ch15 - Chapter 15 Multinational Capital Structure...

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15-1 Chapter 15 Chapter 15 Multinational Capital Structure Multinational Capital Structure and Cost of Capital and Cost of Capital Learning objectives The MNC’s optimal capital structure Project valuation and the cost of capital The impact of market imperfections WACC versus APV Systematic versus unsystematic risks Sources of funds for multinational operations The international evidence Butler / Multinational Finance 4e (2008) John Wiley & Sons, Inc.
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15-2 Systematic vs unsystematic risks Only systematic or nondiversifiable operating risks should be reflected in capital costs - Capital costs are increased if these risks are positively related to the market portfolio - Capital costs are decreased if these risks are negatively related to the market portfolio Operating risks that are unsystematic or diversifiable should not be priced by investors and should not be reflected in capital costs Butler / Multinational Finance Chapter 15 Multinational capital structure and cost of capital Capital structure and cost of capital Project valuation and cost of capital Sources of funds for multinational operations The international evidence on capital structure MM’s irrelevance proposition Weighted average cost of capital Adjusted present value The cost of capital in emerging markets
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15-3 Country risks and equity returns Equity returns are related to country risks Erb, Harvey and Viskanta find - Prices go up (down) following a decrease (increase) in country risk - Countries with high country risk tend to have more volatile returns - Countries with high country risk tend to have lower betas (systematic risks) Erb, Harvey, & Viskanta, “Political Risk, Financial Risk & Economic Risk,” Financial Analysts Journal , 1996. Butler / Multinational Finance Chapter 15 Multinational capital structure and cost of capital Capital structure and cost of capital Project valuation and cost of capital Sources of funds for multinational operations The international evidence on capital structure MM’s irrelevance proposition Weighted average cost of capital Adjusted present value The cost of capital in emerging markets
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15-4 Liberalizations and the cost of capital Liberalizations tend to benefit firms and investors in the liberalized market Financial market liberalizations tend to - Increase the correlation of emerging market and world market returns - Have little impact on emerging market return volatility - Decrease local firms’ capital costs by as much as 1 percent Bekaert & Harvey, “Foreign Speculators and Emerging Equity Markets,” Journal of Finance , 2000.
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