《国际财务管理》（英文版） Chap16 International Capital Structure and the Cost of Capital

Chapter Sixteen International Capital Structure16 and the Cost of capital Chapter objective This chapter discusses the cost of capital for the multinational firm

INTERNATIONAL FINANCIAL MANAGEMENT EUN / RESNICK Second Edition 16 Chapter Sixteen International Capital Structure and the Cost of Capital Chapter Objective: This chapter discusses the cost of capital for the multinational firm

Chapter outline Cost of Capital Cost of Capital in Segmented vS Integrated Markets Does the Cost of Capital Differ Among Countries o Cross-Border listings of stocks Capital Asset Pricing Under Cross-Listings o The effect of foreign Equity Ownership Restrictions The financial structure of subsidiaries McGraw-Hilylrwoin 16-1 Copyright@ 2001 by The McGraw-Hill Companies, Inc. All rights

McGraw-Hill/Irwin Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. 16-1 Chapter Outline ⚫ Cost of Capital ⚫ Cost of Capital in Segmented vs. Integrated Markets ⚫ Does the Cost of Capital Differ Among Countries? ⚫ Cross-Border Listings of Stocks ⚫ Capital Asset Pricing Under Cross-Listings ⚫ The Effect of Foreign Equity Ownership Restrictions ⚫ The Financial Structure of Subsidiaries

Cost of capital o The cost of capital is the minimum rate of return an investment project must generate in order to pay its financing costs For a levered firm, the financing costs can be represented by the weighted average cost of capital K=(1-)K1+(1-o)i McGraw-Hilylrwoin 16-2 Copyright@ 2001 by The McGraw-Hill Companies, Inc. All rights

McGraw-Hill/Irwin Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. 16-2 Cost of Capital ⚫ The cost of capital is the minimum rate of return an investment project must generate in order to pay its financing costs. ⚫ For a levered firm, the financing costs can be represented by the weighted average cost of capital. K λ K λ τ i l = (1− ) + (1− )

Weighted Average Cost of Capital K=(1-x)K1+(1-0)i Where K= weighted average cost of capital K=cost of equity capital for a levered firm i= pretax cost of debt 2= debt to total market value ratio McGraw-Hilylrwoin 16-3 Copyright@ 2001 by The McGraw-Hill Companies, Inc. All rights

McGraw-Hill/Irwin Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. 16-3 Weighted Average Cost of Capital Where K = weighted average cost of capital Kl = cost of equity capital for a levered firm i = pretax cost of debt  = debt to total market value ratio K λ K λ τ i l = (1− ) + (1− )

The firm's Investment Decision and the Cost of Capital a firm that can reduce its cost of capital will increase the profitable capital expenditures that K local the firm can take on and increase the wealth of the K Shareholders o Internationalizing the IRR firms cost of capital is one such policy Investment (S) local global McGraw-Hilylrwoin 16-4 Copyright@ 2001 by The McGraw-Hill Companies, Inc. All rights

McGraw-Hill/Irwin Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. 16-4 The Firm’s Investment Decision and the Cost of Capital ⚫ A firm that can reduce its cost of capital will increase the profitable capital expenditures that the firm can take on and increase the wealth of the shareholders. ⚫ Internationalizing the firm’s cost of capital is one such policy. Investment ($) IRR K global K local Ilocal Iglobal

Cost of Capital in Segmented vs Integrated Markets o The cost of equity capital(Ke)of a firm is the expected return on the firm's stock that investors require This return is frequently estimated using the Capital asset Pricing Model(CaPm) R=R+B(RM-R,) COV(R,RM) where Var(Rm) McGraw-Hilylrwoin 16-5 Copyright@ 2001 by The McGraw-Hill Companies, Inc. All rights

McGraw-Hill/Irwin Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. 16-5 Cost of Capital in Segmented vs. Integrated Markets ⚫ The cost of equity capital (Ke ) of a firm is the expected return on the firm’s stock that investors require. ⚫ This return is frequently estimated using the Capital Asset Pricing Model (CAPM): ( ) i f i RM Rf R = R + β − Var( ) Cov( , ) M i M i R R R where β =

Cost of Capital in Segmented vs Integrated Markets If capital markets are segmented. then investors can onl invest domestically. This means that the market portfolio (M)in the CaPm formula would be the domestic portfolio instead of the world portfolio R=R+B(rus-R) versus R=R+B(Rw-R) Clearly integration or segmentation of international financial markets has major implications for determining the cost of capital McGraw-Hilylrwoin 16-6 Copyright@ 2001 by The McGraw-Hill Companies, Inc. All rights

McGraw-Hill/Irwin Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. 16-6 Cost of Capital in Segmented vs. Integrated Markets If capital markets are segmented, then investors can only invest domestically. This means that the market portfolio (M) in the CAPM formula would be the domestic portfolio instead of the world portfolio. ( )f US US Ri = Rf + βi R − R versus ( ) W f W Ri = Rf + βi R − R Clearly integration or segmentation of international financial markets has major implications for determining the cost of capital

Does the cost of capital Differ among Countries? o There do appear to be differences in the cost of capital in different countries When markets are imperfect, international financing can lower the firms cost of capital One way to achieve this is to internationalize the firm's ownership structure McGraw-Hilylrwoin 16-7 Copyright@ 2001 by The McGraw-Hill Companies, Inc. All rights

McGraw-Hill/Irwin Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. 16-7 Does the Cost of Capital Differ among Countries? ⚫ There do appear to be differences in the cost of capital in different countries. ⚫ When markets are imperfect, international financing can lower the firm’s cost of capital. ⚫ One way to achieve this is to internationalize the firm’s ownership structure

Real after -Tax Cost of funds 864202 UK 77787980818283848586878889909192 Source: Robert McCauley and Steven Zimmer, " Exchange Rates and International Differences in the Cost of Capital" Y Amihud and R Levich, Exchange Rates and Corporate Performance(Burr Ridge, Ill, Irwin 1994) McGraw-Hilylrwoin 16-8 Copyright@ 2001 by The McGraw-Hill Companies, Inc. All rights

McGraw-Hill/Irwin Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. 16-8 Real After-Tax Cost of Funds Source: Robert McCauley and Steven Zimmer, “Exchange Rates and International Differences in the Cost of Capital” in Y. Amihud and R. Levich, Exchange Rates and Corporate Performance (Burr Ridge, Ill; Irwin 1994). 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 8 6 4 2 0 -2 U.S. UK

Cross-Border listings of stocks Cross-border listings of stocks have become quite popular among major corporations The largest contingent of foreign stocks are listed on the london stock exchange U.S. exchanges attracted the next largest contingent of foreign stocks McGraw-Hilylrwoin 16-9 Copyright@ 2001 by The McGraw-Hill Companies, Inc. All rights

McGraw-Hill/Irwin Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. 16-9 Cross-Border Listings of Stocks ⚫ Cross-border listings of stocks have become quite popular among major corporations. ⚫ The largest contingent of foreign stocks are listed on the London Stock Exchange. ⚫ U.S. exchanges attracted the next largest contingent of foreign stocks