Fundamentals of Multinational Finance, 5e (Moffett et al.)
Chapter 13 Raising Equity and Debt Globally
Multiple Choice and True/False Questions
13.1 Designing a Strategy to Source Capital Globally
1) The choice of when and how to source equity globally is usually aided early on by the advice
of
A) an investment banker.
B) your stock broker.
C) a commercial banker.
D) the internal revenue service.
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) Most firms raise their initial capital in foreign markets.
4) 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, then an international bond issue in the target market, then cross
listing the outstanding issues on other exchanges.
D) Cross listing the outstanding issues on other exchanges, then an international bond issue, then
an international bond issue in the target market.
5) Which of the following would likely be the ultimate step in a firm’s efforts to source equity
globally?
A) an international bond issue
B) an equity listing in less-prestigious markets
C) an equity listing in a target market
D) a Euroequity issue in global equity markets
13.2 Optimal Financial Structure
1) Given the following information, what is the cost of equity for the Teevox Corporation?
Expected return in the domestic market is 12%, the risk-free rate of return is 4%, the firm’s beta
is 1.1, and the required return on debt for the firm is 7%.
A) 12.00%
B) 10.00%
C) 12.80%
D) 7.70%
2) Wallet Drug Company has just recently raised money abroad for the first time in the history of
the firm. Prior to the recent equity issue abroad, the firm had a D/V ratio of 40%, an effective tax
rate of 30%, a before-tax cost of debt of 9%, and a domestic beta of 1.3. The expected return on
the market portfolio was 13% and the risk-free rate was 5%. After the equity issue, Wallet Drug
has a D/V ratio of 50%, their after-tax cost of debt has not changed, nor has the effective tax rate,
the firm’s international beta is 1.0, the expected return on the market portfolio is only 12%, and
the risk-free rate is still 5%. What was the firm’s WACC prior to the issue of new common stock
abroad?
A) 9.15%
B) 11.76%
C) 13%
D) 15.4%
3) Wallet Drug Company has just recently raised money abroad for the first time in the history of
the firm. Prior to the recent equity issue abroad, the firm had a D/V ratio of 40%, an effective tax
rate of 30%, a before-tax cost of debt of 9%, and a domestic beta of 1.3. The expected return on
the market portfolio was 13% and the risk-free rate was 5%. After the equity issue, Wallet Drug
has a D/V ratio of 50%, their after-tax cost of debt has not changed, nor has the effective tax rate,
the firm’s international beta is 1.0, the expected return on the market portfolio is only 12%, and
the risk-free rate is still 5%. What is the firm’s new cost of equity after the international issue?
A) 9.15%
B) 11.76%
C) 12.00 %
D) 15.40%
4) Wallet Drug Company has just recently raised money abroad for the first time in the history of
the firm. Prior to the recent equity issue abroad, the firm had a D/V ratio of 40%, an effective tax
rate of 30%, a before-tax cost of debt of 9%, and a domestic beta of 1.3. The expected return on
the market portfolio was 13% and the risk-free rate was 5%. After the equity issue, Wallet Drug
has a D/V ratio of 50%, their after-tax cost of debt has not changed, nor has the effective tax rate,
the firm’s international beta is 1.0, the expected return on the market portfolio is only 12%, and
the risk-free rate is still 5%. What is the change in the firm’s WACC after the international equity
issue?
A) 2.61%
B) 1.74%
C) 0.63%
D) There is no change in the firm’s WACC.
5) 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
6) Financial theory has at last provided us with a single optimal capital structure for domestic
firms.
7) 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.
8) For most firms, the cost of capital decreases to a low point as the firm ________ debt
financing. Beyond some optimal level, the cost of capital increases as the amount of debt
________.
A) decreases; increases
B) decreases; decreases
C) increases; increases
D) increases; decreases
9) 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.
10) 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.
11) 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) None of the above are factors.
12) 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%
13) 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.
13.3 Optimal Financial Structure and the MNE
1) The domestic theory of optimal capital structure does not need to be modified for MNEs.
2) In theory, a 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
3) ________ are negotiable certificates issued by a bank to represent the underlying shares of
stock, which are held in trust at a foreign custodian bank.
A) Negotiable CDs
B) International mutual funds
C) Depositary receipts
D) Eurodeposits
4) Depositary receipts traded outside the United States are called ________ depositary receipts.
A) Euro
B) Global
C) American
D) None of the above
5) Each ADR represents ________ of the shares of the underlying foreign stock.
A) a multiple
B) 100
C) 1
D) ADRs have nothing to do with foreign stocks.
6) ADRs cannot be exchanged for the underlying shares of the foreign stock, therefore, arbitrage
cannot keep the prices in line with the foreign price of the stock.
7) Which of the following is NOT an advantage of ADRs to U.S. shareholders?
A) Transfer of ownership is done in the U.S. in accordance with U.S. laws.
B) In the event of the death of the shareholder, the estate does not go through a foreign court.
C) Settlement for trading is generally faster in the United States.
D) All of the above are advantages of ADRs.
8) ADRs that are created at the request of a foreign firm wanting its shares traded in the United
States are
A) facilitated.
B) unfacilitated.
C) sponsored.
D) unsponsored.
9) Who pays the costs of creating a sponsored ADR?
A) the foreign firm whose stocks underlie the ADR
B) the U.S. bank creating the ADR
C) both the U.S. bank and the foreign firm
D) the SEC since they require the regulation
10) Level I ADRs trade primarily
A) on the New York Stock Exchange.
B) on the American Stock Exchange.
C) over the counter or pink sheets.
D) Level I ADRs typically do not trade at all, but instead are privately issued and held until
maturity.
