Cost of capital, international financial managementAshutosh136471
User
in short
ChatGPT
Capital budgeting is about choosing the right long-term investments, while cost of capital is the expense associated with financing those investments.
Ch 5 international capital structure and cost of capital latestShadina Shah
This document discusses international capital structures and costs of capital. It covers several topics: (1) how the cost of capital is estimated using weighted average cost of capital and CAPM models; (2) how segmented vs integrated capital markets impact cost of capital calculations; (3) evidence that costs of capital differ among countries; (4) benefits and costs of cross-border stock listings for reducing costs; and (5) how foreign ownership restrictions can increase costs through pricing-to-market effects. The chapter aims to explain how multinational firms can reduce their costs of capital through international diversification and accessing different capital markets.
Multinational cost and capital structureNits Kedia
The document discusses how multinational corporations determine their cost of capital and establish optimal capital structures. It explains that an MNC's cost of capital may differ from domestic firms due to their size, access to international markets, diversification across countries, and exposure to exchange rate and country risks. The cost of capital also varies by country based on interest rates, risk premiums, and tax laws. An MNC considers these corporate and country characteristics when deciding how much debt and equity to use in different subsidiaries to minimize its overall cost of capital.
The document discusses how multinational corporations determine their cost of capital and establish optimal capital structures. It explains that an MNC's cost of capital may differ from domestic firms due to their size, access to international markets, diversification across countries, and exposure to exchange rate and country risks. The cost of capital also varies by country based on interest rates, risk premiums, and tax laws. An MNC considers these corporate and country characteristics when deciding how much debt and equity to use in different subsidiaries to minimize its overall cost of capital.
This document discusses the cost of capital from an international perspective. It defines key terms like weighted average cost of capital and explains how cost of capital is determined. It also discusses how segmented versus integrated capital markets can impact a firm's cost of capital calculation. The document notes that international diversification can lower a firm's cost of capital. Cross-border stock listings are also discussed as a way for firms to potentially achieve a lower cost of capital.
The document discusses topics related to international finance and financial management for multinational firms. It covers concepts like weighted average cost of capital (WACC), capital asset pricing model (CAPM), adjusted present value (APV) analysis, and implications of foreign ownership restrictions. It also provides an example of using APV to evaluate a potential diesel engine plant investment in the UK by a US-based company.
The document discusses various international financing options for companies, including equity capital and debt capital. It describes equity capital options such as depository receipts (DRs), which allow foreign companies to list shares on a domestic exchange. It distinguishes between sponsored DRs, which companies actively participate in, and unsponsored DRs, issued without company agreement. Debt capital options discussed include eurobonds, bonds denominated in non-domestic currency, and foreign bonds, bonds issued by foreign companies denominated in the local currency.
The document discusses various forms of multinational restructuring by multinational corporations (MNCs), including international acquisitions, divestitures, and alliances. It explains how MNCs value foreign target firms for acquisition using net present value analysis and outlines factors that can cause valuations to vary between MNCs, such as different cash flow estimates, exchange rate effects, and required rates of return. It also discusses other methods of multinational restructuring like partial acquisitions and privatized business acquisitions.
Cost of capital, international financial managementAshutosh136471
User
in short
ChatGPT
Capital budgeting is about choosing the right long-term investments, while cost of capital is the expense associated with financing those investments.
Ch 5 international capital structure and cost of capital latestShadina Shah
This document discusses international capital structures and costs of capital. It covers several topics: (1) how the cost of capital is estimated using weighted average cost of capital and CAPM models; (2) how segmented vs integrated capital markets impact cost of capital calculations; (3) evidence that costs of capital differ among countries; (4) benefits and costs of cross-border stock listings for reducing costs; and (5) how foreign ownership restrictions can increase costs through pricing-to-market effects. The chapter aims to explain how multinational firms can reduce their costs of capital through international diversification and accessing different capital markets.
Multinational cost and capital structureNits Kedia
The document discusses how multinational corporations determine their cost of capital and establish optimal capital structures. It explains that an MNC's cost of capital may differ from domestic firms due to their size, access to international markets, diversification across countries, and exposure to exchange rate and country risks. The cost of capital also varies by country based on interest rates, risk premiums, and tax laws. An MNC considers these corporate and country characteristics when deciding how much debt and equity to use in different subsidiaries to minimize its overall cost of capital.
The document discusses how multinational corporations determine their cost of capital and establish optimal capital structures. It explains that an MNC's cost of capital may differ from domestic firms due to their size, access to international markets, diversification across countries, and exposure to exchange rate and country risks. The cost of capital also varies by country based on interest rates, risk premiums, and tax laws. An MNC considers these corporate and country characteristics when deciding how much debt and equity to use in different subsidiaries to minimize its overall cost of capital.
This document discusses the cost of capital from an international perspective. It defines key terms like weighted average cost of capital and explains how cost of capital is determined. It also discusses how segmented versus integrated capital markets can impact a firm's cost of capital calculation. The document notes that international diversification can lower a firm's cost of capital. Cross-border stock listings are also discussed as a way for firms to potentially achieve a lower cost of capital.
