International CapitalStructure and the Costof CapitalChapter Thirteen
ChapterObjectives:This chapter discusses the cost ofcapital for the multinational firm
❖Chapter Objectives: ❖This chapter discusses the cost of capital for the multinational firm
ChapterOutlineCost of CapitalCost of Capital in Segmented vs. IntegratedMarketsDoes the Cost of Capital Differ AmongCountries?*Cross-Border Listings of StocksCapital Asset Pricing Under Cross-ListingsThe Effect of Foreign EquityOwnershipRestrictionsThe Financial Structure of Subsidiaries
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
CostofCapital The cost of capital is the minimum rate ofreturn an investment project mustgenerate in order to pay its financingcosts.For a levered firm, the financing costs canbe represented by the weighted averagecost of capital:K= (1 - 2)K, + (1 - )i
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 – )Kl + (1 – t)i
Weighted Average Cost ofCapitalK = (1 - 2)K, + 2(1 - t)iWhereK = weighted average cost of capitalK, = cost of equity capital for a levered firmi = pretax cost of debta = debt to total market value ratiot = marginal corporate income tax rate
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 t = marginal corporate income tax rate K = (1 – )Kl + (1 – t)i