Multinational Business Finance, 15e, Global Edition (Eiteman/Stonehill/Moffett)
Chapter 13 Global Cost and Availability of Capital
13.1 Financial Globalization and Strategy
1) If a firm lies within a country with ________ or ________ domestic capital markets, it can
achieve lower global cost and greater availability of capital with a properly designed and
implemented strategy to participate in international capital markets.
A) liquid; segmented
B) liquid; large
C) illiquid; segmented
D) large; illiquid
2) Other things equal, a firm that must obtain its long-term debt and equity in a highly illiquid
domestic securities market will probably have a:
A) relatively low cost of capital.
B) relatively high cost of capital.
C) relatively average cost of capital.
D) cost of capital that we cannot estimate from this question.
3) Relatively high costs of capital are more likely to occur in:
A) highly illiquid domestic securities markets.
B) highly liquid domestic securities markets.
C) unsegmented domestic securities markets.
D) none of the above
4) Reasons that firms may find themselves with relatively high costs of capital include:
A) The firms reside in emerging countries with undeveloped capital markets.
B) The firms are too small to easily gain access to their own national securities market.
C) The firms are family owned and they choose not to access public markets and lose control of
the firm.
D) all of the above
5) Which of the following is NOT a contributing factor to the segmentation of capital markets?
A) excessive regulatory control
B) perceived political risk
C) anticipated foreign exchange risk
D) All of the above are contributing factors.
6) Which of the following is NOT a contributing factor to the segmentation of capital markets?
A) lack of transparency
B) asymmetric availability of information
C) insider trading
D) All of the above are contributing factors.
7) The weighted average cost of capital (WACC) is:
A) the required rate of return for all of a firm’s capital investment projects.
B) the required rate of return for a firm’s average risk projects.
C) not applicable for use by MNE.
D) equal to 13%.
8) The capital asset pricing model (CAPM) is an approach:
A) to determine the price of equity capital.
B) used by marketers to determine the price of saleable product.
C) that can be applied only to domestic markets.
D) none of the above
9) Which of the following is NOT a key variable in the equation for the capital asset pricing
model?
A) the risk-free rate of interest
B) the expected rate of return on the market portfolio
C) the marginal tax rate
D) All are important components of the CAPM.
10) ________ risk is a function of the variability of expected returns of the firm’s stock relative
to the market index and the measure of correlation between the expected returns of the firm and
the market.
A) Systematic
B) Unsystematic
C) Total
D) Diversifiable
11) Systematic risk:
A) is the standard deviation of a security’s return.
B) is measured with beta.
C) is measured with standard deviation.
D) none of the above
12) Which of the following is generally unnecessary in measuring the cost of debt?
A) a forecast of future interest rates
B) the proportions of the various classes of debt a firm proposes to use
C) the corporate income tax rate
D) All of the above are necessary for measuring the cost of debt.
13) The after-tax cost of debt is found by:
A) dividing the before-tax cost of debt by (1 – the corporate tax rate).
B) subtracting (1 – the corporate tax rate) from the before-tax cost of debt.
C) multiplying the before-tax cost of debt by (1 – the corporate tax rate).
D) subtracting the corporate tax rate from the before-tax cost of debt.
14) A firm whose equity has a beta of 1.0:
A) has greater systematic risk than the market portfolio.
B) stands little chance of surviving in the international financial market place.
C) has less systematic risk than the market portfolio.
D) None of the above is true.
15) The difference between the expected (or required) return for the market portfolio and the
risk-free rate of return is referred to as:
A) beta.
B) the geometric mean.
C) the market risk premium.
D) the arithmetic mean.
16) If a company fails to accurately predict it’s cost of equity, then:
A) the firm’s WACC will also be inaccurate.
B) the firm may not be using the proper interest rate to estimate NPV.
C) the firm may incorrectly accept or reject projects based on decisions made using the cost of
capital computed with an incorrect cost of equity.
D) All of the above are true.
17) Which of the following statements is NOT true regarding beta?
A) Beta will have a value of less than 1.0 if the firm’s returns are less volatile than the market.
B) Beta will have a value of greater than 1.0 if the firm’s returns are more volatile than the
market.
C) Beta will have a value of equal to 1.0 if the firm’s returns are of equal volatility to the market.
D) All of the statements above are true.
18) Which of the following will NOT affect a firm’s beta?
A) the choice of the market portfolio against which to compare the variability of a firm’s returns
B) the choice of the risk-free security
C) the choice of the time period used to calculate the firm’s beta
D) None of the above, because each of them affects the calculation of a firm’s beta.
19) Beta may be defined as:
A) the measure of systematic risk.