The document discusses topics related to international finance and financial management for multinational firms. It covers concepts like weighted average cost of capital (WACC), capital asset pricing model (CAPM), adjusted present value (APV) analysis, and implications of foreign ownership restrictions. It also provides an example of using APV to evaluate a potential diesel engine plant investment in the UK by a US-based company.
The document discusses various international financing options for companies, including equity capital and debt capital. It describes equity capital options such as depository receipts (DRs), which allow foreign companies to list shares on a domestic exchange. It distinguishes between sponsored DRs, which companies actively participate in, and unsponsored DRs, issued without company agreement. Debt capital options discussed include eurobonds, bonds denominated in non-domestic currency, and foreign bonds, bonds issued by foreign companies denominated in the local currency.
The document discusses various forms of multinational restructuring by multinational corporations (MNCs), including international acquisitions, divestitures, and alliances. It explains how MNCs value foreign target firms for acquisition using net present value analysis and outlines factors that can cause valuations to vary between MNCs, such as different cash flow estimates, exchange rate effects, and required rates of return. It also discusses other methods of multinational restructuring like partial acquisitions and privatized business acquisitions.
This chapter discusses various forms of multinational restructuring that multinational corporations undertake, including international acquisitions, divestitures, alliances, and shifting production among subsidiaries. It explains how MNCs evaluate and value potential foreign acquisition targets, which can vary depending on estimated cash flows, exchange rates, and required rates of return. The chapter also covers other methods of multinational restructuring such as partial acquisitions and privatized businesses, and treats restructuring decisions as real options problems.
CHAPTER 18 Multinational Capital Budgeting and Cross-Border Acquis.docxcravennichole326
CHAPTER 18 Multinational Capital Budgeting and Cross-Border Acquisitions
When it comes to finances, remember that there are no withholding taxes on the wages of sin.
—Mae West (1892–1980), Mae West on Sex, Health and ESP, 1975.
LEARNING OBJECTIVES
■Extend the domestic capital budgeting analysis to evaluate a greenfield foreign project
■Distinguish between the project viewpoint and the parent viewpoint of a potential foreign investment
■Adjust the capital budgeting analysis of a foreign project for risk
■Examine the use of project finance to fund and evaluate large global projects
■Introduce the principles of cross-border mergers and acquisitions
This chapter describes in detail the issues and principles related to the investment in real productive assets in foreign countries, generally referred to as multinational capital budgeting. The chapter first describes the complexities of budgeting for a foreign project. Second, we describe the insights gained by valuing a project from both the project’s viewpoint and the parent’s viewpoint using an illustrative case involving an investment by Cemex of Mexico in Indonesia. This illustrative case also explores real option analysis. Next, the use of project financing today is discussed, and the final section describes the stages involved in affecting cross-border acquisitions. The chapter concludes with the Mini-Case, Elan and Royalty Pharma, about a hostile takeover (acquisition) attempt that played out in the summer of 2013.
Although the original decision to undertake an investment in a particular foreign country may be determined by a mix of strategic, behavioral, and economic factors, the specific project should be justified—as should all reinvestment decisions—by traditional financial analysis. For example, a production efficiency opportunity may exist for a U.S. firm to invest abroad, but the type of plant, mix of labor and capital, kinds of equipment, method of financing, and other project variables must be analyzed with traditional discounted cash flow analysis. The firm must also consider the impact of the proposed foreign project on consolidated earnings, cash flows from subsidiaries in other countries, and on the market value of the parent firm.
Multinational capital budgeting for a foreign project uses the same theoretical framework as domestic capital budgeting—with a few very important differences. The basic steps are as follows:
■Identify the initial capital invested or put at risk.
■Estimate cash flows to be derived from the project over time, including an estimate of the terminal or salvage value of the investment.
■Identify the appropriate discount rate for determining the present value of the expected cash flows.
■Use traditional capital budgeting methods, such as net present value (NPV) and internal rate of return (IRR), to assess and rank potential projects.
Complexities of Budgeting for a Foreign Project
Capital budgeting for a foreign project is considerably more complex than the ...
Japanese firms rely more heavily on bank financing and internal cash flows, while U.S. firms rely more on external financing through public debt and equity markets. This difference stems from Japan's main bank system where long-term relationships between firms and banks facilitate internal financing, compared to the U.S. where arm's-length capital markets play a larger role in corporate financing. As financial systems globalize, the differences in financing practices between countries have narrowed to some degree.
International BusinessPresentation(By;Zaman).pptxzaman raza
This document discusses risks in international business and factors that influence capital structure decisions for multinational corporations. It begins by outlining various risks like political, regulatory, economic, currency, and cultural risks that companies face when doing business abroad. It then examines methods for valuing capital projects, including payback period, internal rate of return, and net present value. Finally, it analyzes how company characteristics like cash flow stability and credit risk as well as country characteristics like tax laws and currency values influence an MNC's capital structure decisions.
