Question 1

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 given values: Required Return = 5% + 2.0 * (13% - 5%) = 5% + 2.0 * 8% = 5% + 16% = 21%.

Question 2

Capital asset pricing theory would most likely suggest that the cost of capital is generally ____ for ____.

Accepted Answer

Capital asset pricing theory suggests that the cost of capital is generally lower for Multinational Corporations (MNCs) because they have more opportunities to diversify their investments and risks across different countries, thereby reducing their overall risk.

Question 3

A firm's cost of ____ reflects an opportunity cost: what the existing shareholders could have earned if they had received the earnings as dividends and invested the funds themselves.

Accepted Answer

The description matches the concept of retained earnings, which represent the portion of a company's earnings that are kept instead of being distributed as dividends. The cost of retained earnings reflects what shareholders could have earned if they had received the dividends and invested the funds themselves.

Question 4

Normally, each subsidiary of an MNC will issue its own stock where it does business.

Accepted Answer

Each subsidiary of an MNC can issue its own stock, but it is not a requirement. The MNC may also issue stock at the parent level, representing ownership in all of its subsidiaries.

Question 5

The ____ an MNC's cost of capital, the ____ will be the net present value for a proposed project with a given set of expected cash flows.

Accepted Answer

A lower cost of capital means that the MNC can secure funding at a lower rate, which in turn means that the net present value of a proposed project will be higher as the cost of borrowing is lower. Conversely, a higher cost of capital will result in a lower net present value for the proposed project.

Question 6

The ____ an MNC, the ____ its cost of capital is likely to be.

Accepted Answer

Larger MNCs often have more diversified operations and access to more capital markets, which can lower their cost of capital due to reduced risk and increased borrowing capacity.

Question 7

When assuming that investors in the United States are most concerned with their exposure to the U.S. stock market, it is acceptable to use the U.S. market when measuring a U.S.-based MNC's project's beta.

Accepted Answer

Since investors in the United States are most concerned with their exposure to the U.S. stock market, it is acceptable to use the U.S. market when measuring a U.S.-based MNC's project's beta.

Question 8

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

Accepted Answer

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

Question 9

Which of the following is not a characteristic that favorably affects an MNC's cost of capital, compared to the cost of capital for a domestic firm?​

Accepted Answer

The MNC's exposure to exchange rate risk does not favorably affect its cost of capital. In fact, exposure to exchange rate risk can increase the cost of capital for an MNC due to the additional risk and uncertainty involved. The other options (size, access to international capital markets, and international diversification) can all positively affect an MNC's cost of capital compared to a domestic firm.

Question 10

According to the CAPM, the required rate of return on a stock is a positive function of all of the following, except:

Accepted Answer

According to the CAPM, the required rate of return on a stock is influenced by the risk-free rate of interest, the market rate of return, and the stock's beta. However, the company's earnings are not a factor in determining the required rate of return on a stock.

Question 11

To the extent that individual economies are ____ each other, net cash flows from a portfolio of subsidiaries should exhibit ____ variability, which may reduce the probability of bankruptcy.

Accepted Answer

When individual economies are independent of each other, net cash flows from a portfolio of subsidiaries should exhibit less variability. This is because if one economy experiences a downturn, it does not necessarily directly affect the other economies, leading to more stable cash flows and reducing the probability of bankruptcy.

Question 12

Assume that an MNC has very stable cash flows and uses very little debt. Its cost of debt should be:

Accepted Answer

Since the MNC uses very little debt, it is likely perceived as less risky by lenders. This means that its cost of debt should be lower than its cost of equity, which compensates investors for taking on higher risk.

Question 13

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

Accepted Answer

MNCs may prefer to use more foreign debt when their foreign subsidiaries are subject to potentially weak local currencies because the debt becomes cheaper to service in their home currency terms. Conversely, they might prefer to use less foreign debt when facing potentially strong local currencies to avoid increased costs in home currency terms.

Question 14

The lower a project's beta, the ____ is the project's ____ risk.

Accepted Answer

Beta measures the systematic risk of a project, which is the risk associated with overall market movement. Therefore, a lower beta would indicate lower systematic risk. Unsystematic risk, on the other hand, cannot be measured by beta as it is specific to the individual project and can be diversified.

Question 15

Capital asset pricing theory suggests that ____ risk of projects can be ignored and that ____ risk is relevant.

Accepted Answer

Capital asset pricing theory posits that unsystematic risk can be diversified away and therefore can be ignored, while systematic risk affects all investments and is relevant for pricing and investment decisions.

Question 16

Country differences, such as differences in the risk-free interest rate and differences in risk premiums across countries, can cause the cost of capital to vary across countries.

