Solocha Final 2/3

ADRs that are created at the request of a foreign firm wanting its shares traded in the United States are: sponsored. unfacilitated. facilitated. unsponsored.

A

According to the U.S. school of thought, the worldwide trend toward fuller and more standardized disclosure rules should ________ the cost of equity capital. decrease increase have no impact on none of the above

A

Depositary receipts traded outside the United States are called ________ depositary receipts. Global American Euro none of the above

A

For the most part, U.S. SEC disclosure requirements are ________ other, non-U.S. equity market rules. more stringent than equally stringent to less stringent than none of the above

A

In some respects, internationally diversified portfolios are the same in principle as a domestic portfolio because: investors are trying to reduce the total risk of the portfolio. the investor is attempting to combine assets that are perfectly correlated. investors are trying to reduce systematic risk. all of the above

A

MNEs situated in countries with small illiquid and segmented markets are most like: small domestic U.S. firms in that they must rely on internally generated funds and bank borrowing. small domestic U.S. firms in that they have a strong niche market in the U.S. large U.S. MNEs in that they are all MNEs and have worldwide markets and sources of financing. None of the above is true.

A

One of the most important factors in making debt less expensive than equity is: the tax deductibility of interest. the tax deductibility of dividends. the tax deductibility of depreciation. the tax deductibility of equity.

A

Relative to the efficient frontier of risky portfolios, it is impossible to hold a portfolio that is located ________ the efficient frontier. to the left of on to the right or left of to the right of

A

The addition of foreign securities to the domestic portfolio opportunity set shifts the efficient frontier: up and to the left. down and to the right. up and to the right. down and to the left.

A

The stock exchange with the greatest value of shares traded is: NYSE. Tokyo. London. Nasdaq.

A

TropiKana Inc., a U.S firm, has just borrowed $1,000,000 to make improvements to an Italian fruit plantation and processing plant. If the interest rate is 6.00% per year, how much interest will they pay in the first year? $60,000 $600,000 €60,000 $6,000

A

Unsystematic risk: can be diversified away. is measured with beta. is the remaining risk in a well-diversified portfolio. all of the above

A

________ are domestic currencies of one country on deposit in a second country. Eurocurrencies Federal funds Discount window deposits LIBORs

A

A U.S. investor is considering a portfolio consisting of 60% invested in the U.S. equity index fund and 40% invested in the British equity index fund. The expected returns for the funds are 10% for the U.S. and 8% for the British, standard deviations of 20% for the U.S. and 18% for the British, and a correlation coefficient of 0.15 between the U.S. and British equity funds. Refer to Instruction 16.2. What is the expected return of the proposed portfolio? 19% 9.2% 9.0% 19.2%

B

A U.S. investor makes an investment in Britain and earns 14% on the investment while the British pound appreciates against the U.S. dollar by 8%. What is the investor's total return? 6.00% 23.12% 4.88% 22.00%

B

A/An ________ is defined as one that is targeted at investors in a single country and underwritten in whole or part by investment institutions from that country. strategic alliance directed public share issue SEC rule 144a placement Euroequity public issue

B

Each ADR represents ________ of the shares of the underlying foreign stock. 1 a multiple 100 ADRs have nothing to do with foreign stocks.

B

For most firms, the cost of capital decreases to a low point as the firm ________ debt financing. At some point beyond this optimal level, the cost of capital increases as the amount of debt ________. decreases; increases increases; increases decreases; decreases increases; decreases

B

In general, which has the shorter maturity and is more appropriate for funding short-term inventory needs? Euro-Medium-Term notes (EMTNs) commercial paper the international bond market all of the above

B

In some respects, internationally diversified portfolios are different from a domestic portfolio because: international portfolio diversification increases expected return but does not decrease risk. investors may also acquire foreign exchange risk. investors must leave the country to acquire foreign securities. all of the above

B

Level I ADRs trade primarily: on the American Stock Exchange. over the counter or pink sheets. on the New York Stock Exchange. Level I ADRs typically do not trade at all, but instead are privately issued and held until maturity.

B

Level II ADRs must meet: both U.S. GAAP and home country standards. U.S. GAAP standards. home country accounting standards. none of the above

B

Level III ADR commitment applies to: ADR issues of under $25,000. the sale of a new equity issued in the United States. firms that want to list existing shares on the NYSE. banks issuing foreign mutual funds.

