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Multinational Cost Me Capital and Term Structure

In: Business and Management

Submitted By nuriddin199022
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MULTINATIONAL COST OF CAPITAL AND CAPITAL STRUCTURE
LEARNING OBJECTIVES
The specific objectives of this chapter are to: l explain how corporate and country characteristics influence an MNC’s cost of capital, explain why there are differences in the costs of capital among countries, and explain how corporate and country characteristics are considered by an MNC when it establishes its capital structure.

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An MNC finances its operations by using a mixture of fixed interest borrowing and equity financing that can minimize the overall cost of capital (the weighted average of its interest rate and dividend payments). By minimizing the cost of capital used to finance a given size and risk of operations, financial managers can maximize the value of the company and therefore maximize shareholder wealth.

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MULTINATIONAL COST OF CAPITAL AND CAPITAL STRUCTURE

BACKGROUND ON COST OF CAPITAL
Apart from working capital, a firm’s capital consists of equity (retained earnings and funds obtained by issuing shares) and debt (borrowed funds). With these funds a firm invests in a portfolio of projects, each project potentially offering different risks and different returns. The interest rate that the firm applies or charges to these projects (the cost of using the firm’s capital) will therefore vary according to the project’s particular risk. Profitable investment in this context is where the firm invests in projects that achieve returns greater than that required by their risk. A project that achieves a 20% return from investing in car parks (safe) is arguably a better performer than a project achieving a 25% return from financing a musical show (risky) in that many of the musical shows will fail and most of the investments in car parks will succeed – it is only a higher expected return. For convenience, rather than use NPV terminology we use the closely related IRR

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