Chapter 17: Multinational Cost of Capital and Capital Structure

1. An argument for MNCs to have a debt-intensive capital structure is/ Which of the
following is a reason for MNCs to borrow debts heavily:
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.
ANS: 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
ANS: 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
ANS: D (do 3 đáp án trên đều có always)
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
ANS: C (tỷ giá hối đoái ảnh hưởng tiêu cực nếu họ không đề phòng)
5. 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.
ANS: B
6. According to the text, MNCs:
a. use only debt financing in foreign countries to support foreign subsidiaries.
b. use only equity financing in foreign countries to support foreign subsidiaries.
c. use only parent financing in foreign countries to support foreign subsidiaries.
d. none of the above
ANS: D

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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.
ANS: D
8. According to the text, an MNC's "global" target capital structure is:
a. always debt-intensive.
b. always equity-intensive.
c. sometimes different from an MNC's "local" capital structures (at subsidiaries).
d. none of the above
ANS: C
9. One argument for why subsidiaries should be wholly-owned by the parent is that the
potential conflict of interests between the MNC's ____ is avoided.
a. managers and shareholders
b. majority shareholders and minority shareholders
c. existing creditors
d. managers and creditors
ANS: B
10. One argument for why subsidiaries should not 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 motivate subsidiary managers by allowing them partial ownership.
ANS: D
11. Other things being equal, countries with relatively ____ populations and ____
inflation are more likely to have a low/ high cost of capital.
a. young; high
b. old; high
c. old; low
d. young; low
ANS: C
12. Other things being equal, the financial leverage of MNCs will be higher/ lower 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

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ANS: D
13. 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
ANS: A (U.S, Japan, U.K, Canada là nước công nghiệp phát triển nên ko cần vốn nhiều)
14. Based on the factors that influence a country's cost of capital, the cost of capital in
Vietnam is likely to be ____ than that of the U.K. and ____ than that of Canada.
a. higher; higher
b. higher; lower
c. lower; lower
d. lower; higher
ANS: A (Việt Nam, Ấn Độ là nước đang phát triển có nền kinh tế ổn định cần vốn hơn)
15. According to the text, the cost of debt: (càng thay đổi nhiều, cp càng cao)
a. for each country is somewhat stable over time.
b. among countries changes over time, and these changes are negatively correlated.
c. among countries changes over time, and these changes are positively correlated.
d. among countries changes over time, and are not correlated.
ANS: C
16. The term "local target 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. desired capital structure of a subsidiary of a particular MNC.
d. desired capital structure of a particular MNC overall (including all subsidiaries).
ANS: C
17. The term "global capital structure" is used in the text to represent the:
a. average capital structure of all MNCs across countries.
b. average capital structure of all domestic firms across countries.
c. capital structure of a subsidiary of a particular MNC.
d. capital structure of a particular MNC overall (including all subsidiaries).
ANS: D
18. 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 leverage 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

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d. lower; higher
ANS: B
19. Assume that the risk-free interest rate in the U.S. is the same as that in China. Assume
that the government of China is less likely to rescue local firms that experience financial
problems. Other things being equal, China's firms are likely to use a ____ degree of
financial leverage than U.S. firms. If a firm based in China 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. lower; higher
c. higher; lower
d. lower; lower
ANS: B
20. When an MNC's firm's cost of capital rises/reduces, 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
ANS: A
21. Which of the following is unwanted/ not a factor that favorably (có lợi) 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.
ANS: 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. an increase in the risk-free interest rate.
d. size.
ANS: D
23. The ____ an MNC, the ____ its cost of capital is likely to be.
a. larger; higher
b. larger; lower (doanh nghiệp càng lớn mạnh, beta càng bé vì ít rủi ro)
c. smaller; lower
d. A and C
ANS: B
24. Zoro 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
Zoro stock?

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a. 21%.
b. 41%.
c. 16%.
d. 13%.
e. none of the above

25. Which of the following is not a reason provided in the text regarding 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 risk premium.
d. differences in demographics.
ANS: B
26. In general, MNCs probably do not prefer to use ____ foreign debt when their foreign
subsidiaries are subject to ____ local interest rates.
e. none of the above
a. more; low
b. more; high
c. less; low
d. B and C
ANS: A
27. In general, MNCs probably do not prefer to use ____ foreign debt when their foreign
subsidiaries are subject to potentially ____ local currencies.
e. B and D (vay ở quốc gia đó đến khi đồng nội tệ bên đó yếu hơn sẽ vay đc nhiều hơn,
xử lí vốn tốt hơn )
a. more; strong
b. more; weak
c. less; strong
d. less; weak
ANS: 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
ANS: B
28. 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. NPV = CF – IO(càng bé)
a. lower; higher
b. higher; higher

