CH 17 Abbr - C H A P T E R 17 17 Multinational Cost of...

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Unformatted text preview: C H A P T E R 17 17 Multinational Cost of Capital and Capital Structure Chapter Overview Chapter A. Background on Cost of Capital B. Cost of Capital for MNCs C. Costs of Capital across Countries D. Using the Cost of Capital for Assessing Foreign Projects E. The MNC’s Capital Structure Decision F. Interaction between Subsidiary and Parent Financing Decisions G. Local versus Global Target Capital Structure Chapter 17 Objectives Chapter This chapter will: A. Explain how corporate and country characteristics influence an MNC’s cost of capital B. Explain why there are differences in the costs of capital among countries C. Explain how corporate and country characteristics are considered by an MNC when it establishes its capital structure A. Background on Cost of Capital A. 1. Comparing the Costs of Equity and Debt D E kt = kd + ke where D+E D+E D kd t E ke amount of the firm’s debt before­tax cost of its debt corporate tax rate firm’s equity cost of fi nancing with equity Searching for the Appropriate Capital Structure 17.1 17.1 B. Cost of Capital for MNCs B. 1. Cost­of Equity Comparison Using CAPM the 2. Implications of the CAPM for an MNC’s Risk Summary of Factors That Cause the Cost of Capital of MNCs to Differ From That of Domestic Firms 17.2 17.2 C. Costs of Capital across Countries Countries 1. Country Differences in the Cost of Debt a. Differences in the Risk­Free Rate b. Differences in the Risk Premium c. Comparative Costs of Debt across Countries 2. Country Differences in the Cost of Equity a. Impact of the Euro C. Costs of Capital across Countries Countries 3. Combining the Costs of Debt and Equity 4. Estimating the Cost of Debt and Equity D. Using the Cost of Capital for Assessing Foreign Projects Assessing 1. Derive Net Present Values Based on the Weighted Average Cost of Capital 2. Adjust the Weighted Average Cost of Capital for the Risk Differential D. Using the Cost of Capital for Assessing Foreign Projects Assessing 3. Derive the Net Present Value of the Equity Investment a. Relationship between Project’s Net Present Value and Capital Structure b. Tradeoff When Financing in Developing Countries c. Accounting for Multiple Periods d. Comparing Alternative Debt Compositions e. Comparing Alternative Capital Structures f. Assessing Alternative Exchange Rate scenarios g. Considering Foreign Stock Ownership E. The MNC’s Capital Structure Decision Decision 1. Influence of Corporate Characteristics a. Stability of MNC’s Cash Flows b. MNC’s Credit Risk c. MNC’s Access to Retained Earnings d. MNC’s Guarantees on Debt e. MNC’s Agency Problems E. The MNC’s Capital Structure Decision Decision 2. Influence of Country Characteristics a. Stock Restrictions in Host Countries b. Interest Rates in Host Countries c. Strength of Host country Currencies d. Country Risk in Host Countries e. Tax Laws in Host Countries E. The MNC’s Capital Structure Decision Decision 3. Revising the Capital Structure in Response to Changing Conditions F. Interaction between Subsidiary and Parent Financing Decisions and 1. Impact of Increased Debt Financing by the Subsidiary 2. Impact of Reduced Debt Financing the Subsidiary 3. Summary of Interaction between Subsidiary and Parent Financing Decisions by G. Local versus Global Target Capital Structure Capital 1. Offsetting a Subsidiary’s High of Financial Leverage Degree 2. Offsetting Subsidiary’s Low Degree of Financial Leverage 3. Limitations in Offsetting a Subsidiary’s Abnormal Degree of Financial Leverage ...
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This note was uploaded on 06/02/2011 for the course FINA 4315 taught by Professor Staff during the Spring '08 term at Texas A&M University, Corpus Christi.

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