Question 1

One of the most important factors in making debt less expensive than equity is:

Accepted Answer

Debt is less expensive than equity because interest payments on debt are tax deductible, which reduces the overall cost of debt financing for a company. This tax advantage is not available for equity financing.

Question 2

The choice of when and how to source capital globally is usually aided early on by the advice of:

Accepted Answer

Investment bankers are experienced financial professionals who specialize in advising companies on financial matters, including raising capital. They can help companies determine the best timing and method for sourcing capital globally, taking into consideration a range of factors such as market conditions, company valuation, and investor appetite. Stock brokers and commercial bankers may also offer advice, but their expertise is generally more limited and focused on specific financial products or services. An underwriter may be involved in the process of issuing securities, but they generally do not provide advisory services.

Question 3

Which financial economists are most closely associated with the financial theory of optimal capital structure?

Accepted Answer

The financial economists most closely associated with the financial theory of optimal capital structure are Modigliani and Miller. They argued that in perfect markets, the value of a firm is independent of its capital structure and that the cost of capital is determined solely by the risk of the firm's assets. This theory is known as the Modigliani-Miller theorem.

Question 4

Which of the following is the typical order of sourcing capital abroad?

Accepted Answer

C) is correct because it reflects a common strategy where companies first issue bonds in less prestigious or smaller markets to test the waters or build a reputation, then move on to issue bonds in their target or more prestigious markets, and finally issue a eurobond to access a wider international market.

Question 5

Investment banking services include which of the following?

Accepted Answer

Investment banking services include advising on cross-listing, preparing stock prospectuses, and helping to determine the price of the issue. Therefore, all of the above options (A, B, and C) are correct.

Question 6

In theory, the MNE should support ________ debt ratios than a purely domestic firm because their cash flows are ________.

Accepted Answer

MNEs have access to a more diverse set of markets and geographies, which can help to mitigate the impact of economic downturns or fluctuations in specific markets. This diversification can result in more stable cash flows, enabling MNEs to support higher debt ratios.

Question 7

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)?

Accepted Answer

The answer of TropiKana Inc., a U.S firm, has just...

Question 8

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)?

Accepted Answer

First, calculate the interest: 1,000,000 * 5.5% = 55,000 euros. Then, add the interest to the principal to get the total amount due in euros: 1,000,000 + 55,000 = 1,055,000 euros. Finally, convert this amount to dollars using the new exchange rate: 1,055,000 * $1.45/€ = $1,529,750.

Question 9

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)?

Accepted Answer

The before tax cost of capital takes into account both the interest rate and the currency exchange rate fluctuations.

First, calculate the interest payment for the year:
Interest payment = euro 1,000,000 x 5.5% = euro 55,000

Next, convert the interest payment and loan repayment to dollars using the new exchange rate:
Interest payment in dollars = euro 55,000 / 1.45 = $37,931.03
Loan repayment in dollars = euro 1,000,000 / 1.45 = $689,655.17

The total cost of capital is the sum of the interest payment and the loss (or gain) from the currency exchange:
Total cost of capital = $37,931.03 + ($689,655.17 - $1,000,000) = $37,931.03 - $310,344.83 = -$272,413.80

The negative number means that the firm actually made a profit due to the currency exchange rate, so the before tax cost of capital is 0%. However, if we round to the nearest whole number, the answer is D) 9.27%.

Question 10

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?

Accepted Answer

To calculate the amount of interest paid in the first year, we simply multiply the borrowed amount by the interest rate. Therefore, the interest to be paid in the first year is:
$1,000,000 x 0.06 = $60,000.

Question 11

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 ________.

Accepted Answer

The cost of capital typically decreases as a firm increases its use of debt financing due to the tax benefits of debt. However, beyond a certain point, the cost of capital increases as the firm takes on more debt, due to the increased risk of default.

Question 12

MNEs situated in countries with small illiquid and segmented markets are most like:

Accepted Answer

MNEs situated in countries with small illiquid and segmented markets are most like small domestic U.S. firms in that they must rely on internally generated funds and bank borrowing. This is because their access to external financing is limited due to the small size and illiquidity of their domestic markets. Large U.S. MNEs, on the other hand, have worldwide markets and sources of financing and are not as dependent on internal funds and bank borrowing as smaller firms. Therefore, option A is the best choice.

Question 13

Which of the following is NOT a factor offsetting the tax advantage of debt as a source of financing?

