Chapter Sixteen International Capital Structure16 and the Cost of capital Chapter objective This chapter discusses the cost of capital for the multinational firm
INTERNATIONAL FINANCIAL MANAGEMENT EUN / RESNICK Second Edition 16 Chapter Sixteen International Capital Structure and the Cost of Capital Chapter Objective: This chapter discusses the cost of capital for the multinational firm
Chapter outline Cost of Capital Cost of Capital in Segmented vS Integrated Markets Does the Cost of Capital Differ Among Countries o Cross-Border listings of stocks Capital Asset Pricing Under Cross-Listings o The effect of foreign Equity Ownership Restrictions The financial structure of subsidiaries McGraw-Hilylrwoin 16-1 Copyright@ 2001 by The McGraw-Hill Companies, Inc. All rights
McGraw-Hill/Irwin Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. 16-1 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 ⚫ The Financial Structure of Subsidiaries
Cost of capital o 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-)K1+(1-o)i McGraw-Hilylrwoin 16-2 Copyright@ 2001 by The McGraw-Hill Companies, Inc. All rights
McGraw-Hill/Irwin Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. 16-2 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 λ K λ τ i l = (1− ) + (1− )
Weighted Average Cost of Capital K=(1-x)K1+(1-0)i Where K= weighted average cost of capital K=cost of equity capital for a levered firm i= pretax cost of debt 2= debt to total market value ratio McGraw-Hilylrwoin 16-3 Copyright@ 2001 by The McGraw-Hill Companies, Inc. All rights
McGraw-Hill/Irwin Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. 16-3 Weighted Average Cost of Capital Where K = weighted average cost of capital Kl = cost of equity capital for a levered firm i = pretax cost of debt = debt to total market value ratio K λ K λ τ i l = (1− ) + (1− )
The firm's Investment Decision and the Cost of Capital a firm that can reduce its cost of capital will increase the profitable capital expenditures that K local the firm can take on and increase the wealth of the K Shareholders o Internationalizing the IRR firms cost of capital is one such policy Investment (S) local global McGraw-Hilylrwoin 16-4 Copyright@ 2001 by The McGraw-Hill Companies, Inc. All rights
McGraw-Hill/Irwin Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. 16-4 The Firm’s 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 firm’s cost of capital is one such policy. Investment ($) IRR K global K local Ilocal Iglobal