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Chapter 17
Multinational Cost of Capital and Capital Structure
Lecture Outline
Components of Capital
Retained Earnings
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
Cost of Equity Comparison Using the CAPM
Cost of Capital Across Countries
Country Differences in the Cost of Debt
Country Differences in the Cost of Equity
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.