11) Level II ADRs must meet
A) U.S. GAAP standards.
B) home country accounting standards.
C) both U.S. GAAP and home country standards.
D) none of the above.
12) An unsponsored ADR may be initiated without the approval of the foreign firm with the
underlying stock.
13) Level ________ is the easiest standard to satisfy for issuing ADRs.
A) 144a
B) III
C) II
D) I
14) Level III ADR commitment applies to
A) firms that want to list existing shares on the NYSE.
B) banks issuing foreign mutual funds.
C) ADR issues of under $25,000.
D) the sale of a new equity issued in the United States.
15) Of the following, which is NOT considered to be an advantage to MNEs of having a
financial structure adhere to local debt norms?
A) A localized financial structure reduces criticism of foreign subsidiaries that have previously
used a different capital structure.
B) A localized financial structure helps management evaluate return on equity investment
relative to local competitors in the same industry.
C) MNE have a competitive advantage over the locals, thus by using the local capital structure,
the MNE is even stronger.
D) All of the above are noted as advantages to having a localized capital structure.
16) Of the following, which is NOT considered to be a disadvantage to MNEs of having a
financial structure adhere to local debt norms?
A) Why adhere to local standards if, as an MNE, the firm has important competitive advantages
relating to capital structure?
B) Adhering to local standards may push the MNE consolidated financial ratios out of the
optimal range.
C) A localized financial structure makes it difficult for management to compare operating results
with those of local competitors.
D) All of the above are noted as disadvantages to having a localized capital structure.
17) The MNE in an effort to minimize the cost of external funds should choose ________ funds
to minimize ________.
A) internal; debt financing
B) internal; taxes and political risk
C) external; debt financing
D) external; taxes and political risk
18) Of the following, which is NOT an internal source of financing for the foreign subsidiary?
A) equity in the form of cash from the parent firm
B) equity in the form of real goods from the parent
C) debt in the form of loans from the same commercial bank used by the parent
D) All of the above are internal sources of financing for the foreign subsidiary.
19) Internal sources of funds for a foreign subsidiary of a MNE may come from the parent
company but not from a sister subsidiary. Funding from sister subsidiaries are considered
external funding.
20) Of the following, which is NOT an external source of financing for the foreign subsidiary?
A) borrowing from sister subsidiaries
B) borrowing from commercial banks in the parent country
C) selling new stock to local shareholders
D) All of the above are external sources of financing for the foreign subsidiary.
21) Obtaining local currency debt obligations is particularly attractive to an MNE if the
subsidiary has
A) substantial accounts payable in the local currency.
B) substantial financial obligations in foreign currency units.
C) substantial accounts receivable in the local currency.
D) all of the above.
13.4 Raising Equity Globally
1) Transaction costs for trading equity securities as measured by the bid-ask spreads are lowest
on which exchange?
A) NYSE
B) Nasdaq
C) London
D) Tokyo
2) Depositary receipts traded outside the United States are called ________ depositary receipts.
A) Euro
B) Global
C) American
D) None of the above
3) ________ are negotiable certificates issued by a bank to represent the underlying shares of
stock, which are held in trust at a foreign custodian bank.
A) Negotiable CDs
B) International mutual funds
C) Depositary receipts
D) Eurodeposits
4) The number of foreign firms traded on the London exchange is ________ than the number
traded on the NYSE, and the costs of listing and disclosure in London are ________ those for the
NYSE.
A) less than; less than
B) less than; greater than
C) greater than; less than
D) greater than; greater than
5) The least liquid stock markets as identified by the authors offer little liquidity for their own
domestic firms, and are of little value to foreign firms.
6) Which one of the following characteristics does NOT contribute to overall market liquidity?
A) significant market making activities
B) reduced transaction costs
C) effective crisis management
D) All of the above contribute to efficient markets.
13.5 Depositary Receipts
1) Each ADR represents ________ of the shares of the underlying foreign stock.
A) a multiple
B) 100
C) 1
D) ADRs have nothing to do with foreign stocks.
2) ADRs cannot be exchanged for the underlying shares of the foreign stock, therefore, arbitrage
cannot keep the prices in line with the foreign price of the stock.
3) Which of the following is NOT an advantage of ADRs to U.S. shareholders?
A) Transfer of ownership is done in the U.S. in accordance with U.S. laws.
B) In the event of the death of the shareholder, the estate does not go through a foreign court.
C) Settlement for trading is generally faster in the United States.
D) All of the above are advantages of ADRs.
4) ADRs that are created at the request of a foreign firm wanting its shares traded in the United
States are
A) facilitated.
B) unfacilitated.
C) sponsored.
D) unsponsored.
5) Who pays the costs of creating a sponsored ADR?
A) the foreign firm whose stocks underlie the ADR
B) the U.S. bank creating the ADR
C) both the U.S. bank and the foreign firm
D) the SEC since they require the regulation
6) Level I ADRs trade primarily
A) on the New York Stock Exchange.
B) on the American Stock Exchange.
C) over the counter or pink sheets.
D) Level I ADRs typically do not trade at all, but instead are privately issued and held until
maturity.
7) Level II ADRs must meet
A) U.S. GAAP standards.
B) home country accounting standards.
C) both U.S. GAAP and home country standards.
D) none of the above.
8) An unsponsored ADR may be initiated without the approval of the foreign firm with the
underlying stock.
9) Level ________ is the easiest standard to satisfy for issuing ADRs.
A) 144a
B) III
C) II
D) I
10) Level III ADR commitment applies to
A) firms that want to list existing shares on the NYSE.
B) banks issuing foreign mutual funds.
C) ADR issues of under $25,000.
D) the sale of a new equity issued in the United States.