Multinational Business Finance 13th Edition Test Bank Chapter 13

Unlock access to all the studying documents.

View Full Document

Multinational Business Finance, 13e (Eiteman/Stonehill/Moffett) Chapter 13 The

Global Cost and Availability of Capital 13.1 Financial Globalization and Strategy

Multiple Choice Question: 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 Answer:

Question: 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. Answer:

Question: 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 Answer:

Question: 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 Answer:

Question: 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. Answer:

Question: 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. Answer:

Question: The weighted average cost of capital (WACC) is: A) the required rate of return

for all of a firms capital investment projects. B) the required rate of return for a firms

average risk projects. C) not applicable for use by MNE. D) equal to 13%. Answer:

Question: 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 Answer:

Question: 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.

Answer:

Question: ________ risk is a function of the variability of expected returns of the firms

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 Answer:

Question: Systematic risk: A) is the standard deviation of a securitys return. B) is measured

with beta. C) is measured with standard deviation. D) none of the above Answer:

Question: 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. Answer:

Question: 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. Answer:

Question: 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.

Answer:

Question: 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. Answer:

Question: 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 Answer:

Question: 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 was: 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. Answer:

Question: If a company fails to accurately predict its cost of equity, then: A) the firms 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.

Answer:

Question: Which of the following statements is NOT true regarding beta? A) Beta will

have a value of less than 1.0 if the firms returns are less volatile than the market. B) Beta

will have a value of greater than 1.0 if the firms returns are more volatile than the market.

C) Beta will have a value of equal to 1.0 if the firms returns are of equal volatility to the

market. D) All of the statements above are true. Answer:

Question: Which of the following will NOT affect a firms beta? A) the choice of the

market portfolio against which to compare the variability of a firms returns B) the choice

of the risk-free security C) the choice of the time period used to calculate the firms beta D)

None of the above, because each of them affects the calculation of a firms beta. Answer:

Question: 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. Answer:

Question: Other things equal, an increase in the firms tax rate will increase the WACC for

a firm that has both debt and equity financing. Answer:

Question: If a firms expected returns are more volatile than the expected return for the

market portfolio, it will have a beta less than 1.0. Answer:

Question: 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 firms existing projects. Answer:

Question: One of the elegant beauties of international equity markets is that over the last

100 or so years, the average market risk premium is almost identical across major

industrial countries. Answer:

Question: Firms acquire debt in either the form of loans from commercial banks, or by

selling new common stock. Answer:

Question: 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.

Answer:

Question: International CAPM (ICAPM) assumes that there is a global market in which

the firms equity trades, and estimates of the firms beta, and the market risk premium, must

then reflect this global portfolio. Answer:

Question: Use of the International CAPM (ICAPM) assures that the WACC will be lower

than if a purely domestic market portfolio had been used in the estimation of the cost of

equity. Answer:

Question: A global portfolio is an index of all the securities in the world, whereas a world

portfolio represents those securities actually available to an investor. Answer:

Question: The CAPM has now become very widely accepted in global business as the

preferred method of calculating the cost of equity for a firm. As a result of this, there is

now little debate over what numerical values should be used in its application. Answer:

Question: The geometric mean will, in all but a few extreme circumstances, yield a larger

return than the arithmetic mean return. Answer:

Question: 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? Answer:

Question: The primary goal of both domestic and international portfolio managers is: A) to

maximize return for a given level of risk, or to minimize risk for a given level of return. B)

to minimize the number of unique securities held in their portfolio. C) to maximize their

WACC. D) all of the above Answer:

Question: Which of the following is NOT a portfolio diversification technique used by

portfolio managers? A) diversify by type of security B) diversify by the size of

capitalization of the securities held C) diversify by country D) All of the above are

diversification techniques. Answer:

Question: If all capital markets are fully integrated, securities of comparable expected

return and risk should have the same required rate of return in each national market after

adjusting for: A) time of day and language requirements. B) political risk and time lags. C)

foreign exchange risk and political risk. D) foreign exchange risk and the spot rate.

