ch14_3 - Multinational Financial Management Alan Shapiro...

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1 Multinational Financial Management Alan Shapiro 9 th Edition Power Points by Joseph F. Greco, Ph.D. California State University, Fullerton
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2 CHAPTER 14 The Cost of Capital for Foreign Investment
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3 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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4 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 = ρ(r m , r i ) σ (r i ) * σ (r m ) / σ 2 (r m )=ρ(r m , r i ) σ (r i )/ σ (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. ρ(r m ,
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5 When the returns and financial structure of an investment are expected to be similar to those of the firm’s typical investment, the corporate-wide cost of equity capital may serve as a reasonable proxy for the required rate of return on equity of the project.
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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
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ch14_3 - Multinational Financial Management Alan Shapiro...

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