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| 1 | |
With regard to the financial structure of foreign subsidiaries |
| | A) | It may be best to conform to the parent firm’s debt-to-equity ratio |
| | B) | It may be best to conform to the local norm of the country where the subsidiary operates. |
| | C) | It may be advantageous to vary judiciously to capitalize on opportunities to lower taxes, reduce financing costs and risk, and take advantage fo various market imperfections |
| | D) | All of the above may be correct. |
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| 2 | |
When a parent company is willing to let its subsidiary default, |
| | A) | Creditors and potential creditors will examine the subsidiary’s financial structure closely to assess default risk. |
| | B) | Potential creditors will still look to the parent company’s capital structure as it is still legally and morally responsible for its subsidiary’s debts. |
| | C) | It is incumbent upon the subsidiary to take on as much debt as possible, pay a dividend to the parent and then default. |
| | D) | None of the above. |
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| 3 | |
The cost of capital |
| | A) | Is defined as K = (1 – λ)Kl + λ(1 – t)i |
| | B) | Is the minimum rate of return an investment project must generate in order to pay its financing costs. |
| | C) | Is an accounting number reflecting historical costs. |
| | D) | Is an accounting number reflecting historical costs.
None of the above |
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| 4 | |
Companies can benefit from cross-border listing of stocks in what ways? |
| | A) | The company can expand its potential investor base, which will lead to a higher stock price and a lower cost of capital. |
| | B) | Cross-listing can enhance the liquidity of the company’s stock. |
| | C) | Cross listing may improve the company’s corporate governance and transparency. |
| | D) | All of the above |
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| 5 | |
A firm that can reduce its cost of capital |
| | A) | Has an arbitrage opportunity. |
| | B) | Can identify more projects that generate returns exceeding the cost of capital and thereby increase the firm’s value. |
| | C) | Will lower its overall risk. |
| | D) | None of the above |
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| 6 | |
If international financial markets are fully integrated rather than segmented |
| | A) | Investors would require, on average, lower expected returns on securities. |
| | B) | Investors would require, on average, higher expected returns on securities. |
| | C) | Investors would require, the same expected returns on securities. |
| | D) | None of the above. |
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| 7 | |
If international financial markets are less than fully integrated, then |
| | A) | Any differences in the cost of capital across countries can be diversified away. |
| | B) | Systematic differences in the cost of capital may exist across different countries. |
| | C) | Any difference in the cost of capital that may exist across different countries is due to differences in unsystematic risk. |
| | D) | None of the above. |
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| 8 | |
A consideration of political risk |
| | A) | Generally favors local financing over the parent’s direct financing. |
| | B) | Generally favors external debt over equity financing. |
| | C) | a) and b) are both true |
| | D) | None of the above |
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| 9 | |
When Nestlé announced that it would lift restrictions on foreign ownership of its registered shares |
| | A) | The price of registered shares rose. |
| | B) | The price of registered shares fell. |
| | C) | The two classes of shares began a pricing to market phenomenon after the announcement. |
| | D) | Both a) and c) are correct. |
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| 10 | |
When Nestlé announced that it would lift restrictions on foreign ownership of its registered shares |
| | A) | While the price of registered shares rose, the price of bearer shares fell. As a result, the total market value of the company remained unchanged. |
| | B) | The total market value of the firm increased. |
| | C) | Nestlé’s cost of capital increased. |
| | D) | None of the above. |
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