CAPITAL STRUCTURE OFMULTINATIONAL FIRMSCapital structure for the multinational firm involves a choice between debt and equity financing across all its subsidiaries. A MNC can have more debt in its capital structure if its cash flows are more stable and it has a low credit risk.
Four main capital structure theories Net income approach Net operating income approach Traditional approach Modigliani and miller approach
Net income approach This approach being propounded by durand The cost of debt is lower than the cost of equity The risk perception of investors is not changed by the use of debt. There are no tax.
Net operating income approach This approach also propounded by durand The cost of debt is lower than the cost of equity Cost of debt are constant If we increase proportion of debt capital than overall cost of capital decrease but same time interest burden on company increase These are no corporate tax .
Traditional approach increase in leverage does not affect the overall cost of capital and the value of the firm Higher demanding of return Point of Optimum capital structure
Modigliani- miller approach Feature1. Capital markets are perfect2. Homogeneous risk classes of firm3. Expectations about the net operating income4. Dividend payout ratio 100%5. No corporate taxes