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Chapter 17
ANSWER: A
2. According to the text, there is evidence that the debt ratios (debt/capital) of MNCs based in:
A) the U.S. tend to be generally higher than MNCs headquartered in Japan and Germany.
B) the United Kingdom tend to be generally higher than MNCs headquartered in other non-U.S.
countries.
C) the U.S. tend to be generally lower than MNCs headquartered in Japan and Germany.
D) A and B
ANSWER: C
3. According to the text, the cost of capital for an international project will:
A) always be greater than the firm’s cost of capital.
B) always be less than the firm’s cost of capital.
C) always be the same as the firm’s cost of capital.
D) none of the above
ANSWER: D
4. Which of the following factors is not expected to generally have a favorable impact on the firm’s
cost of capital according to the text?
A) easy access to international capital markets.
B) high degree of international diversification.
C) volatile exchange rate fluctuations.
D) all of the above
ANSWER: C
41 International Financial Management
ANSWER: B
ANSWER: D
7. The term “global” target capital structure for an MNC represents the MNC’s capital structure:
A) in the U.S.
B) relative to competitors across all countries.
C) where it has its largest subsidiary.
D) when consolidating all of its subsidiaries.
ANSWER: D
ANSWER: C
9. One argument for why subsidiaries should be wholly-owned by the parent is that:
A) the potential conflict of interests between the MNC’s managers and shareholders is avoided.
B) the potential conflict of interests between the MNC’s majority shareholders and minority
shareholders is avoided.
C) the potential conflict of interests between the MNC’s existing creditors is avoided.
D) the potential conflict of interests between the MNC’s managers and creditors is avoided.
ANSWER: B
Chapter 17: Multinational Cost of Capital and Capital Structure 42
10. One argument for why subsidiaries should be only partly-owned by the parent is:
A) that the potential conflict of interests between the MNC’s managers and shareholders is
avoided.
B) that the potential conflict of interests between the MNC’s majority shareholders and minority
shareholders is avoided.
C) that the potential conflict of interests between the MNC’s existing creditors is avoided.
D) to offer some protection against threats of any adverse actions by the host government.
ANSWER: D
11. The cost of capital for MNCs based in the U.S. has been generally _______ than MNCs based in
Germany and _______ than MNCs based in Japan.
A) lower; lower
B) lower; higher
C) higher; higher
D) higher; lower
ANSWER: C
12. Other things being equal, countries with relatively _______ populations and _______ inflation are
more likely to have a low cost of capital.
A) young; high
B) old; high
C) old; low
D) young; low
ANSWER: C
13. Other things being equal, the financial leverage of MNCs will be higher if the governments of their
home countries are _______ likely to rescue them (in the event of failure), and if their home
countries are _______ likely to experience a recession.
A) more; more
B) less; more
C) less; less
D) more; less
ANSWER: D
14. Based on the factors that influence a country’s cost of capital, the cost of capital in less developed
countries is likely to be _______ than that of the U.S. and _______ than that of Japan.
A) higher; higher
B) higher; lower
C) lower; lower
D) lower; higher
ANSWER: A
43 International Financial Management
ANSWER: C
16. The term “local target capital structure” is used in the text to represent:
A) the average capital structure of local firms where the MNC’s subsidiary is based.
B) the average capital structure of local firms where the MNC’s parent is based.
C) the desired capital structure of a subsidiary of a particular MNC.
D) the desired capital structure of a particular MNC overall (including all subsidiaries).
ANSWER: C
17. The term “global capital structure” is used in the text to represent:
A) the average capital structure of all MNCs across countries.
B) the average capital structure of all domestic firms across countries.
C) the capital structure of a subsidiary of a particular MNC.
D) the capital structure of a particular MNC overall (including all subsidiaries).
ANSWER: D
18. An MNC may deviate from its target capital structure in each country where financing is obtained,
yet still achieve its target capital structure on a consolidated basis.
A) true.
B) false.
ANSWER: A
19. Assume that the risk-free interest rate in the U.S. is the same as that in Country M. Assume that the
government of Country M is more likely to rescue local firms that experience financial problems.
Other things being equal, Country M’s firms are likely to use a _______ degree of financial lever-
age than U.S. firms. If a firm based in Country M had the same degree of financial leverage and
the same operating characteristics as a U.S. firm, its cost of capital would be _______ than that of
the U.S. firm.
A) higher; higher
B) higher; lower
C) lower; lower
D) lower; higher
ANSWER: B
Chapter 17: Multinational Cost of Capital and Capital Structure 44
20. When an MNC’s firm’s cost of capital rises, it would be _______ likely to divest an existing
project, other things held constant.
A) more
B) less
C) neither; there is no effect
D) neither; MNCs do not ever divest projects
ANSWER: A
21. Which of the following is not a factor that favorably affects an MNC’s cost of capital, according to
your text?
A) exchange rate risk.
B) size.
C) access to international capital markets.
D) international diversification.
ANSWER: A
22. According to your text, which of the following is not a factor that affects an MNC’s cost of capital
unfavorably?
A) exchange rate risk.
B) country risk.
C) political risk.
D) size.
ANSWER: D
23. The ____________ an MNC, the __________ its cost of capital is likely to be.
A) larger; higher
B) larger; lower
C) smaller; lower
D) A and C
ANSWER: B
24. MNC Corporation has a beta of 2.0. The risk-free rate of interest is 5%, and the return on the stock
market overall is expected to be 13%. What is the required rate of return on MNC stock?
A) 21%.
B) 41%.
C) 16%.
D) 13%.
