Question 1

​According to the text, the cost of debt in each country:

Accepted Answer

The text states that the cost of debt in each country changes over time, and these changes are positively correlated among countries.

Question 2

The U.S. risk-free rate is currently 3 percent. The expected U.S. market return is 10 percent. Solso, Inc. is considering a project that has a beta of 1.2. What is the cost of dollar-denominated equity?

Accepted Answer

The cost of dollar-denominated equity is given by the capital asset pricing model (CAPM) as follows:
Cost of Equity = Risk-Free Rate + Beta*(Expected Market Return - Risk-Free Rate)
Plug in the given values:
Cost of Equity = 3% + 1.2*(10% - 3%)
Cost of Equity = 3% + 1.2*7%
Cost of Equity = 11.4%
Therefore, the correct choice is B, 11.4 percent.

Question 3

Based on the factors that influence a country's cost of capital, the cost of capital in less developed countries is likely to be ____ than in the United States and ____ than in Japan.​

Accepted Answer

The cost of capital in less developed countries is typically higher than in developed countries like the United States and Japan due to factors such as higher risk (political, economic, and currency risks), less efficient financial markets, and lower levels of investor protection.

Question 4

If the parent ____ the debt of the subsidiary, the subsidiary's borrowing capacity might be ____.

Accepted Answer

When a parent company backs the debt of its subsidiary, it provides additional assurance to lenders, potentially increasing the subsidiary's borrowing capacity. Conversely, if the parent does not back the subsidiary's debt, lenders may perceive higher risk, which could reduce the subsidiary's borrowing capacity. Thus, both scenarios described in E are correct.

Question 5

Which of the following is not a reason provided in the text for why the cost of debt can vary across countries?

Accepted Answer

The text does not mention a high price/earnings multiple as a reason for why the cost of debt can vary across countries. The other options (A, C, D) are all mentioned as reasons for variation in the cost of debt.

Question 6

Assume that the risk-free interest rate in the United States is the same as that in Country M. Assume that the government of Country M is more likely to rescue local firms that experience financial problems. Other things being equal, Country M's firms are likely to use a ____ degree of financial leverage than U.S. firms. If a firm based in Country M has the same degree of financial leverage and the same operating characteristics as a U.S. firm, its cost of capital will likely be ____ than that of the U.S. firm.​

Accepted Answer

The government's likelihood to rescue firms in Country M reduces the perceived risk of investing in those firms, encouraging them to use a higher degree of financial leverage due to the safety net. This safety net also likely reduces their cost of capital compared to U.S. firms, as investors demand less risk premium.

Question 7

Which of the following factors is generally not expected to have a favorable impact on an MNC's cost of capital according to the text?

Accepted Answer

High exposure to exchange rate fluctuations is generally not expected to have a favorable impact on an MNC's cost of capital, as it increases risks and uncertainty in the international financial market. Options A and B are expected to have a favorable impact on an MNC's cost of capital.

Question 8

One argument for why subsidiaries should be wholly owned by the MNC parent is that parent ownership avoids a potential conflict of interest between the:

Accepted Answer

If the subsidiary is not wholly owned by the MNC parent, there may be a conflict of interest between the parent and the managers at the subsidiary who are minority shareholders. The managers may prioritize their own interests over the interests of the parent company, leading to suboptimal decision making and potential negative impact on the overall MNC. By owning the subsidiary entirely, the parent company can avoid this conflict and ensure alignment of interests between the subsidiary and the parent.

Question 9

According to your text, which of the following is not a factor that increases an MNC's cost of capital?

Accepted Answer

An increase in the size of the MNC does not necessarily increase the cost of capital. In fact, larger MNCs may benefit from economies of scale and scope, which could lead to lower costs of capital. On the other hand, higher exposure to exchange rate risk, higher exposure to country risk, and an increase in the risk-free interest rate can all increase an MNC's cost of capital.