Accepted Answer

Country differences can affect the cost of capital as companies in different countries may face different risk and borrowing costs. This can result in varying risk premiums and differences in the risk-free interest rate, leading to variations in the cost of capital across countries.

Question 17

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 changes in exchange rates.

Question 18

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 provide a reason for why a high price-earnings multiple would lead to variation in the cost of debt across countries. The other options (A, C, and D) are all listed as potential factors that can impact the cost of debt in different countries.

Question 19

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 its cost of capital. A larger size may lead to more diversification and a lower cost of capital. The other options (A, B, and C) all represent factors that could increase the cost of capital for an MNC.

Question 20

In general, an MNC's size, its access to international capital markets, and its international diversification increase the MNC's cost of capital.

Accepted Answer

MNCs' access to international capital markets and their international diversification can actually decrease their cost of capital. However, their size may increase their cost of capital due to higher agency costs and higher risks associated with larger operations.

Quiz 17: Multinational Cost of Capital and Capital Structure

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?

Capital asset pricing theory would most likely suggest that the cost of capital is generally for .

A firm's cost of ____ reflects an opportunity cost: what the existing shareholders could have earned if they had received the earnings as dividends and invested the funds themselves.

Normally, each subsidiary of an MNC will issue its own stock where it does business.

The an MNC's cost of capital, the will be the net present value for a proposed project with a given set of expected cash flows.

The an MNC, the its cost of capital is likely to be.

When assuming that investors in the United States are most concerned with their exposure to the U.S. stock market, it is acceptable to use the U.S. market when measuring a U.S.-based MNC's project's beta.

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

Which of the following is not a characteristic that favorably affects an MNC's cost of capital, compared to the cost of capital for a domestic firm?

According to the CAPM, the required rate of return on a stock is a positive function of all of the following, except:

To the extent that individual economies are each other, net cash flows from a portfolio of subsidiaries should exhibit variability, which may reduce the probability of bankruptcy.

Assume that an MNC has very stable cash flows and uses very little debt. Its cost of debt should be:

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

The lower a project's beta, the is the project's risk.

Capital asset pricing theory suggests that risk of projects can be ignored and that risk is relevant.

Country differences, such as differences in the risk-free interest rate and differences in risk premiums across countries, can cause the cost of capital to vary across countries.

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

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

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

In general, an MNC's size, its access to international capital markets, and its international diversification increase the MNC's cost of capital.

Quiz 17: Multinational Cost of Capital and Capital Structure

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?​

Capital asset pricing theory would most likely suggest that the cost of capital is generally ____ for ____.

A firm's cost of ____ reflects an opportunity cost: what the existing shareholders could have earned if they had received the earnings as dividends and invested the funds themselves.

Normally, each subsidiary of an MNC will issue its own stock where it does business.

The ____ an MNC's cost of capital, the ____ will be the net present value for a proposed project with a given set of expected cash flows.

The ____ an MNC, the ____ its cost of capital is likely to be.

When assuming that investors in the United States are most concerned with their exposure to the U.S. stock market, it is acceptable to use the U.S. market when measuring a U.S.-based MNC's project's beta.

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

Which of the following is not a characteristic that favorably affects an MNC's cost of capital, compared to the cost of capital for a domestic firm?​

According to the CAPM, the required rate of return on a stock is a positive function of all of the following, except:

To the extent that individual economies are ____ each other, net cash flows from a portfolio of subsidiaries should exhibit ____ variability, which may reduce the probability of bankruptcy.

Assume that an MNC has very stable cash flows and uses very little debt. Its cost of debt should be:

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

The lower a project's beta, the ____ is the project's ____ risk.

Capital asset pricing theory suggests that ____ risk of projects can be ignored and that ____ risk is relevant.

Country differences, such as differences in the risk-free interest rate and differences in risk premiums across countries, can cause the cost of capital to vary across countries.

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

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

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

In general, an MNC's size, its access to international capital markets, and its international diversification increase the MNC's cost of capital.

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?

Capital asset pricing theory would most likely suggest that the cost of capital is generally for .

The an MNC's cost of capital, the will be the net present value for a proposed project with a given set of expected cash flows.

The an MNC, the its cost of capital is likely to be.

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

Which of the following is not a characteristic that favorably affects an MNC's cost of capital, compared to the cost of capital for a domestic firm?

To the extent that individual economies are each other, net cash flows from a portfolio of subsidiaries should exhibit variability, which may reduce the probability of bankruptcy.

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

The lower a project's beta, the is the project's risk.

Capital asset pricing theory suggests that risk of projects can be ignored and that risk is relevant.

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

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