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11. Consider a country that presently has a high level of unemployment because of weak economic conditions. Its income levels are very low. This country may be an attractive target as a result of ____ motives by U.S. firms that engage in direct foreign investment.cost-related12. Which of the following is a reason to consider international business?economies of scale.
exploit monopolistic advantages.
diversification.
all of the above13. From the concept of an "efficient frontier," the point on a frontier that is optimal for all firms:cannot be determined since firms vary in their willingness to accept risk.14. Direct foreign investment is perceived by foreign governments to:be a cause of national problems.
be a remedy for national problems.
either A or B is possible.15. Direct foreign investment would typically be welcomed if:the products to be produced are going to be exported.16. Assume a U.S. firm initiates direct foreign investment in the U.K. If the British pound is expected to appreciate against the dollar, the dollar value of earnings remitted to the parent should ____. The parent may request that the subsidiary ____ in order to benefit from the expectation about the pound.increase; postpone remitting earnings until the pound strengthens17. Assume the British pound appreciates against the dollar while the Japanese yen depreciates against the dollar. Which of the following is true?Japanese exporters can increase American sales by shifting operations from their British subsidiaries to Japan.18. Even if production costs are higher in a foreign country, a U.S. firm may establish a manufacturing plant in the foreign country now if:the host government of that country increases all quotas.19. A country with high unemployment could best increase its employment by:encouraging foreign firms to establish subsidiaries that produce products local firms do not produce.20. According to your text, ____ is a country that has been perceived as one of the most attractive sources of new demand.China21. ____ is not a disadvantage of direct foreign investment.a. The expense of establishing a foreign subsidiary
b. The uncertainty of inflation and exchange rate movements
c. Political risk
d. All of the above are disadvantages of direct foreign investment22. Assume the correlation coefficient between the return on the existing project and the return on a proposed foreign project is 1. Also assume the returns on the existing project and the new project are equal, and that the existing project has a lower standard deviation than the proposed project. Under this scenario, undertaking the proposed project will ____ the variance of the firm's overall returns.increase23. Which of the following is not true regarding host government attitudes towards direct foreign investment (DFI)?Host governments generally perceive DFI as a remedy to eliminate a country's political problems.24. Which of the following is not true regarding the efficient frontier considered by MNCs?There is exactly one point on the efficient frontier that is optimal for every MNC, regardless of its degree of risk aversion.25. Which of the following is not a cost-related motive of direct foreign investment?International diversification.26. MNCs commonly consider direct foreign investment because it can improve their profitability and enhance shareholder wealth.True27. ____ is not a revenue-related motive for direct foreign investment.Fully benefiting from economies of scale28. ____ is not a cost-related motive for direct foreign investment.Exploiting monopolistic advantages29. When a firm perceives that a foreign currency is ____, the firm may attempt direct foreign investment in that country, as the initial outlay should be relatively ____.undervalued; low30. Developing countries are mostly targeted because they have advanced technology.False31. Direct foreign investment is normally completed first, and then capital budgeting can be applied later.False32. The best means to accomplish the revenue-related motive of attracting new sources of demand is to:establish a subsidiary or acquire a competitor in a new market.33. To enter markets where superior profits are possible, an MNC should:acquire a competitor that has controlled its local market.34. To exploit monopolistic advantages, an MNC should:establish subsidiaries in markets where competitors are unable to produce the identical product.35. To fully benefit from economies of scale, an MNC should:establish a subsidiary in a new market that can sell products produced elsewhere.36. To use foreign factors of production, an MNC should:establish a subsidiary in a market that has relatively low costs of labor or land.37. They key to international diversification is selecting foreign projects whose performance levels are highly correlated over time.False38. When economic conditions of two countries are ____, then a firm would ____ its risk by operating in both countries instead of concentrating just in one.not highly correlated; reduce39. Along the frontier of efficient project portfolios, exactly one portfolio can be singled out as "optimal" for all MNCs.False40. Some governments restrict foreign ownership of local firms. Such restrictions may limit or prevent international acquisitions.True41. Direct foreign investment (DFI) represents investment in real assets (such as land, buildings, or even existing plants) in foreign countries.True42. Although direct foreign investment is sometimes conducted, benefits are rarely realized.False43. MNCs often attempt to set up production in locations where land and labor are expensive, because expensive factors of production indicate high demand.False44. Due to market imperfections, the cost of factors of production (such as labor) may differ substantially across countries.true45. In assessing the risk of an individual project, the expected correlation of the new project's returns with those of the prevailing business should be considered.True46. Managers of MNCs may attempt to expand their divisions internationally if their compensation may be increased as a result of expansion. This goal is consistent with the goals of shareholders.False47. Countries in eastern Europe are more appealing to MNCs that seek relatively low costs of land and labor than countries in western Europe.True48. Assume a U.S. firm initiates direct foreign investment in Italy. If the euro is expected to depreciate against the dollar, the dollar value of earnings remitted to the parent should ____. The parent may request that the subsidiary ____.decrease; remit earnings immediately before the euro weakens49. To diversify internationally for the purpose of reducing risk, which strategy is appropriate?Establish subsidiaries in markets whose business cycles differ from those where existing subsidiaries are based.50. To fully benefit from use of foreign raw materials:establish a subsidiary in a market where raw materials are cheap and accessible.