E) none of the above
ANSWER: A
25. Which of the following is not a reason the cost of debt can vary across countries?
A) differences in the risk-free rate.
B) a high price/earnings multiple.
C) differences in the risk premium.
D) differences in demographics.
ANSWER: B
26. In general, MNCs probably prefer to use ____________ foreign debt when their foreign
subsidiaries are subject to ___________ local interest rates.
A) more; low
B) more; high
C) less; low
D) B and C
E) none of the above
ANSWER: A
27. In general, MNCs probably prefer to use ____________ foreign debt when their foreign
subsidiaries are subject to potentially ___________ local currencies.
A) more; strong
B) more; weak
C) less; strong
D) less; weak
E) B and D
ANSWER: B
28. A firm’s cost of ___________ reflects an opportunity cost: what the existing shareholders could
have earned if they had received the earnings as dividends and invested the funds themselves..
A) debt
B) retained earnings
C) new common equity
D) none of the above
ANSWER: B
29. The ____________ the cost of capital, the ___________ will be a project’s net present value for a
project with a given set of expected cash flows.
A) lower; higher
B) higher; higher
C) lower; lower
D) none of the above
ANSWER: A
Chapter 17: Multinational Cost of Capital and Capital Structure 46
30. To the extent that individual economies are ______________ each other, net cash flows from a
portfolio of subsidiaries should exhibit ________ variability, which may reduce the probability of
bankruptcy.
A) dependent on; less
B) dependent on; more
C) independent of; less
D) independent of; more
ANSWER: C
31. In general, a firm __________ exposed to exchange rate fluctuations will usually have a
___________ distribution of possible cash flows in future periods.
A) more; narrower
B) less; wider
C) more; wider
D) none of the above
ANSWER: C
32. According to the CAPM, the required rate of return on stock is a positive function of all of the
following, except:
A) the risk-free rate of interest.
B) the market rate of return.
C) the stock’s beta.
D) the company’s earnings.
ANSWER: D
33. The lower a project’s beta, the _______ is the project’s _________ risk.
A) lower; systematic
B) lower; unsystematic
C) higher; systematic
D) higher; unsystematic
ANSWER: A
34. Capital asset pricing theory suggests that _____________ risk of projects can be ignored and that
__________ is relevant.
A) unsystematic; unsystematic
B) unsystematic; systematic
C) systematic; unsystematic
D) systematic; systematic
ANSWER: B
47 International Financial Management
35. Capital asset pricing theory would most likely suggest that the cost of capital is generally ________
for _________.
A) higher; MNCs
B) lower; domestic firms
C) lower; MNCs
D) none of the above
ANSWER: C
36. When assuming that financial markets are segments, it is acceptable to use the U.S. market when
measuring a U.S.-based MNC’s project’s beta.
A) true.
B) false.
ANSWER: A
37. Assume the following information for Pexi Co., a U.S.-based MNC that is considering obtaining
funding for a project in Germany:
ANSWER: D
38. Assume the following information for Pexi Co., a U.S.-based MNC that is considering obtaining
funding for a project in Germany:
C) 10.0%.
D) 7.2%.
ANSWER: B
39. When an MNC is considering financing a portion of a foreign project within the foreign country, the
best method to account for a foreign project’s risk is to:
A) derive net present values based on the WACC.
B) adjust the weighted average cost of capital for the risk differential.
C) derive the net present value of the equity investment.
D) none of the above
ANSWER: C
40. Normally, an MNC will issue stock in all of the countries where it does business.
A) true.
B) false.
ANSWER: B
41. Generally speaking, an MNC’s size, its access to international capital markets, and international
diversification are unfavorable to an MNC’s cost of capital.
A) true.
B) false.
ANSWER: B
42. Country differences, such as differences in the risk-free interest rate and differences in risk
premiums across countries, can cause the cost of capital to vary across countries.
A) true.
B) false.
ANSWER: A
43. Because their economies have lower growth, the cost of debt in industrialized countries is much
higher than the cost of debt in many less developed countries.
A) true.
B) false.
ANSWER: B
49 International Financial Management
44. In the United States, government rescues are not as common as in other countries, such as the
United Kingdom. Therefore, the risk premium on a given level of debt would be higher for U.S.
firms than for firms of the United Kingdom, everything else being equal.
A) true.
B) false.
ANSWER: A
45. Although an MNC can adjust either the discount rate or the cash flows to account for a project’s
risk, there is no perfect formula to adjust for a project’s unique risk.
A) true.
B) false.
ANSWER: A
46. Assume a subsidiary is forced to borrow in excess of the MNC’s optimal capital structure. Also
assume that the parent company reduces its debt financing by an offsetting amount. Under this
scenario, the cost of capital for the MNC overall could not have changed.
A) true.
B) false.
ANSWER: B
47. Because increased external financing by a foreign subsidiary reduces the external financing needed
by the parent, such an action will not affect the overall MNC’s cost of capital.
A) true.
B) false.
ANSWER: B
48. Since the cost of funds can vary among markets, the MNC’s access to the international capital
markets may allow it to attract funds at a lower cost than that paid by domestic firms.
A) true.
B) false.
ANSWER: A
49. Capital asset pricing theory would most likely suggest that the MNC’s cost of capital is lower than
that of domestic firms.
A) true.
B) false.
ANSWER: A
Chapter 17: Multinational Cost of Capital and Capital Structure 50
50. If an MNC’s cash flows are more stable, it can probably handle more debt than an MNC with
erratic cash flows.
A) true.
B) false.
ANSWER: A