Multinational Business Finance, 14e (Eiteman)
Chapter 14 Raising Equity and Debt Globally
14.1 Designing a Strategy to Source Capital Globally
1) The choice of when and how to source capital globally is usually aided early on by the advice
of:
A) an investment banker.
B) your stock broker.
C) a commercial banker.
D) an underwriter.
2) Investment banking services include which of the following?
A) advising when a security should be cross-listed
B) preparation of stock prospectuses
C) help to determine the price of the issue
D) all of the above
3) Which of the following is the typical order of sourcing capital abroad?
A) an international bond issue, then cross listing the outstanding issues on other exchanges, then
an international bond issue in the target market
B) an international bond issue in the target market, then cross listing the outstanding issues on
other exchanges, then an international bond issue
C) an international bond issue in less prestigious markets, then an international bond issue in the
target market, and ultimately a eurobond issue
D) cross listing the outstanding issues on other exchanges, then an international bond issue, then
an international bond issue in the target market
4) Which of the following is the typical first step sourcing capital abroad?
A) an international bond issue placed on a more prestigious foreign market
B) an international bond issue in the eurobond market
C) an international bond issue placed on a less prestigious foreign market
D) issue equity in one of the less prestigious markets to attract the attention of international
investors first
5) By cross listing and selling its shares on a foreign stock exchange, a firm typically tries to
accomplish which of the following?
A) improve the liquidity of its existing shares
B) increase its share price
C) increase the firm’s visibility
D) all of the above
6) Most firms raise their initial capital in foreign markets.
7) The ultimate step sourcing capital abroad would be to place a directed equity issue in a
prestigious target market or a euroequity issue in global equity markets.
8) Sourcing capital abroad usually follows a logic path. List in sequencial order three corporate
strategies in internationalizing the cost of capital.
1) Which financial economists are most closely associated with the financial theory of optimal
capital structure?
A) Modigliani and Miller
B) Fama, Fisher, Jensen, and Roll
C) Black and Scholes
D) Markowitz and Sharpe
2) 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 ________.
A) decreases; increases
B) decreases; decreases
C) increases; increases
D) increases; decreases
3) One of the most important factors in making debt less expensive than equity is:
A) the tax deductibility of depreciation.
B) the tax deductibility of equity.
C) the tax deductibility of dividends.
D) the tax deductibility of interest.
4) One of the most important factors in making debt less expensive than equity is:
A) the seniority of equity obligations to debt claims.
B) the tax deductibility of dividends.
C) the tax deductibility of equity.
D) the seniority of debt obligations to equity claims.
5) Which of the following is NOT a factor offsetting the tax advantage of debt as a source of
financing?
A) increased agency costs
B) increased probability of financial distress (bankruptcy) due to fixed interest payments
C) alternative tax shields to those supplied by interest payments
D) All of the above offset the tax advantage of debt as a source of financing.
6) Most financial theorists believe that the optimal capital structure is a ________ with a debt to
total value ratio somewhere around ________.
A) point; 50%
B) point; 25%
C) range; 30%-60%
D) range; 10%-40%
7) Not all firms have the same optimal capital structure. Factors that might influence a firm’s
capital structure include:
A) the industry in which it operates.
B) the volatility of its sales and operating income.
C) the collateral value of its assets.
D) all of the above
8) Financial theory has at last provided us with a single optimal capital structure for domestic
firms.
9) Financial practice suggests that there is a range for an optimal capital structure for a firm
within an industry rather than a specific optimal ratio of debt to equity.
1) MNEs situated in countries with small illiquid and segmented markets are most like:
A) small domestic U.S. firms in that they must rely on internally generated funds and bank
borrowing.
B) large U.S. MNEs in that they are all MNEs and have worldwide markets and sources of
financing.
C) small domestic U.S. firms in that they have a strong niche market in the U.S.
D) None of the above is true.
2) Which of the following were NOT identified by the authors as a variable that needs to be
modified in the domestic theory of optimal financial structures to accommodate the case of the
multinational enterprise.
A) Financial Distress
B) Availability of capital
C) Diversification of cash flows
D) Foreign exchange risk
3) In theory, the MNE should support ________ debt ratios than a purely domestic firm because
their cash flows are ________.
A) lower; more stable due to international diversification
B) lower; less stable due to international diversification
C) higher; more stable due to international diversification
D) higher; less stable due to international diversification
4) 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?
A) $6,000
B) $60,000
C) $600,000
D) €60,000
5) 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)?
A) $55,000
B) €74,250
C) $74,250
D) $77,000
6) 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)?
A) $55,000
B) $79,750
C) $77,000
D) $37,931
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 and principle will TropiKana pay at the end of the first year if
they repay the entire loan plus interest (rounded)?
A) $1,529,750
B) €1,529,750
C) $1,055,000
D) $1,477,000
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
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)?
A) $1,477,000
B) $1,055,000
C) €1,424,250
D) $1,424,250
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)?
A) 1.73%
B) 5.50%
C) 10.50%
D) 9.27%
10) In part because of access to global markets, MNEs are better able than their domestic
counterparts to maintain their desired debt ratio even when raising new capital.
11) When a firm borrows in a foreign currency, the effective cost is the foreign interest rate plus
an adjustment for changes in the exchange rate.
12) The domestic theory of optimal capital structure does not need to be modified for MNEs.
13) Portfolio diversification of domestic firms reduces risk because cash flows are not perfectly
correlated. The same reasoning is often argued for MNEs diversifying into international markets.
14) In theory multinational firms are in a better position than domestic firms to support higher
debt ratios.
15) A significant advantage of borrowing foreign currency-denominated bonds is that the
borrower need not worry about relative changes in the value of the home currency.
16) For firms to raise capital in international markets, it is more important to adhere to capital
structure ratios similar to those found in the United States and United Kingdom than to those in
the firm’s home country.
17) In theory multinational firms are in a better position than domestic firms to support higher
debt ratios. Provide an argument as to why this could be true and discuss the empirical research
findings about US based MNEs.
1) A/An ________ is defined as one that is targeted at investors in a single country and
underwritten in whole or part by investment institutions from that country.
A) SEC rule 144a placement
B) directed public share issue
C) Euroequity public issue
D) strategic alliance
2) The term “euro” as used in the euro equity market implies:
A) the issuers are located in Europe.
B) the investors are located in Europe.
C) both A and B
D) none of the above