Cost of capital in multinational firms

Although some expats are likely sharing in the upward salary momentum in China, HR consultants note several factors may be undercutting the overall average expat earnings.

Cost of capital in multinational firms

A business mainly raises capital from debt financing and equity capital, and computing WACC involves adding the average cost of debt to the average cost of equity.

Cost of capital in multinational firms

According to the "Journal the Accountancy," the reduction of WACC stretches the spread that lies between it and the return on invested capital to maximize shareholder value. A company can reduce its WACC by cutting debt financing costs, lowering equity costs and capital restructuring.

Equity Costs Equity cost is the return on investments that shareholders expect to earn from the company. It comprises the costs of common stock and retained earnings.

The cost of equity incorporates the scope of inherent risk lurking in the profitability prospects of the company. This is known as equity risk premium, and it serves as the compensating factor for opportunity cost -- that is, alternative investments with similar risk levels the shareholders would have pursued.

If you reduce a given risk, it reduces equity cost. For example, if a particular risk on future net cash flows is linked to poor market segmentation, you can reduce the risk by implementing proper market segmentation strategies.

Asia Clean Capital

Debt Financing Costs The cost of debt is the interest rate applied on loans borrowed from banks and non-bank financial institutions. The applicable interest rate reflects the risks of nonpayment relative to the collateral requirements attached to the loan.

Therefore, cutting the costs of debt begins with lowering the costs of nonpayment. If the interest rate of a debt is higher than the interest rate of alternative capital, your company could source the alternative capital and pay off the debt.

This leaves youwith the obligation of repaying alternative capital at lower interest rates. One option of capital restructuring involves substituting debt for equity, because it translates to lower costs after taxation.

For example, the process of raising equity attracts marginal cost of capital -- that is, the cost of raising new capital in addition to equity risk premium.

The change of capital structure to accommodate more debt than equity eliminates these costs and reduces WACC.

Alternatively, your company can substitute common stock with preferred stock to reduce the WACC. Preferred stock is less costly than common stock, because it attracts lower equity premium rates by virtue of its priority in dividend payout or compensation in the event of bankruptcy.

Considerations Caution must always prevail regardless of the method your company employs to reduce WACC. This is because the suitability of each of these methods depends entirely on the existing capital structure of the company.

For example, if your company already has a lot of debt, it would not be wise to take on more debt when seeking to reduce equity cost.

Aldrich Capital Partners | Growth Equity Firm

Huge amounts of long-term debts could be extremely burdensome to the company.BREAKING DOWN 'Multinational Corporation - MNC' Nearly all major multinationals are either American, Japanese or Western European, such as Nike, .

The Cost of Capital of Multinational Companies Facts and Fallacies by James C. Baker Introduction Capital budgeting has been a major topic of the finance lit­. David Barboza is a correspondent for The New York Times, based in New York.

In , Mr. Barboza was awarded the Pulitzer Prize for International Reporting “for his striking exposure of. Feb 06,  · The Georgetown Report on the State of the Legal Industry is out. It confirms that law firms no longer rule the legal roost and recites some reasons why. . Looking for a lawyer in Islamabad, Pakistan?

Popular 'Material & Occupational Safety' Terms

These qualified lawyers are here to assist you. Or let us contact local law firms for you. It’s free. S. Capital structure and cost-of-capital for the multinational firm..

14(5).-based multinational corporations versus U. K. Vasiliou. Z. 21(4). 'Multinational capital structure and financial flexibility'. Marjorie. 'Internationalization. 'Institutional characteristics and capital structure: A cross-national comparison'.

S

Best business plan consultants and professional business plan writers at pfmlures.com