sell the finished product to countries where the raw materials are more expensive.
A and B51. Procedural and documentation requirements imposed by the foreign government are referred to as:"Red Tape" barriers.52. Constraints pertaining to taxes, currency convertibility, earnings remittance, and employee rights are best described as:regulatory barriers.53. Assume that the government of Krusho requires bribes to approve certain projects. MNCs that attempt to do business in Krusho must deal with:ethical differences.54. The overall variability of a firm's returns depends on the expected return of each individual project, percentage of funds invested in each individual project, and correlation coefficient of returns between the investments.True55. MNCs can probably achieve more desirable risk-return characteristics from their project portfolios if they sufficiently diversify among products and geographical markets.True56. Once a decision to establish a foreign subsidiary has been made, it is irreversible. Therefore, no periodic monitoring of the project is necessary.False57. Direct foreign investment is commonly considered by MNCs because it allows the MNC to:attract new sources of demand.
enter profitable markets.
react to exchange rate movements.
react to trade restrictions.
all of the above58. Which of the following is not true regarding host government attitudes towards direct foreign investment (DFI)?Host governments generally perceive DFI as a remedy for their national problems.59. ____ is not a cost-related motive for direct foreign investment (DFI).Reacting to trade restrictions60. When a foreign currency is perceived by a firm to be ____, the firm will probably ____ direct foreign investment in that country.undervalued; consider
overvalued; not consider
A and C61. The best means of using direct foreign investment (DFI) to fully benefit from cheap foreign factors of production is probably to:establish a subsidiary in a market that has relatively low costs of labor and land; sell the finished product to countries where the cost of production is higher.62. The ____ the correlation in project returns is over time, the ____ will be the project portfolio risk as measured by the portfolio variance.lower; lowerWhich of the following is a corporate characteristic that may affect an MNC's capital structure decision?a. the MNC's cash flow stability
b. its access to retained earnings
c. its credit riskAn MNC's "global" capital structure is:the combination of the capital structures of the parent and all of its subsidiaries.One argument for why subsidiaries should be wholly owned by the MNC parent is that parent ownership avoids a potential conflict of interest between the:parent and managers at the subsidiary who are minority shareholders.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 in the United States and ____ than in Japan.higher; higherThe term "local capital structure" is used in the text to represent the:capital structure of a subsidiary of a particular MNC.When a country's risk-free rate rises, the cost of equity to an MNC in that country _____, and the cost of debt to an MNC in that country ____, other things held constant.increases; increasesAccording to your text, which of the following is not a factor that increases an MNC's cost of capital?an increase in the size of the MNCZoro Corp. has a beta of 2.0. The risk-free rate of interest is 5 percent, and the return on the stock market overall is expected to be 13 percent. What is the required rate of return on Zoro stock?21 percent
RATIONALE: 5% + 2 (13% - 5%) = 21%.In general, MNCs probably prefer to use ____ foreign debt when their foreign subsidiaries are subject to ____ local interest rates.more; lowA 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.retained earningsThe ____ an MNC's cost of capital, the ____ will be the net present value for a proposed project with a given set of expected cash flows.lower; higherAccording to the CAPM, the required rate of return on a stock is a positive function of all of the following, EXCEPT:the company's earnings.Capital asset pricing theory suggests that ____ risk of projects can be ignored and that ____ risk is relevant.unsystematic; systematicWhen assuming that investors in the United States are most concerned with their exposure to the U.S. stock market, it is acceptable to use the U.S. market when measuring a U.S.-based MNC's project's beta.trueCountry 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.trueIn the United States, government rescues of failing firms are not as common as they are in some other countries. Assuming that this is expected to continue in the future, the risk premium on a given level of debt would be higher for U.S. firms than for firms in countries where government rescues are more common, everything else being equal.trueSince the cost of funds can vary among markets, an MNC's access to the international capital markets may allow it to attract funds at a lower cost than that paid by domestic firms.trueWhen a host country announces a plan to block funds remitted to the subsidiary's parent, the subsidiary is likely to use a strategy of increasing local debt financing.trueIt is probably easier to estimate the cost of equity than it is to estimate the cost of debt.falseIf a parent MNC backs the debt of a foreign subsidiary, the borrowing capacity of the parent might be reduced because creditors may not be willing to provide as many funds to the parent if those funds may possibly be needed to rescue the subsidiary.trueWerner Corporation has a target capital structure that consists of 40 percent debt and 60 percent equity. Werner can borrow at an interest rate of 10 percent. Also, Werner has determined its cost of equity to be 14 percent. Werner's tax rate is 40 percent. What is Werner's weighted average cost of capital?10.8 percent
RATIONALE: ((.4*.1)*(1-.4))+(.6*.14) = .108Which of the following is least likely to influence an MNC's capital structure?the MNC's decision to invest excess cash in a Treasury bill rather than in a bank___ are beneficial because they may reduce transaction costs. However, MNCs may not be able to obtain all the funds that they need.private placementsMost MNCs obtain equity funding:
a. in foreign countries.
b. in their home country.
c. through global offerings.
d. through private placements.b____ are beneficial because they may reduce transaction costs. However, MNCs may not be able to obtain all the funds that they need.
a. Private placements
b. Domestic equity offerings
c. Global equity offerings
d. Global debt offeringsaIf the parent ____ the debt of the subsidiary, the subsidiary's borrowing capacity might be ____.
a. does not back; increased
b. backs; reduced
c. does not back; reduced
d. backs; increased
e. C and DeWhich of the following is not a host country characteristic than can affect an MNC's capital structure decision?
a. the strength of the host country currency
b. the country risk in the host country
c. political decisions to increase penalties for criminals in the host country
d. tax laws in the host countrycWhich of the following is least likely to influence an MNC's capital structure?
a. stability of the MNC's cash flows
b. the MNC's credit risk
c. the MNC's access to earnings
d. the MNC's decision to invest excess cash in a Treasury bill rather than in a bankdThe U.S. risk-free rate is currently 3 percent. The expected U.S. market return is 10 percent. Solso, Inc. is considering a project that has a beta of 1.2. What is the cost of dollar-denominated equity?
a. 8.4 percent
b. 11.4 percent
c. 10.0 percent
d. None of the abovebWerner Corporation has a target capital structure that consists of 40 percent debt and 60 percent equity. Werner can borrow at an interest rate of 10 percent. Also, Werner has determined its cost of equity to be 14 percent. Werner's tax rate is 40 percent. What is Werner's weighted average cost of capital?
a. 10.8 percent
b. 12.4 percent
c. 9.2 percent
d. none of the aboveaWhich of the following is not a source of equity for an MNC?
a. retained earnings
b. a global equity offering
c. a domestic equity offering
d. All of the above are sources of equity for an MNC.dThe capital asset pricing model suggests that the required return on a firm's stock is a positive function of:
a. the risk-free rate of interest.
b. the market rate of return.
c. the stock's beta.
d. all of the abovedBased on the CAPM, the ____ the beta of a project, the ____ the required rate of return on that project.
a. higher; higher
b. lower; higher
c. higher; lower
d. B and C
e. none of the aboveaIf a parent MNC backs the debt of a foreign subsidiary, the borrowing capacity of the parent might be reduced because creditors may not be willing to provide as many funds to the parent if those funds may possibly be needed to rescue the subsidiary.
a. True
b. FalseaWhen a firm issues stock in a country with weak laws on corporate disclosure and little legal protection for shareholders, the stock will generally be sold at a relatively ______ price, so the firm incurs a _____ cost of equity.
a. low; low
b. low; high
c. high; high
d. high; lowbIt is probably easier to estimate the cost of equity than it is to estimate the cost of debt.
a. True
b. FalsebIt is always advantageous to use foreign debt to finance a foreign project, particularly in developing countries.
a. True
b. FalsebThe cost of an MNC's capital can be measured as the cost of its debt plus the cost of its equity, with appropriate weights applied to reflect the percentages of debt and equity.
a. True
b. FalseaThe capital asset pricing model (CAPM) suggests that the required return on a firm's stock is a positive function of the risk-free rate of interest and the market rate of return and a negative function of the stock's beta.
a. True
b. FalsebWhen a host country announces a plan to block funds remitted to the subsidiary's parent, the subsidiary is likely to use a strategy of increasing local debt financing.
a. True
b. FalseaAn MNC's cost of capital may differ from that of domestic firms because of the MNC's access to international capital markets, its exposure to exchange rate risk, and other characteristics.
a. True
b. FalseaThere is an advantage to using equity rather than debt financing because dividend payments are tax deductible.
a. True
b. FalsebWhen MNCs pursue international projects that have a high potential for return, but also increase their risk, this increases the return to the bondholders that provided credit to the MNCs.
a. True
b. FalsebAn MNC with stable cash flows can probably handle more debt than an MNC with erratic cash flows.
a. True
b. FalseaCapital asset pricing theory would most likely suggest that the MNC's cost of capital is lower than that of domestic firms.
a. True
b. FalseaSince the cost of funds can vary among markets, an MNC's access to the international capital markets may allow it to attract funds at a lower cost than that paid by domestic firms.aBecause increased external financing by a foreign subsidiary reduces the external financing needed by the parent, such an action will not affect the MNC's overall cost of capital.
a. True
b. FalsebAssume 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. FalsebAn MNC's cost of equity is unrelated to the local risk-free rate.
a. True
b. FalsebIn the United States, government rescues of failing firms are not as common as they are in some other countries. Assuming that this is expected to continue in the future, the risk premium on a given level of debt would be higher for U.S. firms than for firms in countries where government rescues are more common, everything else being equal.
a. True
b. FalseaBecause 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. FalsebCountry 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. Falsean general, an MNC's size, its access to international capital markets, and its international diversification increase the MNC's cost of capital.
a. True
b. FalsebNormally, each subsidiary of an MNC will issue its own stock where it does business.
a. True
b. FalsebAssume that an MNC has very stable cash flows and uses very little debt. Its cost of debt should be:
a. lower than its cost of equity.
b. higher than its cost of equity.
c. lower than the country's risk-free rate.
d. lower than its credit risk premium.aWhen assuming that investors in the United States are most concerned with their exposure to the U.S. stock market, it is acceptable to use the U.S. market when measuring a U.S.-based MNC's project's beta.
a. True
b. FalseaCapital 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 abovecCapital asset pricing theory suggests that ____ risk of projects can be ignored and that ____ risk is relevant.
a. unsystematic; unsystematic
b. unsystematic; systematic
c. systematic; unsystematic
d. systematic; systematicbThe lower a project's beta, the ____ is the project's ____ risk.
a. lower; systematic
b. lower; unsystematic
c. higher; systematic
d. higher; unsystematicaAccording to the CAPM, the required rate of return on a 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.dIn general, an MNC that is ____ 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 abovecTo 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; morecThe ____ an MNC's cost of capital, the ____ will be the net present value for a proposed project with a given set of expected cash flows.
a. lower; higher
b. higher; higher
c. lower; lower
d. none of the aboveaA 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. short-term loans
d. none of the abovebIn 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 CeIn 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 aboveaWhich of the following is not a reason provided in the text for why 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 credit risk premium
d. differences in demographicsbZoro Corp. has a beta of 2.0. The risk-free rate of interest is 5 percent, and the return on the stock market overall is expected to be 13 percent. What is the required rate of return on Zoro stock?
a. 21 percent
b. 41 percent
c. 16 percent
d. 13 percent
e. none of the abovea. The ____ an MNC, the ____ its cost of capital is likely to be.
a. larger; higher
b. larger; lower
c. smaller; lower
d. A and CbAccording to your text, which of the following is not a factor that increases an MNC's cost of capital?
a. higher exposure to exchange rate risk
b. higher exposure to country risk
c. an increase in the risk-free interest rate
d. an increase in the size of the MNCdWhich of the following is not a characteristic that favorably affects an MNC's cost of capital, compared to the cost of capital for a domestic firm?
a. the MNC's exposure to exchange rate risk
b. the MNC's size
c. the MNC's access to international capital markets
d. the MNC's international diversificationaWhen a country's risk-free rate rises, the cost of equity to an MNC in that country _____, and the cost of debt to an MNC in that country ____, other things held constant.
a. increases; increases
b. increases; is not affected
c. is not affected; increases
d. is not affected; is not affectedaAssume that the risk-free interest rate in the United States 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 leverage than U.S. firms. If a firm based in Country M has the same degree of financial leverage and the same operating characteristics as a U.S. firm, its cost of capital will likely be ____ than that of the U.S. firm.
a. higher; higher
b. higher; lower
c. lower; lower
d. lower; higherbAn 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. FalseaWhich of the following is not an external source of debt for an MNC?
a. a private placement of bonds
b. borrowing from a financial institution
c. a domestic bond offering
d. borrowing in the federal funds marketdThe term "local capital structure" is used in the text to represent the:
a. average capital structure of local firms where the MNC's subsidiary is based.
b. average capital structure of local firms where the MNC's parent is based.
c. capital structure of a subsidiary of a particular MNC.
d. capital structure of a particular MNC overall (including all subsidiaries).c. According to the text, the cost of debt in each country:
a. is somewhat stable over time.
b. changes over time, and these changes are negatively correlated among countries.
c. changes over time, and these changes are positively correlated among countries.
d. changes over time, and these changes are not correlated among countries.cBased on the factors that influence a country's cost of capital, the cost of capital in less developed countries is likely to be ____ than in the United States and ____ than in Japan.
a. higher; higher
b. higher; lower
c. lower; lower
d. lower; highera. 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; lessdOther 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; lowcThe cost of capital incurred by U.S.-based MNCs is primarily driven by global stock market volatility.
a. True
b. FalsebOne argument for why subsidiaries should be allowed to issue their own stock is that:
a. it prevents a potential conflict of interests between the MNC's managers and shareholders.
b. it prevents a potential conflict of interests between the MNC's majority shareholders and minority shareholders.
c. it prevents a potential conflict of interests between the MNC's existing creditors.
d. having local investors as minority shareholders may offer some protection against adverse actions by the local government.dOne argument for why subsidiaries should be wholly owned by the MNC parent is that parent ownership avoids a potential conflict of interest between the:
a. parent's managers and board of directors.
b. parent and managers at the subsidiary who are minority shareholders.
c. parent and existing creditors.
d. subsidiary's managers and creditors.b. An MNC's "global" target capital structure is:
a. always debt intensive.
b. always equity intensive.
c. sometimes different from the MNC's "local" capital structure (at a subsidiary).
d. none of the abovecAn MNC's "global" capital structure is:
a. the MNC's capital structure in the United States.
b. the MNC's capital structure relative to the structures of competitors across all countries.
c. the MNC's capital structure where it has its largest subsidiary.
d. the combination of the capital structures of the parent and all of its subsidiaries.dWhich of the following is a corporate characteristic that may affect an MNC's capital structure decision?
a. the MNC's cash flow stability
b. its access to retained earnings
c. its credit risk
d. All of the above may affect an MNC's capital structure decision.dThe 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.bWhich of the following factors is generally not expected to have a favorable impact on an MNC's cost of capital according to the text?
a. easy access to international capital markets
b. high degree of international diversification
c. high exposure to exchange rate fluctuations
d. all of the abovecAccording 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 abovedMNCs headquartered in Japan and Germany tend to use a higher degree of financial leverage than MNCs headquartered in the United States.
a. true
b. falseaAn argument for an MNC to have a debt-intensive capital structure is that:
a. it can reduce the MNC's exposure to exchange rate risk on earnings remitted by subsidiaries to the parent.
b. it can reduce the chance of bankruptcy.
c. it spreads the shareholder base.
d. it forces subsidiaries to pay dividends to shareholders.a