Question 10

According to the text, the cost of capital for an international project will:

Accepted Answer

The cost of capital for an international project can vary and is not always greater, less, or the same as the firm's cost of capital. It depends on various factors such as the project's location, associated risks, and market conditions.

Question 11

An argument for an MNC to have a debt-intensive capital structure is that:

Accepted Answer

A debt-intensive capital structure can reduce an MNC's exposure to exchange rate risk on earnings remitted by subsidiaries to the parent. This is because debt payments are fixed and do not fluctuate with exchange rate movements, whereas equity payments do. Therefore, the MNC can use debt financing to hedge against exchange rate risk, which can ultimately benefit shareholders.

Question 12

Which of the following is not an external source of debt for an MNC?

Accepted Answer

Borrowing in the federal funds market is an interbank market in which banks and other financial institutions lend funds to each other overnight, and is not typically considered an external source of debt for an MNC. Choices A, B, and C are all external sources of debt for an MNC as they involve borrowing from outside parties or institutions.

Question 13

In general, MNCs probably prefer to use ____ foreign debt when their foreign subsidiaries are subject to ____ local interest rates.

Accepted Answer

MNCs are likely to prefer using more foreign debt when their foreign subsidiaries are subject to low local interest rates because it reduces the cost of borrowing.

Question 14

In general, an MNC that is ____ exposed to exchange rate fluctuations will usually have a ____ distribution of possible cash flows in future periods.

Accepted Answer

An MNC that is more exposed to exchange rate fluctuations will usually have a wider distribution of possible cash flows in future periods due to the uncertainty and variability introduced by exchange rate movements.

Question 15

One argument for why subsidiaries should be allowed to issue their own stock is that:​

Accepted Answer

All other choices are incorrect or incomplete. Allowing subsidiaries to issue their own stock can create a sense of ownership and accountability among local investors, which in turn may offer protection against adverse actions by officials of the local government.

Question 16

An MNC's "global" target capital structure is:

Accepted Answer

A multinational corporation's global target capital structure may be different from its local capital structure at a subsidiary. This is because different countries may have different tax laws, financing costs, and other factors that affect the optimal capital structure. Therefore, the global target capital structure may involve a mix of debt and equity that is different from the local capital structure. Option A and B are incorrect as the MNC's capital structure may vary based on several factors.

Question 17

Zoro Corp. has a beta of 2.0. The risk-free rate of interest is 5 percent, and the return on the stock market overall is expected to be 13 percent. What is the required rate of return on Zoro stock?

Accepted Answer

The required rate of return on Zoro stock can be calculated using the Capital Asset Pricing Model (CAPM) formula: Required Return = Risk-Free Rate + Beta * (Market Return - Risk-Free Rate). Plugging in the values: Required Return = 5% + 2.0 * (13% - 5%) = 5% + 2.0 * 8% = 5% + 16% = 21%.

Question 18

The term "local capital structure" is used in the text to represent the:​

Accepted Answer

The term "local capital structure" is specifically defined as the capital structure of a subsidiary of a particular MNC. It is not referring to the capital structure of local firms or the MNC as a whole.

Question 19

Which of the following is not a source of equity for an MNC?

Accepted Answer

All of these options (retained earnings, global equity offering, and domestic equity offering) are sources of equity for an MNC.

Question 20

Werner Corporation has a target capital structure that consists of 40 percent debt and 60 percent equity. Werner can borrow at an interest rate of 10 percent. Also, Werner has determined its cost of equity to be 14 percent. Werner's tax rate is 20 percent. What is Werner's weighted average cost of capital?

Accepted Answer

The WACC is calculated as: WACC = (E/V * Re) + (D/V * Rd * (1-Tc)), where E is equity, V is total value (equity + debt), Re is cost of equity, D is debt, Rd is cost of debt, and Tc is tax rate. Substituting the values: WACC = (0.6 * 14%) + (0.4 * 10% * (1-0.2)) = 8.4% + 3.2% = 11.6%.

