Multinational Business Finance 13th Edition Test Bank Chapter 14

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Multinational Business Finance, 13e (Eiteman/Stonehill/Moffett) Chapter 14 Raising

Equity and Debt Globally 14.1 Designing a Strategy to Source Capital Globally

Multiple Choice

Question: 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. Answer:

Question: 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 Answer:

Question: 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 Answer:

Question: 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 firms visibility D) all of the

above Answer:

Question: Most firms raise their initial capital in foreign markets. Answer:

Question: 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 Answer:

Question: 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 Answer:

Question: 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. Answer:

Question: 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.

Answer:

Question: 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. Answer:

Question: 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% Answer:

Question: Not all firms have the same optimal capital structure. Factors that might

influence a firms 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 Answer:

Question: 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. Answer:

Question: 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 Answer:

Question: 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 Answer:

Question: 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

Answer:

Question: 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

Answer:

Question: 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 Answer:

Question: 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 Answer:

Question: 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% Answer:

Question: Financial theory has at last provided us with a single optimal capital structure

for domestic firms. Answer:

Question: 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. Answer:

Question: 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.

Answer:

Question: 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. Answer:

Question: The domestic theory of optimal capital structure does not need to be modified

for MNEs. Answer:

Question: 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. Answer:

Question: 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.

Answer:

Question: 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 firms home country. Answer:

Question: The stock exchange with the greatest value of shares traded is: A) NYSE. B)

Tokyo. C) Nasdaq. D) London. Answer:

Question: 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 Answer:

Question: The Tokyo exchange is the number one choice of firms looking to gain liquidity

by cross-listing their equity securities. Answer:

Question: 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. Answer:

Question: ________ 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

Answer:

Question: Depositary receipts traded outside the United States are called ________

depositary receipts. A) Euro B) Global C) American D) none of the above Answer:

Question: 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. Answer:

Question: 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. Answer:

Question: 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.

Answer:

Question: 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 Answer:

Question: 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. Answer:

Question: 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 Answer:

Question: Level ________ is the easiest standard to satisfy for issuing ADRs. A) 144a B)

III C) II D) I Answer:

Question: 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. Answer:

Question: 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.

Answer:

Question: An unsponsored ADR may be initiated without the approval of the foreign firm

with the underlying stock. Answer:

Question: ADRs are considered an effective way for firms to improve the liquidity of their

stock, especially if the home market is small and illiquid. Answer:

Question: 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. Answer:

Question: 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 are alternatives to source equity instruments.

Answer:

Question: 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 Answer:

Question: 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 Answer:

Question: Private equity funds (PEF) differ from traditional venture capital (VC) funds in

that: A) VC operates mainly in lesser-developed countries while PEF do not. B) VC

typically invests 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. Answer:

Question: Strategic alliances are normally formed by firms that expect to gain synergies

from which of the following? A) economies of scale B) economies of scope C)

complementary marketing D) all of the above Answer:

Question: SEC rule 144A permits institutional buyers to trade privately placed securities

without the previous holding periods restrictions and without requiring SEC registration.

Answer:

Question: Your authors note several empirical studies that have found: A) no share price

effect for foreign firms that cross-list on major U.S. exchanges. B) a positive share price

effect for foreign firms that cross-list on major U.S. exchanges. C) a negative share price

effect for foreign firms that cross-list on major U.S. exchanges. D) none of the above

Answer:

Question: 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 Answer:

Question: In addition to gaining liquidity, which of the following could also be considered

a legitimate reason for cross-listing equity? A) enhance a firms local image B) become

more familiar with the local financial community C) get better local press coverage D) all

of the above Answer:

Question: 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 Answer:

Question: 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 Answer:

Question: For the most part, U.S. SEC disclosure requirements are ________ other,

non-U.S. equity market rules. A) more stringent than B) less stringent than C) equally

stringent to D) none of the above Answer:

Question: The combined impact of a new equity issue undertaken simultaneously with a

cross-listing has a more favorable impact on stock price than cross-listing alone. Answer:

Question: Because of stringent SEC rules, American companies typically do not find

foreign disclosure rules to be overly onerous. Answer:

Question: 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. Answer:

Question: ________ are domestic currencies of one country on deposit in a second

country. A) LIBORs B) Eurocurrencies C) Federal funds D) Discount window deposits

Answer:

Question: 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. Answer:

Question: 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. Answer:

Question: 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.

Answer:

Question: 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 Answer:

Question: Foreign bonds sold in the United States are nicknamed “Yankee bonds,” foreign

bonds sold in Japan are called “Samurai bonds.” What are foreign bonds sold in the United

Kingdom nicknamed? A) “Union Jacks” B) “Royalty” C) “Bulldogs” D) “Churchills”

Answer:

Question: A ________ is a bond underwritten by a syndicate from a single country, sold

within in that country, denominated in that countrys currency, but the issuer is from outside

that country. A) foreign bond B) Eurobond C) domestic bond D) none of the above

Answer:

Question: Eurocurrencies are NOT the same as the euro developed for the common

European currency. Answer:

Question: The Eurocurrency market continues to thrive because it is a large international

money market relatively free of governmental regulation and interference. Answer:

Question: Moodys rates international bonds at the request of the issuer with the stipulation

that Moodys will publish the ratings even if the ratings are unfavorable. Answer:

Question: 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? Answer: