ECO 410 Week 8 Quiz – Strayer
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Quiz 7 Chapter 13 and 14
Chapter 13
The Global Cost and Availability
of Capital
13.1 Financial Globalization and Strategy
Multiple Choice
1) If a
firm lies within a country with ________ or ________ domestic capital markets,
it can achieve lower global cost and greater availability of capital with a
properly designed and implemented strategy to participate in international
capital markets.
A)
liquid; segmented
B)
liquid; large
C)
illiquid; segmented
D)
large; illiquid
2) Other
things equal, a firm that must obtain its long-term debt and equity in a highly
illiquid domestic securities market will probably have a:
A)
relatively low cost of capital.
B)
relatively high cost of capital.
C)
relatively average cost of capital.
D) cost
of capital that we cannot estimate from this question.
3)
Relatively high costs of capital are more likely to occur in:
A)
highly illiquid domestic securities markets.
B)
highly liquid domestic securities markets.
C)
unsegmented domestic securities markets.
D) none
of the above
4) Reasons
that firms may find themselves with relatively high costs of capital include:
A) The
firms reside in emerging countries with undeveloped capital markets.
B) The
firms are too small to easily gain access to their own national securities
market.
C) The
firms are family owned and they choose not to access public markets and lose
control of the firm.
D) all
of the above
5) Which
of the following is NOT a contributing factor to the segmentation of capital
markets?
A)
excessive regulatory control
B) perceived
political risk
C)
anticipated foreign exchange risk
D) All
of the above are contributing factors.
6) Which
of the following is NOT a contributing factor to the segmentation of capital
markets?
A) lack
of transparency
B)
asymmetric availability of information
C)
insider trading
D) All
of the above are contributing factors.
7) 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%.
8) 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) that
can be applied only to domestic markets.
D) none
of the above
9) 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.
10)
________ risk is a function of the variability of expected returns of the
firm's stock relative to the market index and the measure of correlation
between the expected returns of the firm and the market.
A)
Systematic
B)
Unsystematic
C) Total
D)
Diversifiable
11)
Systematic risk:
A) is
the standard deviation of a security's return.
B) is
measured with beta.
C) is
measured with standard deviation.
D) none
of the above
12)
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.
13) 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.
14) A
firm whose equity has a beta of 1.0:
A) has
greater systematic risk than the market portfolio.
B)
stands little chance of surviving in the international financial market place.
C) has
less systematic risk than the market portfolio.
D) None
of the above is true.
15) The
difference between the expected (or required) return for the market portfolio
and the risk-free rate of return is referred to as:
A) beta.
B) the
geometric mean.
C) the
market risk premium.
D) the
arithmetic mean.
16) In
general the geometric mean will be ________ the arithmetic mean for a series of
returns.
A) less
than
B)
greater than
C) equal
to
D)
greater than or equal to
17) The
beginning share price for a security over a three-year period was $50.
Subsequent year-end prices were $62, $58 and $64. The arithmetic average annual
rate of return and the geometric average annual rate of return for this stock
was:
A) 9.30%
and 8.58% respectively.
B) 9.30%
and 7.89% respectively.
C) 9.30%
and 7.03% respectively.
D) 9.30%
and 6.37% respectively.
18) If a
company fails to accurately predict it's cost of equity, then:
A) the
firm's wacc will also be inaccurate.
B) the
firm may not be using the proper interest rate to estimate NPV.
C) the
firm may incorrectly accept or reject projects based on decisions made using
the cost of capital computed with an incorrect cost of equity.
D) All
of the above are true.
19)
Which of the following statements is NOT true regarding beta?
A) Beta
will have a value of less than 1.0 if the firm's returns are less volatile than
the market.
B) Beta
will have a value of greater than 1.0 if the firm's returns are more volatile
than the market.
C) Beta
will have a value of equal to 1.0 if the firm's returns are of equal volatility
to the market.
D) All
of the statements above are true.
20)
Which of the following will NOT affect a firm's beta?
A) the
choice of the market portfolio against which to compare the variability of a
firm's returns
B) the
choice of the risk-free security
C) the
choice of the time period used to calculate the firm's beta
D) None
of the above, because each of them affects the calculation of a firm's beta.
True/False
1) A
national securities market is segmented if the required rate of return on
securities in that market differs from comparable securities traded in other,
unsegmented markets.
2) 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.
3) If a
firm's expected returns are more volatile than the expected return for the
market portfolio, it will have a beta less than 1.0.
4) The
WACC is usually used as the risk-adjusted required rate of return for new
projects that are of the same average risk as the firm's existing projects.
5) One
of the elegant beauties of international equity markets is that over the last
100 or so years, the average market risk premium is almost identical across
major industrial countries.
6) Firms
acquire debt in either the form of loans from commercial banks, or by selling
new common stock.
7) When
estimating an average corporate after-tax cost of capital, the component cost
of equity is multiplied by (1-t) to allow for the tax-deductibility of dividend
payments.
8)
International CAPM (ICAPM) assumes that there is a global market in which the
firm's equity trades, and estimates of the firm's beta, and the market risk
premium, must then reflect this global portfolio.
9) Use
of the International CAPM (ICAPM) assures that the WACC will be lower than if a
purely domestic market portfolio had been used in the estimation of the cost of
equity.
10) A
global portfolio is an index of all the securities in the world, whereas a
world portfolio represents those securities actually available to an investor.
11) The
CAPM has now become very widely accepted in global business as the preferred
method of calculating the cost of equity for a firm. As a result of this, there
is now little debate over what numerical values should be used in its
application.
12) The
geometric mean will, in all but a few extreme circumstances, yield a larger
return than the arithmetic mean return.
Essay
1) What
are the components of the weighted average cost of capital (WACC) and how do
they differ for an MNE compared to a purely domestic firm?
13.2 The Demand for Foreign Securities: The Role
of International Portfolio Investors
Multiple Choice
1) The
primary goal of both domestic and international portfolio managers is:
A) to
maximize return for a given level of risk, or to minimize risk for a given
level of return.
B) to
minimize the number of unique securities held in their portfolio.
C) to
maximize their WACC.
D) all
of the above
2) Which
of the following is NOT a portfolio diversification technique used by portfolio
managers?
A)
diversify by type of security
B)
diversify by the size of capitalization of the securities held
C)
diversify by country
D) All
of the above are diversification techniques.
3) If
all capital markets are fully integrated, securities of comparable expected
return and risk should have the same required rate of return in each national
market after adjusting for:
A) time
of day and language requirements.
B)
political risk and time lags.
C)
foreign exchange risk and political risk.
D)
foreign exchange risk and the spot rate.
4)
Capital market segmentation is a financial market imperfection caused mainly
by:
A)
government constraints.
B)
institutional practices.
C)
investor perceptions.
D) all
of the above
5)
Capital market imperfections leading to financial market segmentation include:
A)
asymmetric information between domestic and foreign-based investors.
B) high
securities transaction costs.
C)
foreign exchange risks.
D) all
of the above
6)
Capital market imperfections leading to financial market segmentation include:
A)
political risks.
B) corporate
governance differences.
C)
regulatory barriers.
D) all
of the above
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