B

Portfolio theory assumes that investors are risk-averse. This means that investors: prefer more risk to less for a given return. will accept some risk, but not unnecessary risk. cannot be induced to make risky investments. All of the above are true.

B

Refer to Table 16.1. What is the value of the Sharpe Measure for France? 0.0071 0.113 either A or B neither A nor B

B

Refer to Table 16.1. What is the value of the Treynor Measure for the Netherlands? 0.197 0.0109 either A or B neither A nor B

B

The Sharpe and Treynor Measures tend to be consistent in their ranking of portfolios when the portfolios: contain only U.S. equity investments. are properly diversified. are poorly diversified. none of the above

B

The Sharpe measure uses ________ as the measure of risk and the Treynor measure uses ________ as the measure of risk. beta; variance standard deviation; beta beta; standard deviation standard deviation; variance

B

The ________ connects the risk-free security with the optimal domestic portfolio. security market line capital market line capital asset pricing model none of the above

B

TropiKana Inc., a U.S firm, has just borrowed euro 1,000,000 to make improvements to an Italian fruit plantation and processing plant. If the interest rate is 5.50% per year and the Euro appreciates against the dollar from $1.40/€ at the time the loan was made to $1.45/€ at the end of the first year, how much interest and principle will TropiKana pay at the end of the first year if they repay the entire loan plus interest (rounded)? $1,477,000 $1,529,750 $1,055,000 €1,529,750

B

TropiKana Inc., a U.S firm, has just borrowed euro 1,000,000 to make improvements to an Italian fruit plantation and processing plant. If the interest rate is 5.50% per year and the Euro depreciates against the dollar from $1.40/€ at the time the loan was made to $1.35/€ at the end of the first year, how much interest and principle will TropiKana pay at the end of the first year if they repay the entire loan plus interest (rounded)? €1,424,250 $1,424,250 $1,477,000 $1,055,000

B

________ are negotiable certificates issued by a bank to represent the underlying shares of stock, which are held in trust at a foreign custodian bank. Eurodeposits Depositary receipts Negotiable CDs International mutual funds

B

________ risk is measured with beta. Unsystematic Systematic International Domestic

B

A U.S. investor is considering a portfolio consisting of 60% invested in the U.S. equity index fund and 40% invested in the British equity index fund. The expected returns for the funds are 10% for the U.S. and 8% for the British, standard deviations of 20% for the U.S. and 18% for the British, and a correlation coefficient of 0.15 between the U.S. and British equity funds. Refer to Instruction 16.2. What is the standard deviation of the proposed portfolio? 19.00 38.00 14.45 19.20

C

A fully diversified domestic portfolio has a beta of: 0.0 -1.0 1.0 There is not enough information to answer this question.

C

A well-diversified portfolio has about ________ of the risk of the typical individual stock. 19% 52% 27% 8%

C

Empirical evidence shows that new issues of equity by domestic firms in the U.S. market typically has a ________ stock price reaction and new equity issues in the U.S. markets by foreign firms with segmented domestic markets have a ________ stock price reaction. positive; negative negative; negative negative; positive positive; positive

C

In September 2009 a U.S. investor chooses to invest $500,000 in German equity securities at a then current spot rate of $1.30/euro. At the end of one year the spot rate is $1.35/euro. Refer to Instruction 16.1. At the end of the year the investor sells his stock that now has an average price per share of €57. What is the investor's average rate of return after converting the stock back into dollars? 5.0% -7.24% -1.35% -5.0%

C

In theory, the MNE should support ________ debt ratios than a purely domestic firm because their cash flows are ________. higher; less stable due to international diversification lower; more stable due to international diversification higher; more stable due to international diversification lower; less stable due to international diversification

C

Private equity funds (PEF) differ from traditional venture capital (VC) funds in that: VC typically invests in family business whereas PEF do not. VC operates mainly in lesser-developed countries while PEF do not. VC is almost unavailable to emerging markets while PEF capital is available. All of the above are true.