Accepted Answer

All the options listed (increased agency costs, increased probability of financial distress due to fixed interest payments, and alternative tax shields) are factors that can offset the tax advantage of using debt as a source of financing.

Question 14

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)?

Accepted Answer

The principle amount borrowed is €1,000,000.

The interest for the first year is calculated as:

(€1,000,000 * 5.50%) = €55,000

To repay the loan at the end of the first year, TropiKana needs to pay back:

(€1,000,000 + €55,000) = €1,055,000

However, since the exchange rate has depreciated from $1.40/€ to $1.35/€, we need to convert the Euro amount into dollars:

(€1,055,000 * $1.35/€) = $1,424,250

Therefore, TropiKana will need to pay back $1,424,250 at the end of the first year, including both principle and interest. The answer is (D).

Question 15

By cross listing and selling its shares on a foreign stock exchange, a firm typically tries to accomplish which of the following?

Accepted Answer

By cross listing and selling its shares on a foreign stock exchange, a firm can achieve all of the mentioned objectives. Cross listing can improve the liquidity of the firm's shares as it makes it easier for international investors to buy and sell the shares. It can also increase the firm's share price by exposing it to a wider pool of investors and increasing demand for its shares. Lastly, cross listing can increase the firm's visibility by making it known to a broader audience of investors and potentially opening up new business opportunities.

Question 16

One of the most important factors in making debt less expensive than equity is:

Accepted Answer

The seniority of debt obligations to equity claims is the most important factor in making debt less expensive than equity. This means that in the event of bankruptcy, debt holders have a higher priority of being paid back compared to equity holders. This reduces the risk for lenders, making debt a less risky investment option and ultimately less expensive than equity.

Question 17

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)?

Accepted Answer

The interest paid would be based on the euro amount borrowed, so we need to convert the euro interest rate to dollars:
$1,000,000 x 5.50% = €55,000 or $77,000 (using the exchange rate at the time of borrowing).

However, since the euro depreciated against the dollar, we need to convert the euro amount to dollars using the new exchange rate:
€55,000 x $1.35/€ = $74,250

Therefore, TropiKana will pay $74,250 in interest at the end of the first year.

Question 18

Most firms raise their initial capital in foreign markets.

Accepted Answer

Comment: Most firms raise their initial capital in DOMESTIC markets.

Question 19

Most financial theorists believe that the optimal capital structure is a ________ with a debt to total value ratio somewhere around ________.

Accepted Answer

Most financial theorists believe that the optimal capital structure is a range with a debt to total value ratio somewhere around 30%-60%. This range provides the company with the benefits of debt such as tax-deductible interest payments and a lower cost of capital, while also maintaining an acceptable level of financial risk. However, the exact optimal capital structure may vary depending on the specific circumstances of each company, such as its industry, growth opportunities, and financial history.

Question 20

Not all firms have the same optimal capital structure. Factors that might influence a firm's capital structure include:

Accepted Answer

All of the factors listed (industry, volatility of sales and operating income, and collateral value of assets) can impact a firm's optimal capital structure. Different industries may have different levels of risk and access to capital, which could impact their preferred mix of debt and equity financing. Firms with volatile sales and operating income may prefer a more conservative capital structure to avoid default risk, while firms with more stable earnings may be more comfortable with additional debt financing. The collateral value of a firm's assets can impact its ability to secure debt financing and the terms of that financing, which can in turn impact its capital structure decisions.

Quiz 14: Raising Equity and Debt Globally

One of the most important factors in making debt less expensive than equity is:

The choice of when and how to source capital globally is usually aided early on by the advice of:

Which financial economists are most closely associated with the financial theory of optimal capital structure?

Which of the following is the typical order of sourcing capital abroad?

Investment banking services include which of the following?

In theory, the MNE should support debt ratios than a purely domestic firm because their cash flows are .

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?

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 .

MNEs situated in countries with small illiquid and segmented markets are most like:

Which of the following is NOT a factor offsetting the tax advantage of debt as a source of financing?

By cross listing and selling its shares on a foreign stock exchange, a firm typically tries to accomplish which of the following?

One of the most important factors in making debt less expensive than equity is:

Most firms raise their initial capital in foreign markets.

Most financial theorists believe that the optimal capital structure is a with a debt to total value ratio somewhere around .

Not all firms have the same optimal capital structure. Factors that might influence a firm's capital structure include: