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1) The reason more foreign firms do not sell equity securities in the U.S. and list on the NYSE is because of

Answer

the foreign exchange risk of listing in U.S. dollars.

the threat of confiscation.

detailed U.S. disclosure rules.

the relative inefficiency of U.S. equity markets.

2) Brachman Builders is a large international construction firm that wants to raise up to $60 million to finance expansion. Brachman desires to maintain a capital structure that is 50% debt and 50% equity. Brachman can finance in the domestic and international markets at the rates listed in the following table. Both debt and equity would have to be sold in multiples of $15 million, and these cost figures show the component costs, each, of debt and equity if raised half by equity and half by debt.

Up to $30 million of new capital

Cost of Domesic Equity 10%
Cost of Domesic Debt 8%
Cost of European Equity 12%
Cost European Debt 6%
$31 million to $60 of new capital
Cost of Domesic Equity 16%
Cost of Domesic Debt 10%
Cost of European Equity14%
Cost European Debt 8%

What is the lowest possible average cost of capital for Brachman if the firm raises $30 million, maintains their desired capital structure and they are in a 30% tax bracket?

Answer

7.00%

8.10%

4.90%

7.10%

3) 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
True
False

4) Which of the following does not constitute a benefit to the investor of diversifying internationally?

Answer

The increase in the expected return from an internationally diversified investment.

The relatively low degree of correlation between the world's stock markets.

A lower total level of nondiversifiable risk.

All of the above are benefits of international diversification.

5) TropiKana Inc. has just borrowed >1,000,000 to make improvements to an Italian fruit plantation and processing plant. If the interest rate is 7.00% per year and the Euro depreciates against the dollar from $1.15/ > at the time the loan was made to $1.10/ > 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)?

Answer

$972,727

$1,177,000

>972,727

$1,070,000

6) ABC Inc. borrows 100m JPY when JPY spot rate is JPY120/$. The JPY interest rate for the loan is 3%. One year later when ABC pays back the JPY principal and interest, the exchange rate is JPY 95/$. What is the dollar cost of ABC's JPY loan?

Answer

3%

30.1%

-18.46%

None of the above

7) A firm whose equity has a beta of 1.0

Answer

has less systematic risk than the market portfolio.

has greater systematic risk than the market portfolio.

stands little chance of surviving in the international financial market place.

None of the above is true.

8) 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.

Answer

positive; negative

negative; negative

positive; positive

negative; positive

9) Which of the following is NOT a reason why capital budgeting for a foreign project is more complex than for a domestic project?

Answer

Parent firms must specifically recognize remittance of funds due to differing rules and regulations concerning remittance of cash flows, taxes, and local norms.

Differing rates of inflation between the foreign and domestic economies.

Parent cash flows must be distinguished from project cash flows.

All of the above add complexity to the international capital budgeting process.

10) Theoretically, most MNEs should be in a position to support higher ________ than their domestic counterparts because their cash flows are diversified internationally.

Answer

temperatures

debt ratios

equity ratios

None of the above.

11) Given the information provided in the table, what is your estimate of the cost of equity for Gibson Flowers?

Risk-free rate of interest 3.5%
Average equity market return 10.5%
Estimated cost of debt 8.0%
Estimated correlation of Gibson with the market 0.726
Estimated standard deviation of Gibson's returns 35%
Estimated standard deviation of the market's returns 20%
Estimated effective U.S. tax rate 35%

Answer

13.34%

12.39%

7.81%

16.83%

12) When determining a firm's weighted average cost of capital (wacc) which of the following terms is NOT necessary?

Answer

The firm's tax rate.

The firm's cost of equity.

The firm's cost of debt.

All of the above are necessary.

13) A Chinese MNC needs US$25,000,000 for one year to finance working capital. The company has two alternatives for borrowing:
1. Borrow US$25,000,000 in Eurodollars in London at 6.25% per annum
2. Borrow RMB 205,000,000 in Shanghai at 8.00% per annum, and exchange these RMB at the present exchange rate of RMB8.2/$ for U.S. dollars.
At what ending exchange rate would Chinese MNC be indifferent between borrowing U.S. dollars and borrowing RMB?

Answer

RMB 8.2/$

RMB8.9/$

RMB8.067/$

RMB8.335/$

14) Empirical research has found that systematic risk for MNEs is greater than that for their domestic counterparts. This could be due to

Answer

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.

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.

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.

None of the above Systematic risk is less for MNEs than for their domestic counterparts.

15) 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
True
False

Solution Preview

1) The reason more foreign firms do not sell equity securities in the U.S. and list on the NYSE is because of
Answer

the foreign exchange risk of listing in U.S. dollars.

the threat of confiscation.

detailed U.S. disclosure rules.

the relative inefficiency of U.S. equity markets.

2) Brachman Builders is a large international construction firm that wants to raise up to $60 million to finance expansion. Brachman desires to maintain a capital structure that is 50% debt and 50% equity. Brachman can finance in the domestic and international markets at the rates listed in the following table. Both debt and equity would have to be sold in multiples of $15 million, and these cost figures show the component costs, each, of debt and equity if raised half by equity and half by debt.

Up to $30 million of new capital

Cost of Domestic Equity 10%
Cost of Domestic Debt 8% [After-tax = 8% * (1-.30) = 5.6%]
Cost of European Equity 12%
Cost European Debt 6% [After-tax = 6% * (1-.30) = 4.2%]

$31 million to $60 of new capital
Cost of Domestic Equity 16%
Cost of Domestic Debt 10%
Cost of European Equity14%
Cost European Debt 8%

What is the lowest possible average cost of capital for Brachman if the firm raises $30 million, maintains their desired capital structure and they are in a 30% tax bracket?
Answer

7.00%

8.10%

4.90%

7.10%
Amount to be raised = $30 million (as asked in question, and NOT $60 million]
1: Domestic equity & Domestic debt = [50*10% + 50% * 5.6%]  7.8%
2: Domestic equity & European debt = [50%*10% + 50%*4.2%]  7.1%
3. European equity & European debt = [50%*12%+ 50%*4.2%]  8.1%
4. European equity & Domestic debt = [50%*12% + 50%*5.6%]  8.8%
Of the 4 options listed above, the 2nd option gives the lowest possible average cost of capital of 7.1%.

3) 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
True
False

4) Which of the following does not constitute a benefit to the investor of diversifying internationally?
Answer

The increase in the expected return from an internationally diversified investment.

The relatively low degree of correlation between the world's stock markets.

A lower total level of ...

Solution Summary

The reason more foreign firms do not sell equity securities in the United States is determined. The list on the NYSE is given.

$2.19