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Question;12.3 The Cost of Capital for MNEs Compared to;Domestic Firms;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.;Answer: FALSE;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) Because of the;international diversification of cash flows, the risk of bankruptcy for MNEs is;significantly lower than that for purely domestic firms.;4) 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.;5) The;opportunity set of projects is typically smaller for MNEs than for purely;domestic firms because international markets are typically specialized niches.;6) The optimal;financial structure of multinational firms could differ from that of domestic;firms because of;A) political;pressures on the host country.;B) the greater;availability of capital to multinational firms.;C) the ability of;multinational firms to diversify their cash flows internationally.;D) all of the;above.;7) 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.;8) 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;9) Domestic firms;rely much more heavily on short and intermediate debt, which lie at the low;cost end of the yield curve, than do MNEs.;Answer: TRUE;12.4 Solving a Riddle: Is the Weighted Average;Cost of Capital for MNEs Really Higher than for Their Domestic Counterparts?;1) 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.;2) 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;3) The;international availability of capital to MNEs;A) allows the firm;to avoid income taxes.;B) allows the;firm to shift tax payments to other counties.;C) allows the;firm to lower their cost of equity, relative to domestic firms.;D) none of the;above.;4) Which of the;following does NOT constitute a benefit to the investor of diversifying;internationally?;A) the relatively;low degree of correlation between the world's stock markets;B) the increase;in the expected return from an internationally diversified investment;C) a lower total;level of nondiversifiable risk;D) All of the;above are benefits of international diversification.;5) Empirical;studies show that neither mature domestic firms nor MNEs are typically willing;to assume the higher agency costs or bankruptcy risk associated with higher;MCCs and capital budgets.

 

Paper#51242 | Written in 18-Jul-2015

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