Cost of Capital in Multinational Firms
The Cost of Capital in Multinational Firms
Monique N. Mixon
University of Maryland University College
FIN 630, 04 November 2012
Turnitin.com=_________
ABSTRACT
This paper examines the cost of capital for multinational firms and determines that the multinational firm should use the weighted average cost of capital (WACC) to evaluate international and domestic investment decisions and to magistrate the enactment of subsidiaries domestically and internationally. This paper also discusses the modification essential to evaluate exchange risk and to comprise financing that is endowed or tied to precise investments. Overseas affiliates, do not have a self-governing capital structure because their obligations are overtly or subliminally the responsibility of the parent company.
Introduction
Over the last 20 years, the multinational corporation (MNC) has become a normal entity in business, rather than the exemption. Due to this factor, the need to internationalize the tools of domestic financial analysis has become obvious (Shapiro, 1978). One of the most essential tools of domestic and multinational financial analysis is the cost of capital. The cost of capital is the return expected by those who supply funds to the firm. The return expected by suppliers of funds reflects the level prevailing interest rates and a premium for risk (Giddy, 1981). Since the cost of capital is defined as the smallest amount of return essential to investors, from the perspective of management it is the straightforward capacity of the firm’s financial performance. It determines the acceptability of investment opportunities, providing a discount rate that may be used to determine the net present value (NPV) of the future cash flows expected from a new investment (Wang, 2008). Alternatively, the cost of capital from a management perspective is the cut-off rate against which to compare the internal rate of return (IRR) of any proposed new
Monique N. Mixon
University of Maryland University College
FIN 630, 04 November 2012
Turnitin.com=_________
ABSTRACT
This paper examines the cost of capital for multinational firms and determines that the multinational firm should use the weighted average cost of capital (WACC) to evaluate international and domestic investment decisions and to magistrate the enactment of subsidiaries domestically and internationally. This paper also discusses the modification essential to evaluate exchange risk and to comprise financing that is endowed or tied to precise investments. Overseas affiliates, do not have a self-governing capital structure because their obligations are overtly or subliminally the responsibility of the parent company.
Introduction
Over the last 20 years, the multinational corporation (MNC) has become a normal entity in business, rather than the exemption. Due to this factor, the need to internationalize the tools of domestic financial analysis has become obvious (Shapiro, 1978). One of the most essential tools of domestic and multinational financial analysis is the cost of capital. The cost of capital is the return expected by those who supply funds to the firm. The return expected by suppliers of funds reflects the level prevailing interest rates and a premium for risk (Giddy, 1981). Since the cost of capital is defined as the smallest amount of return essential to investors, from the perspective of management it is the straightforward capacity of the firm’s financial performance. It determines the acceptability of investment opportunities, providing a discount rate that may be used to determine the net present value (NPV) of the future cash flows expected from a new investment (Wang, 2008). Alternatively, the cost of capital from a management perspective is the cut-off rate against which to compare the internal rate of return (IRR) of any proposed new
References: Bishnoi, R. (2012). Comparative relationship between cost of equity capital and leverage in matched sets of multinational corporations and U.S. domestic firms. Journal Of Financial Management & Analysis, 25(1), 75-84. Wang, Z. (2008). Cost of capital and return on capital: U.S.-based multinational corporations versus U.S. domestic corporations. Southern Illinois University at Carbondale. ProQuest Dissertations and Theses, , 70-n/a. Retrieved from http://ezproxy.umuc.edu/login?url=http://search.proquest.com/docview/304465186?accountid=14580 Giddy, I. H. (1981). The cost of capital in the international firm. Managerial and Decision Economics (Pre-1986), 2(4), 263-263. Retrieved from http://ezproxy.umuc.edu/login?url=http://search.proquest.com/docview/229843638?accountid=14580 Thines-Stanley, M. (1981). Capital structure and cost-of-capital for the multinational firm. Journal of International Business Studies (Pre-1986), 12(000001), 103-103. Retrieved from http://ezproxy.umuc.edu/login?url=http://search.proquest.com/docview/197407801?accountid=14580 Shapiro, A. C. (1978). Financial Structure and cost of capital in the multinational corporation. Journal of Financial & Quantitative Analysis, 13(2), 211-226