Question 1

Assume the following information for Brama Co., a U.S.-based MNC that needs funding for a project in Germany: U.S. risk-free rate = 4%
German risk-free rate = 5%
Risk premium on dollar-denominated debt provided by U.S. creditors = 3%
Risk premium on euro-denominated debt provided by German creditors = 4%
Beta of project = 1.2
Expected U.S. market return = 10%
U.S. corporate tax rate = 30%
German corporate tax rate = 40%
What is Brama's after-tax cost of dollar-denominated debt?

Accepted Answer

A)   7.0%.
B)   4.9%.
C)   8.0%.
D)   5.6%.E) B) and C)
F) A) and C)

Question 2

The capital asset pricing model suggests that the required return on a firm's stock is a positive function of:

Accepted Answer

A)   the risk-free rate of interest.
B)   the market rate of return.
C)   the stock's beta.
D)   all of the aboveE) B) and C)
F) A) and B)

Question 3

One argument for why subsidiaries should be wholly-owned by the parent is that the potential conflict of interests between the MNC's ____ is avoided.

Accepted Answer

A)   managers and shareholders
B)   majority shareholders and minority shareholders
C)   existing creditors
D)   managers and creditorsE) A) and C)
F) All of the above

Question 4

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

Accepted Answer

A)   average capital structure of all MNCs across countries.
B)   average capital structure of all domestic firms across countries.
C)   capital structure of a subsidiary of a particular MNC.
D)   capital structure of a particular MNC overall (including all subsidiaries) .E) A) and B)
F) All of the above

Question 5

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

Accepted Answer

A)   average capital structure of local firms where the MNC's subsidiary is based.
B)   average capital structure of local firms where the MNC's parent is based.
C)   capital structure of a subsidiary of a particular MNC.
D)   capital structure of a particular MNC overall (including all subsidiaries) .E) A) and B)
F) All of the above

Question 6

The capital asset pricing model suggests that the required return on a firm's stock is a negative function of:

Accepted Answer

A)   the risk-free rate of interest.
B)   the market rate of return.
C)   the stock's beta.
D)   none of the aboveE) A) and B)
F) A) and C)

Question 7

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

Accepted Answer

A) True 
 B)False

Question 8

An MNC can obtain equity by all of the following except:

Accepted Answer

A)   retained earnings.
B)   a global equity offering.
C)   a domestic equity offering.
D)   none of the above.E) All of the above
F) B) and D)

Question 9

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

Accepted Answer

A)   always be greater than the firm's cost of capital.
B)   always be less than the firm's cost of capital.
C)   always be the same as the firm's cost of capital.
D)   none of the aboveE) A) and C)
F) B) and D)

Question 10

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

Accepted Answer

A)   the risk-free rate of interest.
B)   the market rate of return.
C)   the stock's beta.
D)   the company's earnings.E) A) and D)
F) A) and C)

Question 11

If a parent company backs the debt of a foreign subsidiary, the borrowing capacity of the parent might be reduced as creditors are not willing to provide as many funds to the parent if those funds may possibly be needed to rescue a parent's subsidiary.

Accepted Answer

A) True 
 B)False

Question 12

An MNC may deviate from its target capital structure in each country where financing is obtained, yet still achieve its target capital structure on a consolidated basis.

Accepted Answer

A) True 
 B)False

Question 13

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

Accepted Answer

A)   higher; MNCs
B)   lower; domestic firms
C)   lower; MNCs
D)   none of the aboveE) None of the above
F) A) and D)

Question 14

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

Accepted Answer

A)   lower; systematic
B)   lower; unsystematic
C)   higher; systematic
D)   higher; unsystematicE) A) and B)
F) A) and C)

Question 15

According to the text, the cost of debt:

Accepted Answer

A)   for each country is somewhat stable over time.
B)   among countries changes over time, and these changes are negatively correlated.
C)   among countries changes over time, and these changes are positively correlated.
D)   among countries changes over time, and are not correlated.E) A) and B)
F) C) and D)

Question 16

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

Accepted Answer

A)   8.4%
B)   11.4%
C)   10%
D)   None of the aboveE) A) and B)
F) None of the above

Question 17

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

Accepted Answer

A)   10.80%
B)   12.40%
C)   9.20%
D)   None of the aboveE) None of the above
F) All of the above

Question 18

An argument for MNCs to have a debt-intensive capital structure is:

Accepted Answer

A)   they are well diversified.
B)   they can reduce the chance of bankruptcy.
C)   it spreads the shareholder base.
D)   it forces subsidiaries to pay dividends to shareholders.E) A) and B)
F) B) and C)

Question 19

Because increased external financing by a foreign subsidiary reduces the external financing needed by the parent, such an action will not affect the overall MNC's cost of capital.

Accepted Answer

A) True 
 B)False

Question 20

Most MNCs obtain equity funding:

Accepted Answer

A)   in foreign countries.
B)   in their home country.
C)   through global offerings.
D)   through private placements.E) A) and B)
F) None of the above

Exam 17: Multinational Cost of Capital and Capital Structure

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

Correct Answer
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According to the text, the cost of debt:

Correct Answer
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If a parent company backs the debt of a foreign subsidiary, the borrowing capacity of the parent might be reduced as creditors are not willing to provide as many funds to the parent if those funds may possibly be needed to rescue a parent's subsidiary.

Correct Answer
verified

An MNC may deviate from its target capital structure in each country where financing is obtained, yet still achieve its target capital structure on a consolidated basis.

Correct Answer
verified

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

Correct Answer
verified

An MNC can obtain equity by all of the following except:

Correct Answer
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One argument for why subsidiaries should be wholly-owned by the parent is that the potential conflict of interests between the MNC's ____ is avoided.

Correct Answer
verified

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

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

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

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

Correct Answer
verified

Most MNCs obtain equity funding:

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

Correct Answer
verified

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

Correct Answer
verified

Because increased external financing by a foreign subsidiary reduces the external financing needed by the parent, such an action will not affect the overall MNC's cost of capital.

Correct Answer
verified

An argument for MNCs to have a debt-intensive capital structure is:

Correct Answer
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The capital asset pricing model suggests that the required return on a firm's stock is a negative function of:

Correct Answer
verified

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

Correct Answer
verified

The capital asset pricing model suggests that the required return on a firm's stock is a positive function of:

Correct Answer
verified

Exam 17: Multinational Cost of Capital and Capital Structure

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

Correct AnswerverifiedShow Answer

According to the text, the cost of debt:

Correct AnswerverifiedShow Answer

If a parent company backs the debt of a foreign subsidiary, the borrowing capacity of the parent might be reduced as creditors are not willing to provide as many funds to the parent if those funds may possibly be needed to rescue a parent's subsidiary.

Correct AnswerverifiedShow Answer

An MNC may deviate from its target capital structure in each country where financing is obtained, yet still achieve its target capital structure on a consolidated basis.

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

An MNC can obtain equity by all of the following except:

Correct AnswerverifiedShow Answer

One argument for why subsidiaries should be wholly-owned by the parent is that the potential conflict of interests between the MNC's ____ is avoided.

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

Most MNCs obtain equity funding:

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

Because increased external financing by a foreign subsidiary reduces the external financing needed by the parent, such an action will not affect the overall MNC's cost of capital.

Correct AnswerverifiedShow Answer

An argument for MNCs to have a debt-intensive capital structure is:

Correct AnswerverifiedShow Answer

The capital asset pricing model suggests that the required return on a firm's stock is a negative function of:

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

The capital asset pricing model suggests that the required return on a firm's stock is a positive function of:

Correct AnswerverifiedShow Answer

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

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

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