tb16

KirtC.Butler,MultinationalFinance,3rdedition123Chapter16MultinationalCapitalStructureandtheCostofCapitalTrue/False1.Afirm’scostofcapitalisindependentofitsfinancialstructure.ANS:False.Giventhefirm’sinvestments,financialstructuredeterminesthefirm’scostofcapital.2.Capitalstructurereferstotherelativeproportionofmonetaryandrealassetsinthefirm.ANS:False.Capitalstructurereferstotheproportionsandformsoflong-termdebtandequitycapitalusedtofinancetheassetsofthefirm.3.Thegoaloffinancialpolicyistominimizethefirm’soverallcostofcapital,giventhefirm’sassets.ANS:True.4.Iffinancialmarketsareperfectandtherearenotaxes,thencorporatefinancialpolicyisvitallyimportanttothefirm’sstakeholders.ANS:False.Iffinancialmarketsareperfect,thencorporatefinancialpolicyisirrelevant.5.Iffinancialmarketsareperfect,thenthevalueofanassetisdeterminedbythevalueofexpectedfutureinvestmentcashflowsandnotbythewaythatitisfinanced.ANS:True.6.Inintegratedfinancialmarkets,nominalratesofreturnonequivalentassetsareequal.ANS:False.Inintegratedmarkets,realafter-taxrequiredreturnsonequivalentassetsareequal.7.Iffinancialmarketsareintegratedandsystematicriskistobemeasuredagainstamarketportfolio,thentheappropriatechoiceofamarketportfolioisthedomesticmarketindex.ANS:False.Theworldmarketindexistheappropriatemarketportfolio.8.Ifgoodsandfinancialmarketsaresegmentedacrossnationalbordersbutareotherwiseefficient,thenmultinationalcorporationscanreducetheircostofcapitalthroughforeigndirectinvestmentorthroughfinancingfromforeignsourcesorboth.ANS:True.9.Onbalance,marketsegmentationhurtsthemultinationalcorporationmorethanthedomesticcorporation.ANS:False.Themultinationalcorporationmaybeabletogainaccesstonewinvestmentsorfinancingatmorefavorableratesthanareavailabledomestically.10.Ifinvestorsarerestrictedfromsomemarketsbycapitalflowbarriers,thenthemultinationalcorporationwithaccesstothesemarketscanprovideindirectdiversificationbenefitstoinvestors.ANS:True.11.Ahighercostofcapitalonforeigninvestmentcouldariseifaforeigngovernmentrequiresthatatleastapartoftheforeigninvestmentbefinancedlocally.ANS:True.KirtC.Butler,MultinationalFinance,3rdedition12412.Foreignpoliticalrisksincreasethevariabilityofoutcomesonforeigninvestmentprojects.ANS:True.13.Thetotalriskofaforeigninvestmentislikelytobegreaterthansimilardomesticinvestments.ANS:True.14.Thetotaloperatingriskofaforeigninvestmentcouldbegreaterthantheriskofasimilardomesticinvestment,andyettheinvestmentcouldhavealowerrequiredreturnthanasimilardomesticinvestment.ANS:True.15.Inperfectandintegratedfinancialmarkets,multinationalcorporationsareabletoachievediversificationbenefitsthatcannotbereplicatedbyindividualinvestorsorportfoliomanagers.ANS:False.Investorscanalreadydiversifyforthemselvesinperfect,integratedfinancialmarkets.16.Inaperfectandintegratedfinancialmarket,investorscanreduceoreveneliminatethecurrencyriskexposuresoftheirportfoliosthroughtheirownportfoliohedginganddiversificationstrategies.ANS:True.17.Intherealworld,hedgingcanincreasethefirm’sexpectedcashflowsbyreducingexpectedtaxes,bankruptcycosts,andagencycosts.ANS:True.18.Whenevaluatingnewinvestmentalternatives,themultinationalcorporationshoulduseadiscountratethatreflectsthesystematicriskofotherassetsinthatcountry.ANS:False.Useanasset-specificdiscountratethatreflectstheriskoftheproposedinvestment.19.Accordingtotheweightedaveragecostofcapitalapproachtoprojectvaluation,operatingcashflowsarediscountedattherequiredreturnofleveredequitycapital.ANS:False.After-taxoperatingcashflowstodebtandequityarediscountedataweightedaverageofafter-taxrequiredreturnsondebtandequitycapital.20.Discountratesonnewinvestmentsshouldreflectthediscountratesonthefirm’sexistingassetsandthefirm’sexistingdebt-equitymix.ANS:False.Thediscountrateshouldreflectthesystematicoperatingriskanddebtcapacityoftheproposedinvestment.21.Discountingafter-taxcashflowstodebtandequityattheweightedaveragecostofcapitalisthemostcommonlyusedmethodforprojectvaluationinmarketeconomies.ANS:True.KirtC.Butler,MultinationalFinance,3rdedition12522.Thetargetdebtcapacityofaforeignprojectistheamountofdebtthatthefirmwouldchoosetoborrowiftheprojectwerefinancedasa“stand-alone”entity.ANS:True.23.Thediscountrateinprojectvaluationshouldreflectthemixofdebtandequitythatisactuallyraisedtofinanceaparticularproject.ANS:False.Thediscountrateshouldreflectthetargetoroptimalmixofdebtandequity.24.Thetargetdebtcapacityofaforeignprojectshouldreflectthefirm’sexistingassetsanddebt-equitymix.ANS:False.Debtcapacityisasset-specific.25.Themarketportfolioinanintegratedfinancialmarketisthedomesticmarketindex.ANS:False.Themarketportfolioinanintegratedfinancialmarketisgloballydiversified.26.Forinvestmentsindevelopedeconomies,thesecuritymarketlineisstillthemostpopularmethodforidentifyingequityrequiredreturns.ANS:True.27.Thevalueofaforeigninvestmentdependsonthewayitisfinanced.ANS:True.28.Adjustedpresentvalueisfoundbydiscountingcashflowstoleveredequityatadiscountratethatreflectsthesystematicriskofleveredequity.ANS:False.APVaddsthevalueoffinancingsideeffectstothevalueofunlevere