C

The number of foreign firms traded on the London exchange is ________ than the number traded on the NYSE, and the costs of listing and disclosure in London are ________ those for the NYSE. greater than; less than less than; greater than greater than; greater than less than; less than

C

Which financial economists are most closely associated with the financial theory of optimal capital structure? Black and Scholes Markowitz and Sharpe Modigliani and Miller Fama, Fisher, Jensen, and Roll

C

Which of the following is the typical order of sourcing capital abroad? an international bond issue, then cross listing the outstanding issues on other exchanges, then an international bond issue in the target market cross listing the outstanding issues on other exchanges, then an international bond issue, then an international bond issue in the target market an international bond issue in less prestigious markets, then an international bond issue in the target market, and ultimately a eurobond issue an international bond issue in the target market, then cross listing the outstanding issues on other exchanges, then an international bond issue

C

Who pays the costs of creating a sponsored ADR? the SEC since they require the regulation the U.S. bank creating the ADR the foreign firm whose stocks underlie the ADR both the U.S. bank and the foreign firm

C

Your authors note several empirical studies that have found: a negative share price effect for foreign firms that cross-list on major U.S. exchanges. no share price effect for foreign firms that cross-list on major U.S. exchanges. a positive share price effect for foreign firms that cross-list on major U.S. exchanges. none of the above

C

An internationally diversified portfolio: has the same overall risk shape as a purely domestic portfolio. should result in a portfolio with a lower beta than a purely domestic portfolio. is only about 12% as risky as the typical individual stock. all of the above

D

Another school of thought about the worldwide trend toward fuller and more standardized disclosure rules is that the cost of U.S. level equity capital disclosure: leads to fewer foreign firms cross listing in U.S. equity markets. chases away potential listers of equity. is an onerous costly burden. all of the above

D

Beta may be defined as: the measure of systematic risk. the ratio of the variance of the portfolio to the variance of the market. a risk measure of a portfolio. all of the above

D

By cross listing and selling its shares on a foreign stock exchange, a firm typically tries to accomplish which of the following? increase the firm's visibility increase its share price improve the liquidity of its existing shares all of the above

D

Eurobanks are: major world banks that conduct a Eurocurrency business in addition to normal banking activities. banks where Eurocurrencies are deposited. financial intermediaries that simultaneously bid for time deposits in and make loans in a currency other than that of the currency of where it is located. All of the above are descriptions of a Eurobank.

D

Eurocredits are: typically variable rate and tied to the LIBOR. bank loans to MNEs and others denominated in a currency other than that of the country where the bank is located. usually for maturities of six months or less. All of the above are true.

D

Foreign bonds sold in the United States are nicknamed "Yankee bonds," foreign bonds sold in Japan are called "Samurai bonds." What are foreign bonds sold in the United Kingdom nicknamed? "Union Jacks" "Royalty" "Churchill's" "Bulldogs"

D

In September 2009 a U.S. investor chooses to invest $500,000 in German equity securities at a then current spot rate of $1.30/euro. At the end of one year the spot rate is $1.35/euro. Refer to Instruction 16.1. At an average price of €60/share, how many shares of stock will the investor be able to purchase? 8333 shares 10,833 shares 6173 shares 6410 shares

D

In September 2009 a U.S. investor chooses to invest $500,000 in German equity securities at a then current spot rate of $1.30/euro. At the end of one year the spot rate is $1.35/euro. Refer to Instruction 16.1. At the end of the year the investor sells his stock that now has an average price per share of €57. What is the investor's average rate of return before converting the stock back into dollars? 5.0% -3.0% 3.0% -5.0%

D

In September 2009 a U.S. investor chooses to invest $500,000 in German equity securities at a then current spot rate of $1.30/euro. At the end of one year the spot rate is $1.35/euro. Refer to Instruction 16.1. How many euros will the U.S. investor acquire with his initial $500,000 investment? €370,370 €500,000 €650,000 €384,615

D

In addition to gaining liquidity, which of the following could also be considered a legitimate reason for cross-listing equity? enhance a firm's local image get better local press coverage become more familiar with the local financial community all of the above

D

Investment banking services include which of the following? advising when a security should be cross-listed help to determine the price of the issue preparation of stock prospectuses all of the above

D

Level ________ is the easiest standard to satisfy for issuing ADRs. III II 144a I

D

Most financial theorists believe that the optimal capital structure is a ________ with a debt to total value ratio somewhere around ________. point; 25% point; 50% range; 10%-40% range; 30%-60%

D

Not all firms have the same optimal capital structure. Factors that might influence a firm's capital structure include: the collateral value of its assets. the industry in which it operates. the volatility of its sales and operating income. all of the above

D

Of the following, which was NOT cited by the authors as a valuable function provided by the Eurocurrency market? The Eurocurrency market is a major source of short-term bank loans to finance corporate working capital needs. Eurocurrency deposits are an efficient and convenient money market device for holding excess corporate liquidity. Eurocurrency deposits are a tool used by the Federal Reserve to regulate the money supply of countries that peg their currency against the U.S. dollar. All of the above were cited by the authors.

D

One of the most important factors in making debt less expensive than equity is: the tax deductibility of dividends. the tax deductibility of equity. the seniority of equity obligations to debt claims. the seniority of debt obligations to equity claims.

D

Refer to Table 16.1. ________ appears to have the greatest amount of risk as measured by monthly standard deviation, but ________ has the best return per unit of risk according to the Sharpe Measure. France; Austria United States; Netherlands United States; Austria France; Netherlands

D

Strategic alliances are normally formed by firms that expect to gain synergies from which of the following? complementary marketing economies of scale economies of scope all of the above

D

The authors present a comparison of correlation coefficients between major global equity markets over a variety of different periods. The comparison yields a number of conclusions listed here EXCEPT: that same century of data, however, yields a high correlation between the U.S. and Canada (0.80). the correlation between equity markets for the full twentieth century shows quite low levels of correlation between some of the largest markets (close to 0.50 in some cases). the correlation coefficients between those same equity markets for selected sub periods over the last quarter of the twentieth century, however, show significantly different correlation coefficients. None of the answers listed are inaccurate conclusions.

D

The choice of when and how to source capital globally is usually aided early on by the advice of: a commercial banker. your stock broker. an underwriter. an investment banker.

D

The efficient frontier of the domestic portfolio opportunity set: represents optimal portfolios of securities that represent minimum risk for a given level of expected portfolio return. runs along the extreme left edge of the opportunity set. contains the portfolio of risky securities that the logical investor would choose to hold. all of the above

D

The term "euro" as used in the euro equity market implies: the issuers are located in Europe. the investors are located in Europe. both A and B none of the above

D

TropiKana Inc., a U.S firm, has just borrowed euro 1,000,000 to make improvements to an Italian fruit plantation and processing plant. If the interest rate is 5.50% per year and the Euro appreciates against the dollar from $1.40/€ at the time the loan was made to $1.45/€ at the end of the first year, how much interest will TropiKana pay at the end of the first year (rounded)? $55,000 $37,931 $77,000 $79,750

D

TropiKana Inc., a U.S firm, has just borrowed euro 1,000,000 to make improvements to an Italian fruit plantation and processing plant. If the interest rate is 5.50% per year and the Euro appreciates against the dollar from $1.40/€ at the time the loan was made to $1.45/€ at the end of the first year, what is the before tax cost of capital if the firm repays the entire loan plus interest (rounded)? 1.73% 10.50% 5.50% 9.27%

D

Which of the following is NOT a factor offsetting the tax advantage of debt as a source of financing? increased agency costs alternative tax shields to those supplied by interest payments increased probability of financial distress (bankruptcy) due to fixed interest payments All of the above offset the tax advantage of debt as a source of financing.

D

Which of the following is NOT an advantage of ADRs to U.S. shareholders? In the event of the death of the shareholder, the estate does not go through a foreign court. Transfer of ownership is done in the U.S. in accordance with U.S. laws. Settlement for trading is generally faster in the United States. All of the above are advantages of ADRs.

D

Which of the following statements is NOT true? Investors will demand a security that adds value. International diversification benefits induce investors to demand foreign securities. An international security adds value to a portfolio if it reduces risk without reducing return. All of the above are true.

D

Which of the following were NOT identified by the authors as an alternative instrument to source equity in global markets? sale of a directed public share issue to investors in a target market sale of shares to private equity funds private placements under SEC rule 144a All of the above are alternatives to source equity instruments.

D