Chapter_16 - Chapter Outline Cost of Capital Cost of...

Info iconThis preview shows pages 1–8. Sign up to view the full content.

View Full Document Right Arrow Icon

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
This is the end of the preview. Sign up to access the rest of the document.

Unformatted text preview: Chapter Outline Cost of Capital Cost of Capital in Segmented vs. Integrated Markets Does the Cost of Capital Differ Among Countries? Cross-Border Listings of Stocks Capital Asset Pricing Under Cross-Listings The Effect of Foreign Equity Ownership Restrictions Cost of Capital The cost of capital is the minimum rate of return an investment project must generate in order to pay its financing costs. For a levered firm, the financing costs can be represented by the weighted average cost of capital: K = (1 ) K l + (1 ) i Weighted Average Cost of Capital Where K = weighted average cost of capital K l = cost of equity capital for a levered firm i = pretax cost of debt = debt to total market value ratio = marginal corporate income tax rate K = (1 ) K l + (1 ) i The Firms Investment Decision and the Cost of Capital A firm that can reduce its cost of capital will increase the profitable capital expenditures that the firm can take on and increase the wealth of the shareholders. Internationalizing the firms cost of capital is one such cost of capital (%) Investment ($) I local I global IRR Cost of Capital in Segmented vs. Integrated Markets The cost of equity capital ( K e ) of a firm is the expected return on the firms stock that investors require. This return is frequently estimated using the Capital Asset Pricing Model (CAPM): ) ( f M i f i R R R R- + = ) V ar( ) , C ov( M M i i R R R = where Cost of Capital in Segmented vs. Integrated Markets If capital markets are segmented, then investors can only invest domestically. This means that the market portfolio (M) in the CAPM formula would be the domestic portfolio instead of the world portfolio. ) ( f US US i f i R R R R- + = versus ) ( f W W i f i R R R R- + = Clearly integration or segmentation of international financial markets has major implications for determining the cost of capital. Does the Cost of Capital Differ among Countries?...
View Full Document

This note was uploaded on 07/16/2011 for the course FINA 5331 taught by Professor Staff during the Spring '08 term at UT Arlington.

Page1 / 25

Chapter_16 - Chapter Outline Cost of Capital Cost of...

This preview shows document pages 1 - 8. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online