The document discusses the capital structure decisions of multinational firms (MNCs). It explains that MNCs consider both corporate characteristics, such as cash flow stability and access to retained earnings, and country characteristics, such as interest rates and tax laws, when determining the capital structure of their subsidiaries. The overall capital structure of an MNC combines the structures of the parent company and its subsidiaries. A subsidiary's debt financing decisions can impact the level of internal funds available to the parent company.
This document provides an overview of foreign direct investment (FDI). It defines FDI as when a firm directly invests in facilities in a foreign country to produce or market goods, making the firm multinational. FDI can take the form of building new facilities or acquiring existing companies. The document discusses theories and strategic motivations for FDI, including accessing resources, serving new markets, improving efficiency, and strategic asset seeking. FDI is described as providing benefits like exploiting location and ownership advantages, improving performance through structural differences between countries, and enabling organizational learning.
- The document contains concept questions and answers related to corporate finance topics like capital structure, dividend policy, and market efficiency.
- It discusses key concepts such as the efficient market hypothesis, agency costs, bankruptcy costs, and the tradeoff between debt and equity financing.
- The questions assess understanding of valuation models like APV and WACC, as well as theories including MM propositions, pecking order theory, and the irrelevance of dividends under perfect market conditions.
This document discusses considerations for multinational capital budgeting. It compares capital budgeting analyses from the perspective of a parent company versus a subsidiary and identifies factors that create differences in their cash flows, such as taxes, regulations on transferring funds, and exchange rate movements. The document also outlines inputs needed for multinational capital budgeting analyses and methods for assessing risk.
The document discusses international equity markets. It provides statistics on market capitalization, liquidity, and concentration of major stock exchanges in 2018. It describes how secondary markets allow for trading of shares and outlines different market structures. It discusses factors that drove greater global integration of capital markets in the 1980s and describes cross-listing of shares, Yankee stock offerings, and American Depository Receipts. It also summarizes empirical findings on cross-listings and provides an overview of international equity market benchmarks and iShares MSCI funds. In closing, it outlines macroeconomic factors, exchange rates, and industrial structure that can influence international equity returns.
This document discusses various methods for analyzing foreign direct investment and determining the appropriate discount rates for foreign projects. It addresses calculating net present value from both the subsidiary and parent company's perspectives. Additionally, it covers incorporating political and economic risks, using three stage approaches, and estimating costs of capital and betas for foreign investments using domestic proxy firms and accounting for country-specific risk. Key considerations discussed include sources of higher returns from foreign direct investment, factors influencing locations of multinational investment, and challenges in estimating cash flows, cannibalization, and intangible benefits.
The document discusses several topics related to foreign investment analysis and capital budgeting for multinational corporations. It covers two methods of international capital budgeting, the significance of segmented capital markets, and issues related to the cost of capital for foreign investments. It also addresses difficulties in estimating cash flows for foreign projects, political and economic risk analysis, and three approaches to analyzing foreign investments.
This document summarizes chapter 1 of the textbook "International Financial Management" by Jeff Madura. The chapter discusses the goal of multinational corporations to maximize shareholder wealth and conflicts against this goal. It also outlines theories justifying international business and common methods used, such as international trade, licensing, and establishing foreign subsidiaries. The chapter reviews opportunities and risks of international operations and how multinational corporations can manage their value through financial decisions.
This document discusses the goals and operations of multinational corporations (MNCs). It begins by stating the main goal of MNCs is to maximize shareholder wealth, but there can be conflicts with foreign managers having different goals. It then covers some key theories for international business expansion, including comparative advantage and product life cycles. Different methods for conducting international business are also outlined, such as exporting, licensing, franchising, joint ventures, acquisitions, and foreign direct investment through new subsidiaries. The document closes by discussing how MNCs manage risks associated with international operations like exchange rate fluctuations and exposure to foreign economic and political conditions.
The document discusses direct foreign investment (DFI) by multinational corporations. It outlines common motives for DFI such as accessing new markets, using cheaper foreign factors of production, and diversifying internationally. The benefits of international diversification for firms are presented, including lower risk from reduced correlations between foreign projects. Governments may provide incentives for desired DFI and impose barriers on less desired forms through regulations and policies.
Writing a 15 pages final paper, will be discussed in our 1st meeti.docxambersalomon88660
Writing a 15 pages final paper, will be discussed in our 1st meeting.
The final Paper and PowerPoint Presentation: Topic Analysis– 15 to 20 pages in APA format
Choose a topic in IT Project Management for your topic analysis. Email to your instructor a proposal of the topic area you intend to use for your topic analysis. Prepare a summary that identifies the major research threads in your topic. A reference list should be included in the summary. The topic should be relevant to your course material.
The professor will approve the topic of the project during the time when the class meets. E-mail the professor by week 2 with the topic for your final project. Email the professor a draft reference list by week 5. The Final Project will be a research report relevant to the selected topic. Your report will include an evolution of the chosen topic, the problems resolved or will be resolved, and future trends. The paper should have 5-7 academic references for each of these areas (published articles and/or textbook. The paper should be 15 to 20 pages in length and must be presented in the APA style, and is due during the last week of classes.