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c. lower; lower
d. none of the above
ANS: A
29. 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
ANS: C
30. In general, a firm ____ exposed to exchange rate fluctuations will usually have a
____ distribution of possible cash flows in future periods.
a. more; narrower (Ở Đài Loan có chịu nhiều biến động thì cân nhắc phân phối sang nước
khác, mở rộng hơn)
b. less; wider
c. more; wider
d. none of the above
ANS: C
31. 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.
ANS: D
32. The higher a project's beta, the ____ is the project's ____ risk?
a. lower; unsystematic
b. higher; systematic (có hệ thống là trước đây có xảy ra, đã từng làm rồi thì mình học hỏi
đc r => có lợi)
c. higher; unsystematic
d. lower; systematic
ANS: C
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
ANS: A
34. Capital asset pricing theory suggests that ____ risk of projects can be ignored and that
____is relevant.
a. unsystematic; unsystematic
b. unsystematic; systematic

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c. systematic; unsystematic
d. systematic; systematic
ANS: B
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
ANS: C
Exhibit 17-1 Assume the following information for Pexi Co., a U.S.-based MNC that is
considering obtaining funding for a project in Germany: U.S. risk-free rate = 4% German
risk-free rate = 5% Risk premium on dollar-denominated debt provided by U.S. creditors
= 3% Risk premium on euro-denominated debt provided by German creditors = 4% Beta
of project = 1.2 Expected U.S. market return = 10% U.S. corporate tax rate = 30%
German corporate tax rate = 40%
36. Refer to Exhibit 17-1. What is Pexi's cost of dollar-denominated debt (rf+rd)x(1-T)?
a. 7.0%.
b. 8.0%.
c. 6.3%.
d. 4.9%.

37. Refer to Exhibit 17-1. What is Pexi's cost of dollar-denominated equity?

38. 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
ANS: C
39. In general, the ____ the cost of capital, the ____ the NPV of a project that is
evaluated with this cost of capital.
e. none of the above
a. higher; higher
b. lower; lower
c. higher; lower
d. A and B

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ANS: C
40. The 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 above
ANS: D
41. The capital asset pricing model suggests that the required return on a firm's stock is a
negative function of:
a. the risk-free rate of interest.
b. the market rate of return.
c. the stock's beta.
d. none of the above
ANS: D
42. The cost of capital can vary among countries because:
a. MNCs based in some countries do not have a competitive advantage over others.
b. MNCs may be able to adjust their international operations and sources of funds to
capitalize on differences in the cost of capital among countries (của doanh nghiệp).
c. of country differences in tax laws or monetary supply.
d. none of the above.
ANS: C
43. Werner Corporation has a target capital structure that consists of 40% debt and 60%
equity. Werner can borrow at an interest rate of 10%. Also, Werner has determined its
cost of equity to be 14%. Werner's tax rate is 40%. What is Werner's weighted average
cost of capital?
a. 10.80%
b. 12.40%
c. 9.20%
d. None of the above
ANS: A
44. The U.S. risk-free rate is currently 3%. The expected U.S. market return is 10%.
Solso, Inc. is considering a project that has a beta of 1.2. What is the cost of dollar-
denominated equity?
a. 8.4%
b. 11.4%
c. 10%
d. None of the above
ANS: B
45. Which of the following is least likely to influence an MNC's capital structure?
e. None of the above
a. The stability of MNC's cash flows
b. The MNC's credit risk

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c. The MNC's access to earnings
d. The MNC's decision to invest excess cash in a Treasury bill rather than in a bank
ANS: D
46. Which of the following is not a host country characteristic than can affect an MNC's
capital structure decision?
a. The strength of host country currencies
b. The country risk in host countries
c. Political decisions to increase penalties for criminals
d. Tax laws in host countries
ANS: C
47. If the parent ____ the debt of the subsidiary, the subsidiary's borrowing capacity
might be ____.
e. C and D (cty mẹ gánh nợ dùm, cty con có thể vay nhiều hơn)
a. does not back; increased
b. backs; decreased
c. does not back; decreased
d. backs; increased
ANS: E
Vingroup has a target capital structure that consists of 40% debt and 60% equity. it can
borrow a loan from BIDV at an interest rate of 10%. Also, Vingroup has determined its
cost of equity to be 14%. Currently, the corporate tax rate in Vietnam is 40%. What is its
weighted average cost of capital in percentage? (Write down the number only, round up
to 1 decimal number)
Answer: 10.8
48. 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 is 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 affected
ANS: A
49. To your text, which of the following is not a factor that increases an MNCs 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 MNC
ANS: D
50. 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

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c. lower than the country's risk free rate
d. lower than its credit risk premium
ANS: A
51.Based on the CAPM, the _____ the beta of a project, the ____ the required rate of
return on that project
e. none of the above
a. higher; higher
b. lower; higher
c. higher; lower
d. B and C
ANS: A
52.An MNC can obtain equity by all of the following except
a. retained earnings
b. a global equity offering
c. a domestic equity offering
d. none of the above
ANS: D
53.____ 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 offerings
ANS: A
54. Most MNCs obtain equity funding
a. in foreign countries
b. in their home country
c. through global offerings
d. through private placements
ANS: B

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