Chapter 14Multinational Capital Structure and Cost of Capital

A “sound” banker, alas, is not one who foresees danger and avoids it, but one who, when he is ruined, is ruined in a conventional and orthodox way along with his fellows, so that no one can really blame him.

— John Maynard Keynes

Capital structure refers to the proportions and forms of long-term capital used to finance the assets of the firm. Management must choose the amount of debt, its currency of denomination, maturity, seniority, fixed or floating interest payments, convertibility or callability options, and indenture provisions. Capital structure is an important determinant of the firm's overall cost of capital, that is, investors' required return on long-term debt and equity capital. Through judicious capital structure choices, the firm can minimize the cost of capital and maximize the after-tax value of operating cash flows.

The opportunities as well as the complexities of financial strategy are many times greater for the multinational corporation than for the domestic firm. In particular, the MNC has greater flexibility in choosing the markets and currencies in which it raises funds. By accessing unsatisfied demand in international capital markets, the MNC can minimize its overall cost of capital and thereby maximize its value. This chapter describes the multinational corporation's choice of capital structure and its impact on ...

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