CHAPTER 14 Raising Equity and Debt Globally
Do what you will, the capital is at hazard. All that can be required of a trustee to invest, is, that he shall conduct himself faithfully and exercise a sound discretion. He is to observe how men of prudence, discretion, and intelligence manage their own affairs, not in regard to speculation, but in regard to the permanent disposition of their funds, considering the probable income, as well as the probable safety of the capital to be invested.
—Prudent Man Rule, Justice Samuel Putnam, 1830.
LEARNING OBJECTIVES
■Design a strategy to source capital equity globally
■Examine the potential differences in the optimal financial structure of the multinational firm compared to that of the domestic firm
■Describe the various financial instruments that can be used to source equity in the global equity markets
■Understand the different forms of foreign listings—depositary receipts—in U.S. markets
■Analyze the unique role private placement enjoys in raising global capital
■Evaluate the different goals and considerations relevant to a firm pursuing foreign equity listing and issuance
■Explore the different structures that can be used to source debt globally
Chapter 13 analyzed why gaining access to global capital markets should lower a firm’s cost of capital, increase its access to capital, and improve the liquidity of its shares by overcoming market segmentation. A firm pursuing this lofty goal, particularly a firm from a segmented or emerging market, must first design a financial strategy that will attract international investors. This involves choosing among alternative paths to access global capital markets.
This chapter focuses on firms that reside in less liquid, segmented, or emerging markets. They are the ones that need to tap liquid and unsegmented markets in order to attain.
This chapter discusses the cost of capital and capital structure for multinational corporations (MNCs). It explains that an MNC's cost of capital may differ from domestic firms due to its size, access to international capital markets, diversification across countries, and exposure to exchange rate and country risks. The capital asset pricing model is used to assess how required rates of return differ between MNCs and domestic firms. Additionally, both corporate characteristics and country characteristics influence an MNC's optimal capital structure decision.
FAI-lT .1 Financing the Global FirmCost of Capital (d.docxmydrynan
FAI-lT .1 Financing the Global Firm
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The Cost of Capital and Financial Structure
ke = cost of equity
k'vncc = weighted
average after-tax
cost of capital
ka r x) = after-iax
cost of debt
Total Debt (D)
Debt Ratio (o/"\ =
-
Total Assets (V)
Partly offsetting the favorable effect of more debt is an increase in the cost of equity (k"),
because investors perceive greater financial risk. Nevertheless, the overall lveighted average
after-tax cost of capital (kwacc) continues to decline as the debt ratio increases, until finan-
cial risk becomes so serious that investors and management alike pierceive a real danger of
insoivency. This result causes a sharp increase in the cost of new debt and equity, thus increas-
ing the weighted average cost of capital. The lou,point on the resulting U-shaped cost of cap-
ital curve. which is at 14"/" in Exhibit 13.2. defines the debt ratio range in which the cost of
capital is minimized.
Most theorists believe that the low point is actually a rather broad flat area encompass-
ing a wide range of debt ratios, 30% to 60% In Exhibit 13.2, rvhere little difference exists in
the cost of capital. They also believe that, at least in the United States, the range of the flat
area and the location of a particular firm's debt ratio rvithin that range are determined by
such variables as 1) the industry in which it competes;2) volatility of its sales and operating
income; and 3) the collateral value of its assets.
*ptirt:;:l Finasreial Strer*t*r* and the MfdH
The domestic theory of optimal financial structures needs to be modified by four more vari-
ables in order to accommodate the case of the MNE. These variables, in order of appearance,
are 1) availability of capital; 2) diversification of cash flows; 3) foreign exchange risk; and
4) expectations of international portfoiio investors.
Availability of Capital. Chapter 12 demonstrated that access to capital in global markets allows
an MNE to lower its cost of equity and debt compared rvith most domestic firms. It also per-
mits an MNE to maintain its desired debt ratio, even when significant amounts of new funds
must be raised. In other wordq a multinational firm's marginal cost of capital is constant for
considerable ranges of its capital budget. This statement is not true for most small domestic
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capital markets ale rn
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The document provides an overview of multinational financial management. It discusses the goal of maximizing shareholder wealth for multinational corporations (MNCs) and the conflicts against this goal, such as agency problems between managers and shareholders. It also describes theories justifying international business, such as comparative advantage, and common methods for conducting international business, such as exporting, licensing, and foreign direct investment. Finally, it addresses how management structure and technology impact agency costs and the flows of cash for MNCs.
This document provides an overview of international financial management for multinational corporations (MNCs). It discusses the goal of MNCs to maximize shareholder wealth and potential conflicts with subsidiary managers pursuing local goals. Agency costs are usually larger for MNCs than domestic firms due to difficulties monitoring foreign managers. Centralized management reduces agency costs but decentralized management gives local managers more control. MNCs must balance maximizing group value with constraints like regulations and ethics. Theories like comparative advantage and product life cycle explain why firms expand internationally using various methods like exports, foreign direct investment, and joint ventures.
The cost of capital is the weighted average of the costs of different sources of financing like debt and equity. It represents the minimum return required by investors to compensate for the risk of the project. The document discusses various methods to estimate the costs of debt, preferred stock, and equity like using yield to maturity, bond ratings, dividend yield, CAPM, and dividend discount model. It also covers topics like taxes, weights, country risk premium, and treating flotation costs.
