ch14THE COST OF CAPITAL FOR FOREIGN INVESTMENTS(跨国公司财务管理-Joseph F. Greco).pptVIP

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ch14THE COST OF CAPITAL FOR FOREIGN INVESTMENTS(跨国公司财务管理-Joseph F. Greco).ppt

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ch14THE COST OF CAPITAL FOR FOREIGN INVESTMENTS(跨国公司财务管理-Joseph F. Greco)

Multinational Financial Management Alan Shapiro7th Edition J.Wiley Sons Power Points by Joseph F. Greco, Ph.D. California State University, Fullerton CHAPTER 14 THE COST OF CAPITAL FOR FOREIGN INVESTMENTS CHAPTER OVERVIEW: I. THE COST OF EQUITY CAPITAL II. THE WEIGHTED AVERAGE COST OF CAPITAL FOR FOREIGN PROJECTS III. DISCOUNT RATES FOR FOREIGN INVESTMENTS IV. THE COST OF DEBT CAPITAL V. ESTABLISHING A WORLDWIDE CAPITAL STRUCTURE I. THE COST OF EQUITY CAPITAL A. Definition 1. the minimum (required) rate of return necessary to induce investors to buy or hold the firm’s stock. 2. used to value future equity cash flows 3. determines common stock price THE COST OF EQUITY CAPITAL B. Capital Asset Pricing Model ri = rf + ?i ( rm - rf ) where ri = the equity required rate rf = the risk free return rate ?i= Cov(rm, ri)/ ?2 rm where THE COST OF EQUITY CAPITAL Cov(rm, ri) is the covariance between asset and market returns and ?2 rm , the variance of market returns. II. THE WEIGHTED AVERAGE COST OF CAPITAL FOR FOREIGN PROJECTS II. FOREIGN PROJECTS A. Weighted Average Cost of Capital (WACC = k0) k0 = (1-L) ke + L id (1 - t) where L = the parent’s debt ratio id (1 - t) = the after-tax debt cost ke = the equity cost of capital THE WEIGHTED AVERAGE COST OF CAPITAL FOR FOREIGN PROJECTS k0 is used as the discount rate in the calculation of Net Present Value. 2. Two Caveats a. Weights must be a proportion using market, not book value. b. Calculating WACC, weights must be marginal reflecting future debt structure. III. DISCOUNT RATES FOR FOREIGN INVESTMENTS III. DISCOUNT RATES AND FOREIGN PROJECTS A. Systematic Risk 1. Not diversifiable 2. Foreign projects in non-synchronous economies should be less correlated with domestic markets. DISCOUNT RATES FOR FOREIGN INVESTMENTS 3. Paradox: LDCs have