Review Chapter 17 - Chapter 17 Multinational Cost of...

Info iconThis preview shows pages 1–3. Sign up to view the full content.

View Full Document Right Arrow Icon
Chapter 17 Multinational Cost of Capital and Capital Structure Lecture Outline Background on Cost of Capital Comparing the Costs of Equity and Debt Cost of Capital for MNCs Cost of Capital Comparison Using the CAPM Implications of the CAPM for an MNC’s Risk Costs of Capital Across Countries Country Differences in the Cost of Debt Country Differences in the Cost of Equity Estimating the Cost of Debt and Equity Using the Cost of Capital for Assessing Foreign Projects Derive Net Present Values Based on the Weighted Average Cost of Capital Adjust the Weighted Average Cost of Capital for the Risk Differential Derive the Net Present Value of the Equity Investment The MNC’s Capital Structure Decision Influence of Corporate Characteristics Influence of Country Characteristics Revising the Capital Structure in Response to Changing Conditions Interaction Between Subsidiary and Parent Financing Decisions Impact of Increased Debt Financing by the Subsidiary Impact of Reduced Debt Financing by the Subsidiary Summary of Interaction Between Subsidiary and Parent Financing Decisions Local Versus Global Target Capital Structure Offsetting a Subsidiary’s High Degree of Financial Leverage Offsetting a Subsidiary’s Low Degree of Financial Leverage Limitations in Offsetting a Subsidiary’s Abnormal Degree of Financial Leverage Impact of an MNC’s Capital Structure Decisions on Its Value 19
Background image of page 1

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

View Full DocumentRight Arrow Icon
20 International Financial Management Chapter Theme This chapter explains why the capital structure and the cost of capital of MNCs may vary with those of domestic firms. It also explains why the cost of capital varies across countries. The disparity in the cost of capital across countries is important because it can influence the MNC’s decisions on where to establish subsidiaries and where to obtain funds. Topics to Stimulate Class Discussion 1. Why don’t all MNCs attempt to obtain funds in countries where the cost of capital is very low? 2. The cost of capital is very high in Latin American countries. Yet, many MNCs continue to establish subsidiaries there. What underlying factor that causes a high cost of capital can also enhance the revenues of subsidiaries over time? 3. Explain why a firm’s capital structure may be dependent on the countries in which it operates. POINT/COUNTER-POINT: Should the Reduced Tax Rate on Dividends Affect an MNC’s Capital Structure? POINT: No. The change in the tax law reduces the taxes that investors pay on dividends. It does not change the taxes paid by the MNC. Thus, it should not affect the capital structure of the MNC. COUNTER-POINT: A dividend income tax reduction may encourage a U.S.-based MNC to offer dividends to its shareholders, or to increase the dividend payment. This strategy reflects an increase in the cash outflows of the MNC. To offset these outflows, the MNC may have to adjust its capital structure. For example, the next time that it raises funds, it may prefer to use equity rather than debt so that it could free up some cash outflows (the outflows to cover dividend would be less than
Background image of page 2
Image of page 3
This is the end of the preview. Sign up to access the rest of the document.

Page1 / 13

Review Chapter 17 - Chapter 17 Multinational Cost of...

This preview shows document pages 1 - 3. Sign up to view the full document.

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