.
D)Issuing additional shares of stock has to be approved by existing stockholders who often will not approve.

Question 41

How can local financing help MNCs reduce country risk?

A)By raising funds locally,MNCs receive the tactic agreement of the country where the funds are raised that no government actions will be taken that will be adverse to the firm.
B)If an MNC raises funds locally,it creates local stakeholders in the MNC,and countries may be reluctant to take actions that might damage or reduce the profitability of firms that have local stakeholders.
C)If an MNC raises funds locally,it gains the support of the local capital markets which,in turn,lobby the local government not to take actions that will adversely affect firms that participate in the local capital market.
D)When an MNC raises funds locally,it automatically receives special incentives from the local government that reduce country risk.

Question 42

MNCs can acquire financing for projects through either debt or equity.What is the difference between debt and equity?

Question 43

MNCs can borrow money by issuing bonds.How are bonds generally structured,and what obligations do bonds impose on MNCs?

Question 44

Standard financial theory advocates that MNCs separate their financing and investing decisions:

A)so MNCs generally do consider decisions on where and how to invest separately from their decisions on how to finance their investments.
B)but MNCs,in particular,often reject this advice and take chances with currency exposure by combining investing and financing decisions.
C)but currency risk can require that firms considering financing opportunities with consideration of investment opportunities.
D)so MNCs often finance their capital needs in one currency and make their investments in another currency.

Question 45

MNCs might raise equity funds through an IPO or through a seasoned offering.What is the difference between an IPO and a seasoned offering?

Question 46

What is cost of capital?

Question 47

In a plain vanilla swap the MNC:

A)swaps payments to be received in one currency for payments to be received in another currency.
B)trades interest payments to be made at a specified point in time for interest payments to be made at another point in time.
C)exchanges payments to be received from one entity for payments to be received by another entity.
D)exchanges fixed interest payments for interest payments based on a floating rate,expecting that the interest rate will increase.

Question 48

The agency costs that an MNC is exposed to can be reduced by raising equity capital in a foreign country where it operates because:

A)foreign equity can be used to provide incentives to foreign managers,thereby aligning the interests of the MNC and their foreign managers.
B)foreign countries will be reluctant to take action that will damage a firm that has raised equity capital in the country.
C)equity markets will oversee regulation of firms that have raised equity in countries where the equity markets operate.
D)equity instruments are much more appealing investments than debt instruments.

Question 49

Within reasonable parameters,if a firm increases its debt as a proportion of its capital structure:

A)its overall cost of capital increases because the amount of interest it has to pay increases.
B)WACC declines because of the tax advantage of debt.
C)WACC increases because the proportion of interest to dividends increases.
D)its costs increase because it is contractually required to pay interest,while dividends are paid in the firm's discretion.

Question 50

How does a line of credit differ from a term loan?