The APCO Geopolitical Radar - Q3 2024 The Global Operating Environment for Bu...APCO
The Radar reflects input from APCO’s teams located around the world. It distils a host of interconnected events and trends into insights to inform operational and strategic decisions. Issues covered in this edition include:
This chapter discusses various forms of multinational restructuring that multinational corporations undertake, including international acquisitions, divestitures, alliances, and shifting production among subsidiaries. It explains how MNCs evaluate and value potential foreign acquisition targets, which can vary depending on estimated cash flows, exchange rates, and required rates of return. The chapter also covers other methods of multinational restructuring such as partial acquisitions and privatized businesses, and treats restructuring decisions as real options problems.
CHAPTER 18 Multinational Capital Budgeting and Cross-Border Acquis.docxcravennichole326
CHAPTER 18 Multinational Capital Budgeting and Cross-Border Acquisitions
When it comes to finances, remember that there are no withholding taxes on the wages of sin.
—Mae West (1892–1980), Mae West on Sex, Health and ESP, 1975.
LEARNING OBJECTIVES
■Extend the domestic capital budgeting analysis to evaluate a greenfield foreign project
■Distinguish between the project viewpoint and the parent viewpoint of a potential foreign investment
■Adjust the capital budgeting analysis of a foreign project for risk
■Examine the use of project finance to fund and evaluate large global projects
■Introduce the principles of cross-border mergers and acquisitions
This chapter describes in detail the issues and principles related to the investment in real productive assets in foreign countries, generally referred to as multinational capital budgeting. The chapter first describes the complexities of budgeting for a foreign project. Second, we describe the insights gained by valuing a project from both the project’s viewpoint and the parent’s viewpoint using an illustrative case involving an investment by Cemex of Mexico in Indonesia. This illustrative case also explores real option analysis. Next, the use of project financing today is discussed, and the final section describes the stages involved in affecting cross-border acquisitions. The chapter concludes with the Mini-Case, Elan and Royalty Pharma, about a hostile takeover (acquisition) attempt that played out in the summer of 2013.
Although the original decision to undertake an investment in a particular foreign country may be determined by a mix of strategic, behavioral, and economic factors, the specific project should be justified—as should all reinvestment decisions—by traditional financial analysis. For example, a production efficiency opportunity may exist for a U.S. firm to invest abroad, but the type of plant, mix of labor and capital, kinds of equipment, method of financing, and other project variables must be analyzed with traditional discounted cash flow analysis. The firm must also consider the impact of the proposed foreign project on consolidated earnings, cash flows from subsidiaries in other countries, and on the market value of the parent firm.
Multinational capital budgeting for a foreign project uses the same theoretical framework as domestic capital budgeting—with a few very important differences. The basic steps are as follows:
■Identify the initial capital invested or put at risk.
■Estimate cash flows to be derived from the project over time, including an estimate of the terminal or salvage value of the investment.
■Identify the appropriate discount rate for determining the present value of the expected cash flows.
■Use traditional capital budgeting methods, such as net present value (NPV) and internal rate of return (IRR), to assess and rank potential projects.
Complexities of Budgeting for a Foreign Project
Capital budgeting for a foreign project is considerably more complex than the ...
Japanese firms rely more heavily on bank financing and internal cash flows, while U.S. firms rely more on external financing through public debt and equity markets. This difference stems from Japan's main bank system where long-term relationships between firms and banks facilitate internal financing, compared to the U.S. where arm's-length capital markets play a larger role in corporate financing. As financial systems globalize, the differences in financing practices between countries have narrowed to some degree.
International BusinessPresentation(By;Zaman).pptxzaman raza
This document discusses risks in international business and factors that influence capital structure decisions for multinational corporations. It begins by outlining various risks like political, regulatory, economic, currency, and cultural risks that companies face when doing business abroad. It then examines methods for valuing capital projects, including payback period, internal rate of return, and net present value. Finally, it analyzes how company characteristics like cash flow stability and credit risk as well as country characteristics like tax laws and currency values influence an MNC's capital structure decisions.
The document discusses the capital structure decisions of multinational firms (MNCs). It explains that MNCs consider both corporate characteristics, such as cash flow stability and access to retained earnings, and country characteristics, such as interest rates and tax laws, when determining the capital structure of their subsidiaries. The overall capital structure of an MNC combines the structures of the parent company and its subsidiaries. A subsidiary's debt financing decisions can impact the level of internal funds available to the parent company.
This document provides an overview of foreign direct investment (FDI). It defines FDI as when a firm directly invests in facilities in a foreign country to produce or market goods, making the firm multinational. FDI can take the form of building new facilities or acquiring existing companies. The document discusses theories and strategic motivations for FDI, including accessing resources, serving new markets, improving efficiency, and strategic asset seeking. FDI is described as providing benefits like exploiting location and ownership advantages, improving performance through structural differences between countries, and enabling organizational learning.
- The document contains concept questions and answers related to corporate finance topics like capital structure, dividend policy, and market efficiency.
