文档介绍：Chapter 17 Multinational Cost of Capital & Capital Structure
Multinational Cost of Capital
& Capital Structure
17
Chapter
South-Western/Thomson Learning ? 2003
Chapter Objectives
To explain how corporate and country characteristics influence an MNC’s cost of capital;
To explain why there are differences in the costs of capital across countries; and
To explain how corporate and country characteristics are considered by an MNC when it establishes its capital structure1>.
Cost of Capital
A firm’s capital consists of equity (retained earnings and funds obtained by issuing stock) and debt (borrowed funds).
The cost of equity reflects an opportunity cost, while the cost of debt is reflected in interest expenses.
Firms want a capital structure that will minimize their cost of capital, and hence the required rate of return on projects.
Cost of Capital
A firm’s weighted average cost of capital
kc = ( D ) kd ( 1 _ t ) + ( E ) ke
D + E D + E
where D is the amount of debt of the firm
E is the equity of the firm
kd is the before-tax cost of its debt
t is the corporate tax rate
ke is the cost of financing with equity
Cost of Capital
The interest payments on debt are tax deductible. However, as interest expenses increase, the probability of bankruptcy will increase too.
It is favorable to increase the use of debt financing until the point at which the bankruptcy probability es large enough to offset the tax advantage of using debt.
Cost of Capital
Debt’s Tradeoff
Cost of Capital
Debt Ratio
Cost of Capital for MNCs
The cost of capital for MNCs may differ from that for domestic firms because of the following differences.
Size of Firm. Because of their size, MNCs are often given preferential treatment by creditors. They can usually achieve smaller per unit flotation costs too.
Cost of Capital for MNCs
Acess to International Capital Markets. MNCs are normally able to obtain funds through international capital markets, where the cost of