Académique Documents
Professionnel Documents
Culture Documents
Multinational Financial Management By Alan Shapiro (Wiley Eastern Publication, 8th Edition) International Financial Management Jeff Madura (Cengage Learning) International Financial Management By P G Apte (Tata McGraw Hill)
WACC
WACC = Rd (1 T) D/V + Re E/V Must reflect target capital structure based on market value weights. Advantage of debt:
Tax Shield Increased chances of bankruptcy increases the cost of equity capital
International Financial Management
Disadvantage of debt:
Rajiv Srivastava
COST OF CAPITAL
Cost
WACC
Cost of Equity
Rajiv Srivastava
CAPITAL STRUCTURE
VALUE OF THE FIRM
Value
Levered Firm; VL
PV of Financial Distress
Level of Debt
Rajiv Srivastava International Financial Management 6
IRR of Projects
CONVENTIONAL CAP-M
Cost of equity given by CAPM Re = Rf + (Rm Rf) Parameters of risk free rate, risk premium, and are required on global basis rather than local basis. Assets are priced as per CAPM which implies reward for only systematic risk since unsystematic risk can be diversified away by investors in their individual capacities.
Rajiv Srivastava International Financial Management
10
INTL CAP-M
Much of the risk faced by investors in MNCs is unsystematic. Risk across countries cannot be diversified away by investors themselves. MNCs while doing business in different nations can derive the benefits of diversification. The economies must have low degrees of correlation.
11
12
RISK PREMIUM
Risk Premium
Economic conditions Govts willingness to support Degree of operating leverage
Cost of equity:
PE multiple Maturity of capital markets
Rajiv Srivastava
13
PROJECTS BETA
Finding subsidiarys Beta: Use pure play approach: Unlevering and relevering of beta for operational leverage and financial leverage. Identify pure play local firm rather than using MNCs beta. Incorporate separate premium for country risk.
Rajiv Srivastava International Financial Management
14
15
Advantages:
Expanded investor base; higher stock price and lower cost of equity More avenues for raising capital Increased liquidity Increased visibility providing marketing edge Increased cost of listing Increased compliances and cost of administration Increased disclosure requirements Increased threat of take-over
International Financial Management
Disadvantages:
Rajiv Srivastava
16
INTL CAP-M
For Internationally tradable assets Assets are priced as per International CAPM as per systematic risk of the portfolio consisting of securities across the world. Take world market portfolio, and its Beta. Cost of debt will be same across borders if markets are integrated.
Rajiv Srivastava International Financial Management
17
18
Cost of equity is partially priced as per international systematic risk and partly priced as per domestic systematic risk. A non tradable asset (only domestically listed firm) gets the partial benefit of the international listing by another firm. Companies listed on the domestic market alone get the advantage of other firms listing abroad. Free ride due to interplay of domestic and world markets offered by internationally listed share. International markets are neither fully integrated nor fully segmented.
Rajiv Srivastava International Financial Management
19
20
CASE - NESTLE
November 17, 1988: Nestle lifted ban on foreign holding due to:
International criticism for foreign acquisitions. Management thought that local shares were underpriced. Due to underpricing of the registered shares the cost of capital was higher.
21
Rajiv Srivastava
NESTLE SHARES
-25% +35%
Time
22
IMPACT ON PRICES
Bearer shares fell by 25% and registered shares rose by 35%. Since registered shares constituted 68% the overall cost of capital came down for Nestle. Price of bearer shares fell:
Because additional supply of shares was available to investors.
Rajiv Srivastava
23
APPLYING CAP-M
Assume: In Swiss market: Rf = 4.6% Rm = 9.8% Swiss = 0.9 Cost of equity = 4.6 + 0.9 (9.8 4.6) = 9.28% With restrictions removed: Rf = 4.5% Rm = 10.5% w = 0.60 Cost of equity = 4.5 + 0.6 (10.5 4.5) = 8.1% The price of the share P = D/(r - g); Two different r will give two different prices.
Rajiv Srivastava International Financial Management
24
Cost of capital is lower in LDCs (India vs. USA) Developmental financial institutions have played much greater role in financing the corporate in LDCs, while developed nations rely more on venture capital and equity markets. High degree of leverage is acceptable in developing countries than the developed. Keirutsu approach of financing In contrast, for developed nations equity/venture capital plays major developmental role, rather than debt.
International Financial Management
Rajiv Srivastava
25
Stability of Cash flows Credit Risk Access to retained earnings Issue of guarantees on debt Agency problems Legal environment Exchange control rules Strength of the currency Country/Political risk Norms differ across nations
International Financial Management
Country Characteristics:
Rajiv Srivastava
26
Rajiv Srivastava
27
Rajiv Srivastava
28
If parent is responsible in case of default by the subsidiary: Parents capital structure is important. When not, capital structure of subsidiary matters. As long as parent feels legally or morally obligated not to let the subsidiary default on its financial commitments, the capital structure of the subsidiary seems irrelevant. Also capital structure of the subsidiary seems irrelevant for the overall capital structure of the parent, since outlays on subsidiaries are relatively small.
Rajiv Srivastava
29
Management of political risk Reduce currency risk to the extent the funds are to be used locally If local taxes are high tax shield on debts will be high
Avail low cost subsidised debt Avail subsidies In such a case the capital structure of the MNC becomes RESIDUAL.
International Financial Management
Rajiv Srivastava
30