ECO 410 Week 8 Quiz – Strayer
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Quiz 7 Chapter 13 and 14
Chapter 13
The Global Cost and Availability
of Capital
13.1 Financial Globalization and Strategy
Multiple Choice
1) 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
2) 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.
3)
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
4) 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
5) 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.
6) 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.
7) The
weighted average cost of capital (WACC) is:
A) the
required rate of return for all of a firm's capital investment projects.
B) the
required rate of return for a firm's average risk projects.
C) not
applicable for use by MNE.
D) equal
to 13%.
8) 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
9) 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.
10)
________ risk is a function of the variability of expected returns of the
firm's 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
11)
Systematic risk:
A) is
the standard deviation of a security's return.
B) is
measured with beta.
C) is
measured with standard deviation.
D) none
of the above
12)
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.
13) 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.
14) 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.
15) 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.
16) 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
17) 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.
18) If a
company fails to accurately predict it's cost of equity, then:
A) the
firm's 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.
19)
Which of the following statements is NOT true regarding beta?
A) Beta
will have a value of less than 1.0 if the firm's returns are less volatile than
the market.
B) Beta
will have a value of greater than 1.0 if the firm's returns are more volatile
than the market.
C) Beta
will have a value of equal to 1.0 if the firm's returns are of equal volatility
to the market.
D) All
of the statements above are true.
20)
Which of the following will NOT affect a firm's beta?
A) the
choice of the market portfolio against which to compare the variability of a
firm's returns
B) the
choice of the risk-free security
C) the
choice of the time period used to calculate the firm's beta
D) None
of the above, because each of them affects the calculation of a firm's beta.
True/False
1) 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.
2) Other
things equal, an increase in the firm's tax rate will increase the WACC for a
firm that has both debt and equity financing.
3) If a
firm's expected returns are more volatile than the expected return for the
market portfolio, it will have a beta less than 1.0.
4) 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 firm's existing projects.
5) 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.
6) Firms
acquire debt in either the form of loans from commercial banks, or by selling
new common stock.
7) 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.
8)
International CAPM (ICAPM) assumes that there is a global market in which the
firm's equity trades, and estimates of the firm's beta, and the market risk
premium, must then reflect this global portfolio.
9) 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.
10) 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.
11) 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.
12) The
geometric mean will, in all but a few extreme circumstances, yield a larger
return than the arithmetic mean return.
Essay
1) 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?
13.2 The Demand for Foreign Securities: The Role
of International Portfolio Investors
Multiple Choice
1) 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
2) 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.
3) 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.
4)
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
5)
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
6)
Capital market imperfections leading to financial market segmentation include:
A)
political risks.
B) corporate
governance differences.
C)
regulatory barriers.
D) all
of the above
7) 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
8) 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
True/False
1)
Internationally diversified portfolios often have a lower rate of return and
almost always have a higher level of portfolio risk than their domestic counterparts.
2)
Empirical tests of market efficiency fail to show that most major national
markets are reasonably efficient.
3) 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.
4)
Capital market segmentation is a financial market imperfection caused mainly by
government constraints, institutional practices, and investor perceptions.
5) 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.
13.3 The Cost of Capital for MNEs Compared to
Domestic Firms
Multiple Choice
1)
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
2)
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
3) 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.
4)
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.
5) 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
6)
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
7)
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.
True/False
1)
Because of the international diversification of cash flows, the risk of
bankruptcy for MNEs is significantly lower than that for purely domestic firms.
2) The
opportunity set of projects is typically smaller for MNEs than for purely
domestic firms because international markets are typically specialized niches.
3)
Surprisingly, empirical studies find that MNEs have a higher level of
systematic risk than their domestic counterparts.
Essay
1) What
do theory and empirical evidence say about capital structure and the cost of
capital for MNEs versus their domestic counterparts?
13.4 The Riddle: Is the Cost of Capital Higher
for MNEs?
Multiple Choice
1)
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 MNE's increased WACC.
True/False
1)
Empirical studies indicate that MNEs have a lower debt/capital ratio than
domestic counterparts, indicating that MNEs have a lower cost of capital.
Chapter 14 Raising Equity and Debt Globally
14.1 Designing a Strategy to Source Capital
Globally
Multiple Choice
1) 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.
2)
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
3) 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
4) 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 firm's visibility
D) all
of the above
True/False
1) Most
firms raise their initial capital in foreign markets.
14.2 Optimal Financial Structure
Multiple Choice
1) 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
2) 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
3) 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.
4) 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.
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