Answer:

Question: Capital market segmentation is a financial market imperfection caused mainly

by: A) government constraints. B) institutional practices. C) investor perceptions. D) all of

the above Answer:

Question: Capital market imperfections leading to financial market segmentation include:

A) asymmetric information between domestic and foreign-based investors. B) high

securities transaction costs. C) foreign exchange risks. D) all of the above Answer:

Question: Capital market imperfections leading to financial market segmentation include:

A) political risks. B) corporate governance differences. C) regulatory barriers. D) all of the

above Answer:

Question: The authors refer to companies that have access to a ________ as MNEs, and

firms without such access are identified as ________. A) global cost and availability of

capital; domestic firms. B) large domestic capital market; geographically challenged. C)

world financial markets; antiquated. D) none of the above Answer:

Question: The MNE can ________ its ________ by gaining access to markets that are

more liquid and/or less segmented than its own. A) increase; MCC. B) decrease; MCC. C)

maintain; MRR. D) none of the above Answer:

Question: Internationally diversified portfolios often have a lower rate of return and almost

always have a higher level of portfolio risk than their domestic counterparts. Answer:

Question: Empirical tests of market efficiency fail to show that most major national

markets are reasonably efficient. Answer:

Question: A MNEs marginal cost of capital is constant for considerable ranges in its capital

budget, but this statement cannot be made for most domestic firms. Answer:

Question: Capital market segmentation is a financial market imperfection caused mainly

by government constraints, institutional practices, and investor perceptions. Answer:

Question: Since the 1980s and 1990s, segmentation in global financial markets has been

reduced. As a result of this, the correlation among securities markets has increased, thereby

reducing, but not eliminating, the benefits of international portfolio diversification.

Answer:

Question: Theoretically, most MNEs should be in a position to support higher ________

than their domestic counterparts because their cash flows are diversified internationally. A)

equity ratios B) debt ratios C) temperatures D) none of the above Answer:

Question: According to your authors, diversifying cash flows internationally may help

MNEs reduce the variability of cash flows because: A) of a lack of competition among

international firms. B) of an offset to cash flow variability caused by exchange rate

variability. C) returns are not perfectly correlated between countries. D) none of the above

Answer:

Question: Which of the following statements is NOT true regarding MNEs when compared

to purely domestic firms? A) MNEs tend to rely more on short and intermediate term debt.

B) MNEs have greater foreign exchange risk. C) MNEs have greater costs of asymmetric

information. D) MNEs have higher agency costs. Answer:

Question: Empirical research has found that systematic risk for MNEs is greater than that

for their domestic counterparts. This could be due to: A) the fact that the increase in the

correlation of returns between the market and the firm is less than the increase in the

standard deviation of returns of the firm. B) the fact that the decrease in the correlation of

returns between the market and the firm is greater than the increase in the standard

deviation of returns of the firm. C) the reduction in the correlation of returns between the

firm and the market is less than the increase in the variability of returns caused by factors

such as asymmetric information, foreign exchange risk, and the like. D) None of the

above; systematic risk is less for MNEs than for their domestic counterparts. Answer:

Question: The optimal capital budget: A) occurs where the marginal cost of capital equals

the marginal rate of return of the opportunity set of projects. B) is typically larger for

purely domestic firms than for MNEs. C) is an illusion found only in international finance

textbooks. D) none of the above Answer:

Question: Empirical studies indicate that MNEs have higher costs of capital than purely

domestic firms. This could be due to higher levels of: A) political risk. B) exchange rate

risk. C) agency costs. D) all of the above Answer:

Question: Despite the theoretical elegance of this hypothesis, empirical studies have come

to the opposite conclusion.Despite the favorable effect of international diversification of

cash flows, bankruptcy risk was only about the same for MNEs as for domestic firms.

However, MNEs faced higher costs for each of the following EXCEPT: A) agency costs.

B) political risk. C) asymmetric information. D) In fact, each of these costs were higher for

the MNE than for the domestic firm. Answer:

Question: Because of the international diversification of cash flows, the risk of bankruptcy

for MNEs is significantly lower than that for purely domestic firms. Answer:

Question: The opportunity set of projects is typically smaller for MNEs than for purely

domestic firms because international markets are typically specialized niches. Answer:

Question: Surprisingly, empirical studies find that MNEs have a higher level of systematic

risk than their domestic counterparts. Answer:

Question: What do theory and empirical evidence say about capital structure and the cost

of capital for MNEs versus their domestic counterparts? Answer:

Question: Empirical studies indicate that WACC for an MNE is higher than for their

domestic competitors. Reasons cited for this increased cost include all of the following

EXCEPT: A) agency costs. B) foreign exchange risk. C) political risk. D) All of the above

are cited as reasons for an MNEs increased WACC. Answer:

Question: Empirical studies indicate that MNEs have a lower debt/capital ratio than

domestic counterparts, indicating that MNEs have a lower cost of capital. Answer: