Multiple Choice
Identify the
choice that best completes the statement or answers the question.
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1.
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An argument for MNCs to have a debt-intensive capital structure is:
a. | they are well diversified. | b. | foreign government tax rules may change over
time. | c. | exposure to exchange rate fluctuations. | d. | exposure to fund
blockage. |
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2.
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The capital asset pricing theory is based on the premise that:
a. | only unsystematic variability in cash flows is relevant. | b. | only systematic
variability in cash flows is relevant. | c. | both systematic and unsystematic variability in
cash flows are relevant. | d. | neither systematic nor unsystematic variability
in cash flows is relevant. |
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3.
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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. |
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4.
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Other things being equal, countries with relatively _______ populations and
_______ inflation are more likely to have a low cost of capital.
a. | young; high | c. | old; low | b. | old; high | d. | young; low |
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5.
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According to the text:
a. | the cost of debt for each country is somewhat stable over time. | b. | the cost of debt for
countries change over time, and these changes are negatively correlated. | c. | the cost of debt for
countries change over time, and these changes are positively correlated. | d. | the cost of debt for
countries change over time, and are not correlated. |
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6.
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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.
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7.
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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. | c. | access to international capital markets. | b. | size. | d. | international diversification. |
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8.
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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 |
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9.
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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 |
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10.
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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 | c. | independent of; less | b. | dependent on; more | d. | independent of;
more |
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11.
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The lower a project's beta, the _______ is the project's _________
risk.
a. | lower; systematic | c. | higher; systematic | b. | lower; unsystematic | d. | higher;
unsystematic |
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12.
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Assume the following information for Pixy a UK-based MNC that is considering
obtaining funding for a project in Germany:
UK risk-free rate = 4%
German risk-free rate =
5%
Risk premium on pound-denominated debt provided by UK creditors = 3%
Risk premium on
euro-denominated debt provided by German creditors = 4%
Beta of project = 1.2
Expected UK
market return = 10%
UK corporate tax rate = 30%
German corporate tax rate = 40%
What is
Pixy's cost of pound-denominated equity?
a. | 12.0%. | c. | 10.0%. | b. | 11.2%. | d. | 7.2%. |
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