- It discusses key concepts such as the efficient market hypothesis, agency costs, bankruptcy costs, and the tradeoff between debt and equity financing.
- The questions assess understanding of valuation models like APV and WACC, as well as theories including MM propositions, pecking order theory, and the irrelevance of dividends under perfect market conditions.
This document discusses considerations for multinational capital budgeting. It compares capital budgeting analyses from the perspective of a parent company versus a subsidiary and identifies factors that create differences in their cash flows, such as taxes, regulations on transferring funds, and exchange rate movements. The document also outlines inputs needed for multinational capital budgeting analyses and methods for assessing risk.
The document discusses international equity markets. It provides statistics on market capitalization, liquidity, and concentration of major stock exchanges in 2018. It describes how secondary markets allow for trading of shares and outlines different market structures. It discusses factors that drove greater global integration of capital markets in the 1980s and describes cross-listing of shares, Yankee stock offerings, and American Depository Receipts. It also summarizes empirical findings on cross-listings and provides an overview of international equity market benchmarks and iShares MSCI funds. In closing, it outlines macroeconomic factors, exchange rates, and industrial structure that can influence international equity returns.
This document discusses various methods for analyzing foreign direct investment and determining the appropriate discount rates for foreign projects. It addresses calculating net present value from both the subsidiary and parent company's perspectives. Additionally, it covers incorporating political and economic risks, using three stage approaches, and estimating costs of capital and betas for foreign investments using domestic proxy firms and accounting for country-specific risk. Key considerations discussed include sources of higher returns from foreign direct investment, factors influencing locations of multinational investment, and challenges in estimating cash flows, cannibalization, and intangible benefits.
The document discusses several topics related to foreign investment analysis and capital budgeting for multinational corporations. It covers two methods of international capital budgeting, the significance of segmented capital markets, and issues related to the cost of capital for foreign investments. It also addresses difficulties in estimating cash flows for foreign projects, political and economic risk analysis, and three approaches to analyzing foreign investments.
This document summarizes chapter 1 of the textbook "International Financial Management" by Jeff Madura. The chapter discusses the goal of multinational corporations to maximize shareholder wealth and conflicts against this goal. It also outlines theories justifying international business and common methods used, such as international trade, licensing, and establishing foreign subsidiaries. The chapter reviews opportunities and risks of international operations and how multinational corporations can manage their value through financial decisions.
This document discusses the goals and operations of multinational corporations (MNCs). It begins by stating the main goal of MNCs is to maximize shareholder wealth, but there can be conflicts with foreign managers having different goals. It then covers some key theories for international business expansion, including comparative advantage and product life cycles. Different methods for conducting international business are also outlined, such as exporting, licensing, franchising, joint ventures, acquisitions, and foreign direct investment through new subsidiaries. The document closes by discussing how MNCs manage risks associated with international operations like exchange rate fluctuations and exposure to foreign economic and political conditions.
The document discusses direct foreign investment (DFI) by multinational corporations. It outlines common motives for DFI such as accessing new markets, using cheaper foreign factors of production, and diversifying internationally. The benefits of international diversification for firms are presented, including lower risk from reduced correlations between foreign projects. Governments may provide incentives for desired DFI and impose barriers on less desired forms through regulations and policies.
Writing a 15 pages final paper, will be discussed in our 1st meeti.docxambersalomon88660
Writing a 15 pages final paper, will be discussed in our 1st meeting.
The final Paper and PowerPoint Presentation: Topic Analysis– 15 to 20 pages in APA format
Choose a topic in IT Project Management for your topic analysis. Email to your instructor a proposal of the topic area you intend to use for your topic analysis. Prepare a summary that identifies the major research threads in your topic. A reference list should be included in the summary. The topic should be relevant to your course material.
The professor will approve the topic of the project during the time when the class meets. E-mail the professor by week 2 with the topic for your final project. Email the professor a draft reference list by week 5. The Final Project will be a research report relevant to the selected topic. Your report will include an evolution of the chosen topic, the problems resolved or will be resolved, and future trends. The paper should have 5-7 academic references for each of these areas (published articles and/or textbook. The paper should be 15 to 20 pages in length and must be presented in the APA style, and is due during the last week of classes.
CHAPTER 14 Raising Equity and Debt Globally
Do what you will, the capital is at hazard. All that can be required of a trustee to invest, is, that he shall conduct himself faithfully and exercise a sound discretion. He is to observe how men of prudence, discretion, and intelligence manage their own affairs, not in regard to speculation, but in regard to the permanent disposition of their funds, considering the probable income, as well as the probable safety of the capital to be invested.
—Prudent Man Rule, Justice Samuel Putnam, 1830.
LEARNING OBJECTIVES
■Design a strategy to source capital equity globally
■Examine the potential differences in the optimal financial structure of the multinational firm compared to that of the domestic firm
■Describe the various financial instruments that can be used to source equity in the global equity markets
■Understand the different forms of foreign listings—depositary receipts—in U.S. markets
■Analyze the unique role private placement enjoys in raising global capital
■Evaluate the different goals and considerations relevant to a firm pursuing foreign equity listing and issuance
■Explore the different structures that can be used to source debt globally
Chapter 13 analyzed why gaining access to global capital markets should lower a firm’s cost of capital, increase its access to capital, and improve the liquidity of its shares by overcoming market segmentation. A firm pursuing this lofty goal, particularly a firm from a segmented or emerging market, must first design a financial strategy that will attract international investors. This involves choosing among alternative paths to access global capital markets.
