Chapter 17
Multinational Cost of Capital and Capital Structure
Lecture Outline
Components of Capital
External Sources of Debt
External Sources of Equity
The MNC’s Capital Structure Decision
Influence of Corporate Characteristics
Influence of Host Country Characteristics
Response to Changing Country Characteristics
Subsidiary Versus Parent Capital Structure Decisions
Impact of Increased Subsidiary Debt Financing
Impact of Reduced Subsidiary Debt Financing
Limitations in Offsetting a Subsidiary’s Leverage
Multinational Cost of Capital
MNC’s Cost of Debt
MNC’s Cost of Equity
Estimating an MNC’s Cost of Capital
Comparing Costs of Debt and Equity
Costs of Capital for MNCs Vs. Domestic Firms
Costs of Capital Across Countries
Country Differences in the Cost of Debt
Country Differences in the Cost of Equity
© 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
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Multinational Cost of Capital and Capital Structure 2
Chapter Theme
This chapter explains why the capital structure and the cost of capital of MNCs may vary with those of
domestic firms. It also explains why the cost of capital varies across countries. The disparity in the cost
of capital across countries is important because it can influence the MNC’s decisions on where to
establish subsidiaries and where to obtain funds.
Topics to Stimulate Class Discussion
1. Why don’t all MNCs attempt to obtain funds in countries where the cost of capital is very low?
2. The cost of capital is very high in Latin American countries. Yet, many MNCs continue to establish
subsidiaries there. What underlying factor that causes a high cost of capital can also enhance the
revenues of subsidiaries over time?
3. Explain why a firm’s capital structure may be dependent on the countries in which it operates.
POINT/COUNTER-POINT:
Should the Reduced Tax Rate on Dividends Affect an MNC’s Capital
Structure?
POINT: No. The change in the tax law reduces the taxes that investors pay on dividends. It does not
change the taxes paid by the MNC. Thus, it should not affect the capital structure of the MNC.
COUNTER-POINT: A dividend income tax reduction may encourage a U.S.-based MNC to offer
dividends to its shareholders, or to increase the dividend payment. This strategy reflects an increase in the
cash outflows of the MNC. To offset these outflows, the MNC may have to adjust its capital structure. For
example, the next time that it raises funds, it may prefer to use equity rather than debt so that it could free
up some cash outflows (the outflows to cover dividend would be less than outflows associated with debt).
WHO IS CORRECT? Use the Internet to learn more about this issue. Which argument do you support?
Offer your own opinion on this issue.
ANSWER: The MNC may consider shifting its capital structure, but would have to consider how the shift
in its capital structure would affect its own tax rates. A shift to more equity would reduce the corporate tax
advantage from using debt.
© 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.