13.6 Private Placement
1) Which of the following were NOT identified by the authors as an alternative instrument to
source equity in global markets?
A) sale of a directed public share issue to investors in a target market
B) private placements under SEC rule 144a
C) sale of shares to private equity funds
D) all of the above
2) SEC rule 144A permits institutional buyers to trade privately placed securities without the
previous holding periods restrictions and without requiring SEC registration.
3) Private placement represents
A) sale of a security to qualified institutional buyers.
B) taking the firm private via international private equity fund.
C) placing ADRs on the public equity markets.
D) None of the above
4) Private equity funds (PEF) differ from traditional venture capital (VC) funds in that
A) VC operate mainly in lesser-developed countries while PEF do not.
B) VC typically invest in family business whereas PEF do not.
C) VC is almost unavailable to emerging markets while PEF capital is available.
D) All of the above are true.
13.7 Foreign Equity Listing and Issuance
1) 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
2) A ________ is defined as one that targets 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
3) 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.
4) Empirical evidence has found that on average public firms that have been privatized by
issuing public equity have
A) improved profitability.
B) higher debt levels.
C) lower real sales.
D) all of the above.
5) Empirical evidence has found that on average public firms that have been privatized by
issuing public equity have
A) lowered capital investment levels.
B) decreased efficiency.
C) expanded their employment.
D) all of the above.
6) The authors note empirical evidence that shows cross-listing foreign shares of stock on U.S.
exchanges has a positive stock price effect. ________ for the listing of ADRs.
A) There is no stock price reaction
B) There is a negative stock price reaction
C) There is a positive stock price reaction
D) None of the above is true.
7) Empirical evidence shows that new issues of equity by domestic firms in the U.S. market
typically has a ________ stock price reaction and new equity issues in the U.S. markets by
foreign firms with segmented domestic markets have a ________ stock price reaction.
A) negative; negative
B) positive; negative
C) negative; positive
D) positive; positive
8) In addition to gaining liquidity, which of the following could also be considered a legitimate
reason for cross-listing equity?
A) enhance a firm’s local image
B) become more familiar with the local financial community
C) get better local press coverage
D) all of the above
9) An MNE may cross list its shares on a foreign stock exchange so that it can
A) create a secondary market so that shares may be used to compensate top local managers.
B) create a secondary market so that shares can be used to acquire local firms.
C) increase the firm’s visibility to its customers and employees.
D) accomplish all of the above.
10) Which of the following is NOT a barrier to cross listing shares?
A) Fixed income securities such as bonds are not traded in the subject market.
B) investor relations
C) disclosure requirements
D) All are barriers to cross listing shares.
11) Economic studies have found that international cross-listing of securities across financial
markets resulted in ________ abnormal returns that were ________ for firms resident in
emerging markets with a low level of legal barriers to capital flows than for firms resident in
developed countries.
A) positive; greater
B) positive; smaller
C) negative; greater
D) negative; smaller
12) For the most part, U.S. SEC disclosure requirements are ________ stringent than other, non-
U.S. equity market rules.
A) more
B) less
C) as equally
D) none of the above
13) According to the U.S. school of thought, the worldwide trend toward fuller and more
standardized disclosure rules should ________ the cost of equity capital.
A) increase
B) decrease
C) have no impact on
D) none of the above
14) Another school of thought about the worldwide trend toward fuller and more standardized
disclosure rules is that the cost of U.S. level equity capital disclosure
A) chases away potential listers of equity.
B) is an onerous costly burden.
C) leads to fewer foreign firms cross listing in U.S. equity markets.
D) all of the above.
13.8 Raising Debt Globally
1) ________ are domestic currencies of one country on deposit in a second country.
A) LIBORs
B) Eurocurrencies
C) Federal funds
D) Discount window deposits
2) An Irish company strategy to diversify its capital structure can be
A) issuing Eurobond denominated in US dollars.
B) issuing a Yankee Bond.
C) private placement in USA.
D) all of the above
3) Eurocurrencies are NOT the same as the euro developed for the common European currency.
4) Of the following, which was NOT cited by the authors as a valuable function provided by the
Eurocurrency market?
A) Eurocurrency deposits are an efficient and convenient money market device for holding
excess corporate liquidity.
B) Eurocurrency deposits are a tool used by the Federal Reserve to regulate the money supply of
countries that peg their currency against the U.S. dollar.
C) The Eurocurrency market is a major source of short-term bank loans to finance corporate
working capital needs.
D) All of the above were cited by the authors.
5) Eurobanks are
A) banks where Eurocurrencies are deposited.
B) major world banks that conduct a Eurocurrency business in addition to normal banking
activities.
