Question

For a firm to obtain its long-term debt and equity in a highly illiquid domestic capital market implies that it has a:

Select one:

a. Relatively low cost of capital

b. Cost of capital that cannot be estimate

c. Relatively average cost of capital

d. Relatively high cost of capital

Imperfections in the capital market which lead to financial market segmentation include which of the following:

Select one:

a. high securities transaction costs

b. all of the choices

c. asymmetric information between domestic and foreign-based investors

d. foreign exchange risks

Which is true regarding the financial structure of a foreign subsidiary:

Select one:

a. option to conform to the parent company's capital structure

b. avail all available options

c. option to judiciously capitalize on opportunities to lower taxes, reduce financing costs and risks, and take advantage of market imperfections

d. option to conform to the local norm of the country where the subsidiary operates

Using variation of expected stock returns of those of the market index, and correlation between the expected stock returns of and the market, we can estimate ________ risk

Select one:

a. Systematic

b. Unsystematic

c. Diversifiable

d. Total

Answer 1

Part 1:
The correct answer is "relatively high cost of capital". As the market is highly illiquid, investors will demand high return for the liquidity risk.

Part 2:
Answer: Option b is correct. Options a, c and d are included in imperfections in the capital market which lead to financial market segmentation.

Part 3:
Answer: Option b is correct. All the given options a, c and d can be availed regarding the financial structure of a foreign subsidiary.

Part 4:
Answer: Option a is correct.
Using the information referred to in the question, we can estimate beta. Beta is a measure of market risk or systematic risk.