This chapter focuses on firms that reside in less liquid, segmented, or emerging markets. They are the ones that need to tap liquid and unsegmented markets in order to attain.
This chapter discusses the cost of capital and capital structure for multinational corporations (MNCs). It explains that an MNC's cost of capital may differ from domestic firms due to its size, access to international capital markets, diversification across countries, and exposure to exchange rate and country risks. The capital asset pricing model is used to assess how required rates of return differ between MNCs and domestic firms. Additionally, both corporate characteristics and country characteristics influence an MNC's optimal capital structure decision.
FAI-lT .1 Financing the Global FirmCost of Capital (d.docxmydrynan
FAI-lT .1 Financing the Global Firm
Cost of Capital ('/d
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The Cost of Capital and Financial Structure
ke = cost of equity
k'vncc = weighted
average after-tax
cost of capital
ka r x) = after-iax
cost of debt
Total Debt (D)
Debt Ratio (o/"\ =
-
Total Assets (V)
Partly offsetting the favorable effect of more debt is an increase in the cost of equity (k"),
because investors perceive greater financial risk. Nevertheless, the overall lveighted average
after-tax cost of capital (kwacc) continues to decline as the debt ratio increases, until finan-
cial risk becomes so serious that investors and management alike pierceive a real danger of
insoivency. This result causes a sharp increase in the cost of new debt and equity, thus increas-
ing the weighted average cost of capital. The lou,point on the resulting U-shaped cost of cap-
ital curve. which is at 14"/" in Exhibit 13.2. defines the debt ratio range in which the cost of
capital is minimized.
Most theorists believe that the low point is actually a rather broad flat area encompass-
ing a wide range of debt ratios, 30% to 60% In Exhibit 13.2, rvhere little difference exists in
the cost of capital. They also believe that, at least in the United States, the range of the flat
area and the location of a particular firm's debt ratio rvithin that range are determined by
such variables as 1) the industry in which it competes;2) volatility of its sales and operating
income; and 3) the collateral value of its assets.
*ptirt:;:l Finasreial Strer*t*r* and the MfdH
The domestic theory of optimal financial structures needs to be modified by four more vari-
ables in order to accommodate the case of the MNE. These variables, in order of appearance,
are 1) availability of capital; 2) diversification of cash flows; 3) foreign exchange risk; and
4) expectations of international portfoiio investors.
Availability of Capital. Chapter 12 demonstrated that access to capital in global markets allows
an MNE to lower its cost of equity and debt compared rvith most domestic firms. It also per-
mits an MNE to maintain its desired debt ratio, even when significant amounts of new funds
must be raised. In other wordq a multinational firm's marginal cost of capital is constant for
considerable ranges of its capital budget. This statement is not true for most small domestic
k").
1ge
an-
'of
ras-
ap-
.of
firms because they do not have access to the national
equity or debt markets' They must either
rely on internally generated funds or borrow for
the short and medium terms from commel-
cial banks. : r ^^-:+-r *^.lzatc are
Multinational firms domiciled in countries that have illiquid
capital markets ale rn
almost the same ,it,ruiion u, small domesri" tlt*t uniess they have
gained a global cost and
availability of capital. They must rely on l"t"t"u!V generated
funds and bank borrowing' If
they need to raise significant u*o,rrrt. of new iunO--t
to finance gr ...
The document provides an overview of multinational financial management. It discusses the goal of maximizing shareholder wealth for multinational corporations (MNCs) and the conflicts against this goal, such as agency problems between managers and shareholders. It also describes theories justifying international business, such as comparative advantage, and common methods for conducting international business, such as exporting, licensing, and foreign direct investment. Finally, it addresses how management structure and technology impact agency costs and the flows of cash for MNCs.
This document provides an overview of international financial management for multinational corporations (MNCs). It discusses the goal of MNCs to maximize shareholder wealth and potential conflicts with subsidiary managers pursuing local goals. Agency costs are usually larger for MNCs than domestic firms due to difficulties monitoring foreign managers. Centralized management reduces agency costs but decentralized management gives local managers more control. MNCs must balance maximizing group value with constraints like regulations and ethics. Theories like comparative advantage and product life cycle explain why firms expand internationally using various methods like exports, foreign direct investment, and joint ventures.
The cost of capital is the weighted average of the costs of different sources of financing like debt and equity. It represents the minimum return required by investors to compensate for the risk of the project. The document discusses various methods to estimate the costs of debt, preferred stock, and equity like using yield to maturity, bond ratings, dividend yield, CAPM, and dividend discount model. It also covers topics like taxes, weights, country risk premium, and treating flotation costs.
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2. Fifth Edition
International Capital Structure
and the Cost of Capital
17-1
KEY TAKEAWAYS
•Capital structure is how a company funds its overall
operations and growth.