B) a risk measure of a portfolio.
C) the ratio of the variance of the portfolio to the variance of the market.
D) all of the above
20) ________ risk is measured with beta.
A) Systematic
B) Unsystematic
C) International
D) Domestic
21) A fully diversified domestic portfolio has a beta of:
A) 0.0.
B) 1.0.
C) -1.0.
D) There is not enough information to answer this question.
22) Unsystematic risk:
A) is the remaining risk in a well-diversified portfolio.
B) is measured with beta.
C) can be diversified away.
D) all of the above
23) A national securities market is segmented if the required rate of return on securities in that
market differs from comparable securities traded in other, unsegmented markets.
24) Other things equal, an increase in the firm’s tax rate will increase the WACC for a firm that
has both debt and equity financing.
25) If a firm’s expected returns are more volatile than the expected return for the market
portfolio, it will have a beta less than 1.0.
26) The WACC is usually used as the risk-adjusted required rate of return for new projects that
are of the same average risk as the firm’s existing projects.
27) Firms acquire debt in either the form of loans from commercial banks, or by selling new
common stock.
28) When estimating an average corporate after-tax cost of capital, the component cost of equity
is multiplied by (1-t) to allow for the tax-deductibility of dividend payments.
29) What are the components of the weighted average cost of capital (WACC) and how do they
differ for an MNE compared to a purely domestic firm?
13.2 International Portfolio Theory and Diversification
1) In general, the geometric mean will be ________ the arithmetic mean for a series of returns.
A) less than
B) greater than
C) equal to
D) greater than or equal to
2) The beginning share price for a security over a three-year period was $50. Subsequent year-
end prices were $62, $58 and $64. The arithmetic average annual rate of return and the geometric
average annual rate of return for this stock were:
A) 9.30% and 8.58% respectively.
B) 9.30% and 7.89% respectively.
C) 9.30% and 7.03% respectively.
D) 9.30% and 6.37% respectively.
3) A well-diversified portfolio has about ________ of the risk of the typical individual stock.
A) 8%
B) 19%
C) 27%
D) 52%
4) An internationally diversified portfolio:
A) should result in a portfolio with a lower beta than a purely domestic portfolio.
B) has the same overall risk shape as a purely domestic portfolio.
C) is only about 12% as risky as the typical individual stock.
D) all of the above
5) In some respects, internationally diversified portfolios are the same in principle as a domestic
portfolio because:
A) the investor is attempting to combine assets that are perfectly correlated.
B) investors are trying to reduce systematic risk.
C) investors are trying to reduce the total risk of the portfolio.
D) all of the above
6) In some respects, internationally diversified portfolios are different from a domestic portfolio
because:
A) investors may also acquire foreign exchange risk.
B) international portfolio diversification increases expected return but does not decrease risk.
C) investors must leave the country to acquire foreign securities.
D) all of the above
Instruction 13.1:
Use the information to answer the following question(s).
In September 2009 a U.S. investor chooses to invest $500,000 in German equity securities at a
then current spot rate of $1.30/euro. At the end of one year the spot rate is $1.35/euro.
7) Refer to Instruction 13.1. How many euros will the U.S. investor acquire with his initial
$500,000 investment?
A) €650,000
B) €370,370
C) €500,000
D) €384,615
8) Refer to Instruction 13.1. At an average price of €60/share, how many shares of stock will the
investor be able to purchase?
A) 8333 shares
B) 6410 shares
C) 6173 shares
D) 10,833 shares
9) Refer to Instruction 13.1. At the end of the year the investor sells his stock that now has an
average price per share of €57. What is the investor’s average rate of return before converting the
stock back into dollars?
A) 5.0%
B) -3.0%
C) -5.0%
D) 3.0%
10) Refer to Instruction 13.1. At the end of the year the investor sells his stock that now has an
average price per share of €57. What is the investor’s average rate of return after converting the
stock back into dollars?
A) -1.35%
B) 5.0%
C) -5.0%
D) -7.24%
11) A U.S. investor makes an investment in Britain and earns 14% on the investment while the
British pound appreciates against the U.S. dollar by 8%. What is the investor’s total return?
A) 22.00%
B) 23.12%
C) 6.00%
D) 4.88%
12) Which of the following statements is NOT true?
A) International diversification benefits induce investors to demand foreign securities.
B) An international security adds value to a portfolio if it reduces risk without reducing return.
C) Investors will demand a security that adds value.
D) All of the above are true.
13) International CAPM (ICAPM) assumes that there is a global market in which the firm’s
equity trades, and estimates of the firm’s beta, and the market risk premium, must then reflect
this global portfolio.