Quiz 17: Multinational Capital Structure and Cost of Capital

According to the text, the cost of debt in each country:

The U.S. risk-free rate is currently 3 percent. The expected U.S. market return is 10 percent. Solso, Inc. is considering a project that has a beta of 1.2. What is the cost of dollar-denominated equity?

Based on the factors that influence a country's cost of capital, the cost of capital in less developed countries is likely to be than in the United States and than in Japan.

If the parent the debt of the subsidiary, the subsidiary's borrowing capacity might be .

Which of the following is not a reason provided in the text for why the cost of debt can vary across countries?

Which of the following factors is generally not expected to have a favorable impact on an MNC's cost of capital according to the text?

One argument for why subsidiaries should be wholly owned by the MNC parent is that parent ownership avoids a potential conflict of interest between the:

According to your text, which of the following is not a factor that increases an MNC's cost of capital?

According to the text, the cost of capital for an international project will:

An argument for an MNC to have a debt-intensive capital structure is that:

Which of the following is not an external source of debt for an MNC?

In general, MNCs probably prefer to use foreign debt when their foreign subsidiaries are subject to local interest rates.

In general, an MNC that is exposed to exchange rate fluctuations will usually have a distribution of possible cash flows in future periods.

One argument for why subsidiaries should be allowed to issue their own stock is that:

An MNC's "global" target capital structure is:

Zoro Corp. has a beta of 2.0. The risk-free rate of interest is 5 percent, and the return on the stock market overall is expected to be 13 percent. What is the required rate of return on Zoro stock?

The term "local capital structure" is used in the text to represent the:

Which of the following is not a source of equity for an MNC?

Quiz 17: Multinational Capital Structure and Cost of Capital

​According to the text, the cost of debt in each country:

The U.S. risk-free rate is currently 3 percent. The expected U.S. market return is 10 percent. Solso, Inc. is considering a project that has a beta of 1.2. What is the cost of dollar-denominated equity?

Based on the factors that influence a country's cost of capital, the cost of capital in less developed countries is likely to be ____ than in the United States and ____ than in Japan.​

If the parent ____ the debt of the subsidiary, the subsidiary's borrowing capacity might be ____.

Which of the following is not a reason provided in the text for why the cost of debt can vary across countries?

Which of the following factors is generally not expected to have a favorable impact on an MNC's cost of capital according to the text?

One argument for why subsidiaries should be wholly owned by the MNC parent is that parent ownership avoids a potential conflict of interest between the:

According to your text, which of the following is not a factor that increases an MNC's cost of capital?

According to the text, the cost of capital for an international project will:

An argument for an MNC to have a debt-intensive capital structure is that:

Which of the following is not an external source of debt for an MNC?

In general, MNCs probably prefer to use ____ foreign debt when their foreign subsidiaries are subject to ____ local interest rates.

In general, an MNC that is ____ exposed to exchange rate fluctuations will usually have a ____ distribution of possible cash flows in future periods.

One argument for why subsidiaries should be allowed to issue their own stock is that:​

An MNC's "global" target capital structure is:

Zoro Corp. has a beta of 2.0. The risk-free rate of interest is 5 percent, and the return on the stock market overall is expected to be 13 percent. What is the required rate of return on Zoro stock?

The term "local capital structure" is used in the text to represent the:​

Which of the following is not a source of equity for an MNC?

According to the text, the cost of debt in each country:

Based on the factors that influence a country's cost of capital, the cost of capital in less developed countries is likely to be than in the United States and than in Japan.

If the parent the debt of the subsidiary, the subsidiary's borrowing capacity might be .

In general, MNCs probably prefer to use foreign debt when their foreign subsidiaries are subject to local interest rates.

In general, an MNC that is exposed to exchange rate fluctuations will usually have a distribution of possible cash flows in future periods.

One argument for why subsidiaries should be allowed to issue their own stock is that:

The term "local capital structure" is used in the text to represent the: