Problem 1) Assume the risk free interest rate in the U.S. is the same as that in Country M. Assume that the government of Country M is more likely to rescue local firms that experience financial problems. Other things being equal, Country M's firms are likely to use a _______ degree of financial leverage than U.S. firms. If a firm based in Country M had the same degree of financial leverage and the same operating characteristics as a U.S. firm, its cost of capital would be _______ than that of the U.S. firm.
A) higher; higher
B) higher; lower
C) lower; lower
D) lower; higher
Problem 2) Assume that a U.S. firm considers investing in British one year Treasury securities. The interest rate on these securities is 12%, while the interest rate on the same securities in the U.S. is 10%. The firm believes that today's spot rate is an appropri¬ate forecast for the spot rate of the pound in one year. Based on this information, the effective yield on British securities from the U.S. firm's perspective is:
A) equal to the U.S. interest rate.
B) equal to the British interest rate.
C) lower than the U.S. interest rate.
D) higher than the British interest rate.
E) lower than the British interest rate, but higher than the U.S. interest rate.
Problem 3) Ideally, a firm issuing Eurobonds desires to denominate bonds in a currency that:
A) exhibits a low interest rate and is expected to appreciate.
B) exhibits a low interest rate and is expected to depreciate.
C) exhibits a high interest rate and is expected to depreciate.
D) exhibits a high interest rate and is expected to appreciate.
Problem 4) A U.S. firm could issue bonds denominated in euros and partially hedge against exchange rate risk by:
A) invoicing its exports in U.S. dollars.
B) requesting that any imports ordered by the firm be invoiced in U.S. dollars.
C) invoicing its exports in euros.
D) requesting that any imports ordered by the firm be invoiced in the currency denominating the bonds.