C) financial intermediaries that simultaneously bid for time deposits in and make loans in a
currency other than that of the currency of where it is located.
D) All of the above are descriptions of a Eurobank.
6) The modern Eurodollar market has been operating since
A) post-WWI.
B) the great depression of the 1930s.
C) post-WWII.
D) the mid 1970s when the Bretton Woods standard of fixed currency exchange rates was
eliminated.
7) The Eurocurrency market continues to thrive because it is a large international money market
relatively free of governmental regulation and interference.
8) If a MNE needed to obtain, outside of its domestic market, medium-term credit with an
established secondary market it would most likely pursue
A) international bank loans.
B) syndicated credits.
C) some type of euronote.
D) the international bond market.
9) Eurocredits are
A) bank loans to MNEs and others denominated in a currency other than that of the country
where the bank is located.
B) typically variable rate and tied to the LIBOR.
C) usually for maturities of six months or less.
D) All of the above are true.
10) General Motors has agreed to a syndicated eurocredit loan with the following terms: A
revolving loan of $100,000,000 with an up-front fee of 2% of the principal and an interest rate of
LIBOR plus 75 basis points. If the payments are made every six months and the current LIBOR
rate is 4.00%, what is the effective annual cost of this loan?
A) 4.75%
B) 4.85%
C) 4.95%
D) 4.00%
11) In general, which has the shorter maturity and is more appropriate for funding short-term
inventory needs?
A) commercial paper
B) Euro-Medium-Term notes (EMTNs)
C) the international bond market
D) all of the above
12) Which of the following is NOT true regarding Euro-Medium-Term notes (EMTNs) when
compared to typical long-term bonds?
A) The EMTN is a facility allowing continuous issuance over a short period of time.
B) EMTN coupon payments are on set calendar dates regardless of the date of issue.
C) EMTNs are relatively small, often with totals of $5 million or less.
D) All of the above are true.
13) One of the reasons why venture capital is not very present in the emerging markets is
A) emerging market governments are giving tax incentives for foreign capital.
B) the illiquid nature of emerging market capital markets offering limited exit alternatives.
C) the increasing globalization and integration of financial markets.
D) the increasing number of IPOs in the BRIC countries.
14) One of the principles of Islamic Finance is that
A) speculation is allowed under certain conditions.
B) earning interest is prohibited.
C) only profit can be shared.
D) depositor’s returns are fixed and guaranteed by Sharia.
23
15) The final ratings of the Rating agencies
A) are published in at least three international finance news editions.
B) are made public upon the decision of the issuer to have the rating published.
C) are submitted for an government approval.
D) are made public only if the rating is in the highest category.
Essay Questions
13.1 Designing a Strategy to Source Capital Globally
1) There are no questions in this section.
13.2 Optimal Financial Structure
1) Optimal capital structure in a domestic market is determined by many factors. Is there a single
best debt ratio for a firm. If so, what is it? Does there appear to be a range for optimal capital
structure for U.S. firms? If so, what is it? What factors were identified by the authors as
important for an individual firm’s optimal capital structure?
13.3 Optimal Financial Structure and the MNE
1) There are no questions in this section.
13.4 Raising Equity Globally
1) There are no questions in this section.
13.5 Depositary Receipts
1) ADRs are a popular investment tool for many U.S. investors. In recent years several
alternatives for investing in foreign equity securities have become available for U.S. investors,
yet ADRs remain popular. Define what an ADR is and provide at least three examples of the
advantages they may hold over alternative foreign investment vehicles for U.S. investors.
2) There is much debate about whether an MNE should consider individual country norms,
known as localization, when attempting to optimize the consolidated capital structure and
minimize the firm’s cost of capital. Provide arguments for the advantages and disadvantages of
localization of capital structure for subsidiaries. Do you think MNEs should localize the capital
structure of their subsidiaries? Why/why not?
13.6 Private Placement
1) The authors identify four alternative financial instruments for sourcing equity abroad. Identify
and explain one of these techniques. In your answer provide a motivation as to why a firm would
wish to choose this particular technique for raising equity abroad.
13.7 Foreign Equity Listing and Issuance
1) By cross-listing and selling its shares on a foreign stock exchange a firm typically tries to
accomplish one or more objectives. List and briefly explain each of the five objectives identified
by your authors.
2) How does market segmentation impact the effect on share prices from cross-listing on foreign
stock exchanges?
3) What are the two schools of thought regarding the worldwide trend toward increased financial
disclosure by publicly traded firms. Explain which school of thought you hold to and why.
13.8 Raising Debt Globally
1) The Euro-medium-term-note (EMTN) has filled a substantial niche market in global
financing. What are the distinguishing characteristics of the EMTN and why is it such a popular
form of financing for MNEs?