•Debt consists of borrowed money that is due back to
the lender, commonly with interest expense.
•Equity consists of ownership rights in the company,
without the need to pay back any investment.
•The debt-to-equity (D/E) ratio is useful in determining
the riskiness of a company's borrowing practices.
3. WHAT IS CAPITAL STRUCTURE?
• Capital structure is the particular combination
of debt and equity used by a company to finance its
overall operations and growth.
• Equity capital arises from ownership shares in a company
and claims to its future cash flows and profits. Debt comes
in the form of bond issues or loans, while equity may
come in the form of common stock, preferred stock, or
retained earnings. Short-term debt is also considered to
be part of the capital structure.
4. 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
17-3
5. 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
17-4
6. 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 ($)
K global
K local
Ilocal Iglobal
IRR
17-5
7. COST OF CAPITAL IN SEGMENTED VS.
INTEGRATED MARKETS
• The cost of equity capital (Ke) of a firm is the expected return on the
firm’s stock that investors require.
• This return is frequently estimated using the Capital Asset Pricing Model
(CAPM):
where bi=
Cov(Ri ,RM)
Var(RM)
Ri = Rf + bi(RM – Rf)
17-6
8. COST OF CAPITAL IN SEGMENTED VS.
INTEGRATED MARKETS
If capital markets are segmented, then investors can
only invest domestically. This means that the market
portfolio (M) in the CAPM formula would be the
domestic portfolio instead of the world portfolio.
versus
Clearly integration or segmentation of international financial
markets has major implications for determining the cost of
capital.
Ri = Rf + bi (RU.S. – Rf)
U.S.
Ri = Rf + bi (RW – Rf)
W
17-7
9. DOES THE COST OF CAPITAL
DIFFER AMONG COUNTRIES?
• There do appear to be differences in the cost of capital
in different countries.
• When markets are imperfect, international financing can
lower the firm’s cost of capital.
• One way to achieve this is to internationalize the firm’s
ownership structure.
17-8
10. CROSS-BORDER LISTINGS OF STOCKS
• Cross-border listings of stocks have become quite
popular among major corporations.
• The largest contingent of foreign stocks are listed on the
London Stock Exchange.
• U.S. exchanges attracted the next largest contingent of
foreign stocks.
17-9
11. CROSS-BORDER LISTINGS OF STOCKS
Cross-border listings of stocks benefit a company in the
following ways.
1. The company can expand its potential investor base,
which will lead to a higher stock price and lower cost of
capital.
2. Cross-listing creates a secondary market for the
company’s shares, which facilitates raising new capital in
foreign markets.
3. Cross-listing can enhance the liquidity of the company’s
stock.
4. Cross-listing enhances the visibility of the company’s
name and its products in foreign marketplaces.
17-10
12. CROSS-BORDER LISTINGS OF STOCKS
Cross-border listings of stocks do carry costs.
1. It can be costly to meet the disclosure and listing
requirements imposed by the foreign exchange and
regulatory authorities.
2. Once a company’s stock is traded in overseas markets, there
can be volatility spillover from these markets.
3. Once a company’s stock is make available to foreigners, they
might acquire a controlling interest and challenge the
domestic control of the company.
17-11
13. CROSS-BORDER LISTINGS OF STOCKS
On average, cross-border listings of stocks appears to be a
profitable decision.
The benefits outweigh the costs.
17-12
14. THE EFFECT OF FOREIGN EQUITY OWNERSH
RESTRICTIONS
• While companies have incentives to internationalize
their ownership structure to lower the cost of capital and
increase market share, they may be concerned with the
possible loss of corporate control to foreigners.
• In some countries, there are legal restrictions on the
percentage of a firm that foreigners can own.
• These restrictions are imposed as a means of ensuring
domestic control of local firms.
17-13
15. PRICING-TO-MARKET PHENOMENON
• Suppose foreigners, if allowed, would like to buy 30
percent of a Korean firm.
• But they are constrained by ownership constraints
imposed on foreigners to purchase at most 20 percent.
• Because this constraint is effective in limiting desired
foreign ownership, foreign and domestic investors many
face different market share prices.
• This dual pricing is the pricing-to-market
phenomenon.
17-14
16. ASSET PRICING UNDER FOREIGN
OWNERSHIP RESTRICTIONS
• An interesting outcome is that the firm’s cost of capital
depends on which investors, domestic or foreign, supply
capital.
• The implication is that a firm can reduce its cost of
capital by internationalizing its ownership structure.
17-15
17. THE FINANCIAL STRUCTURE
OF SUBSIDIARIES.
• There are three different approaches to determining
the subsidiary’s financial structure.
1. Conform to the parent company's norm.
2. Conform to the local norm of the country where the
subsidiary operates.
3. Vary judiciously to capitalize on opportunities to
lower taxes, reduce financing costs and risk, and take
advantage of various market imperfections.
17-16
18. THE FINANCIAL STRUCTURE
OF SUBSIDIARIES.
• In addition to taxes, political risk should be given due
consideration in the choice of a subsidiary’s financial
structure.
17-17