Chapter 12 Essay

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Fundamentals of Multinational Finance, 5e (Moffett et al.)
Chapter 12 The Global Cost and Availability of Capital

Multiple Choice and True/False Questions

12.1 Financial Globalization and Strategy

1) Which of the following is NOT a key variable in the weighted average cost of capital (WACC) equation?
A) the market value of equity
B) the market value of debt
C) the risk-free rate of return
D) the marginal tax rate
Answer: C
Diff: 1
Topic: 12.1 Financial Globalization and Strategy
Skill: Recognition

2) Segmented national capital markets are limiting firm's competitive advantage in sourcing capital because
A) there is liquid demand for all securities.
B) the yield on the debt securities are lower than in other mature capital markets.
C) FX risk is eliminated with different industry segmentation.
D) the cost and availability of capital can be constrained by excessive regulatory controls and perceived political risk.
Answer: D
Diff: 1
Topic: 12.1 Financial Globalization and Strategy
Skill: Conceptual

3) 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%.
Answer: B
Diff: 1
Topic: 12.1 Financial Globalization and Strategy
Skill: Recognition

4) Which of the following is NOT a key variable in the weighted average cost of capital (WACC) equation?
A) the before-tax cost of debt
B) the risk-adjusted cost of equity
C) the beta of the market portfolio
D) the total market value of the firm's securities
Answer: C
Diff: 1
Topic: 12.1 Financial Globalization and Strategy
Skill: Recognition
5) 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.
Answer: FALSE
Diff: 1
Topic: 12.1 Financial Globalization and Strategy
Skill: Conceptual

6) 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) can be applied only to domestic markets.
D) none of the above.
Answer: A
Diff: 1
Topic: 12.1 Financial Globalization and Strategy
Skill: Conceptual

7) 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.
Answer: C
Diff: 1
Topic: 12.1 Financial Globalization and Strategy
Skill: Recognition

8) 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.
Answer: D
Diff: 1
Topic: 12.1 Financial Globalization and Strategy
Skill: Recognition

9) 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.
Answer: C
Diff: 1
Topic: 12.1 Financial Globalization and Strategy
Skill: Conceptual

12) Ready Supply Co. has a cost of debt of 8%. The risk-free rate of interest is 3% and the expected return on the market portfolio is 10%. If the firm has a beta of 0.90 and an effective tax rate of 30% with a capital structure that is 40% debt and 60% equity, what is the firm's weighted average cost of capital?
A) 7.82%
B) 9.30%
C) 5.60%
D) 8.00%
Answer: A
Diff: 2
Topic: 12.1 Financial Globalization and Strategy
Skill: Analytical

13) Johnson Fuel Systems has a weighted average cost of capital of 7.35%. Estimate Johnson's cost of equity given the
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