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# ch14 - Multinational Financial Management Alan Shapiro 9th...

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Multinational Financial Management Alan Shapiro 9 th Edition J.Wiley & Sons Power Points by Joseph F. Greco, Ph.D. California State University, Fullerton

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CHAPTER 14 The Cost of Capital for Foreign Investment
THE COST OF CAPITAL FOR FOREIGN INVESTMENTS I. THE COST OF EQUITY CAPITAL A. Definition 1. the minimum (required) rate of return necessary to induce investors to buy or hold the firm’s stock. 2. used to value future equity cash flows 3. determines common stock price

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COST OF EQUITY CAPITAL A. Capital Asset Pricing Model (CAPM) Formula r i = r f + Β i ( r m - r f ) where r i = the equity required rate r f = the risk free return rate Β i = Cov(r m , r i )/ σ 2 r m where Cov(r m , r i ) is the covariance between asset and market returns and σ 2 r m , the variance of market returns.
WEIGHTED AVERAGE COST OF CAPITAL (WACC) II. WACC For Foreign Projects A. Weighted Average Cost of Capital (WACC = k 0 ) Formula k 0 = (1-L) k e + L i d (1 - t) where L = the parent’s debt ratio i d (1 - t) = the after-tax debt cost k e = the equity cost of capital k 0 is used as the discount rate in the calculation of Net Present Value

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ch14 - Multinational Financial Management Alan Shapiro 9th...

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