跨国金融原理(第三版)教师手册M14_MOFF9242_03_IM_C.pdf
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1、Chapter 14 Financial Structure and International Debt 1.Objective.What,in simple wording,is the objective sought by finding an optimal capital structure?When taxes and bankruptcy costs are considered,a firm has an optimal financial structure determined by that particular mix of debt and equity that
2、minimizes the firms cost of capital for a given level of business risk.If the business risk of new projects differs from the risk of existing projects,the optimal mix of debt and equity would change to recognize trade-offs between business and financial risks.2.Varying Debt Proportions.As debt in a
3、firms capital structure is increased from no debt to a significant proportion of debt(say,60%),what tends to happen to the cost of debt,to the cost of equity,and to the overall weighted average cost of capital?As the debt ratio,defined as total debt divided by total assets at market values,increases
4、,the overall cost of capital(Kwacc)decreases because of the heavier weight of low-cost debt Kd(1 t)compared to high-cost equity(Ke).The low cost of debt is,of course,due to the tax deductibility of interest shown by the term(1 t).Partly offsetting the favorable effect of more debt is an increase in
5、the cost of equity(Ke),because investors perceive greater financial risk.Nevertheless,the overall weighted average after-tax cost of capital(Kwacc)continues to decline as the debt ratio increases,until financial risk becomes so serious that investors and management alike perceive a real danger of in
6、solvency.This result causes a sharp increase in the cost of new debt and equity,thus increasing the weighted average cost of capital.The low point on the resulting U-shaped cost of capital curve defines the debt ratio range in which the cost of capital is minimized.Most theorists believe that the lo
7、w point is actually a rather broad,flat area encompassing a wide range of debt ratios,30%to 60%.3.Availability of Capital.How does the availability of capital influence the theory of optimal capital structure for a multinational enterprise(MNE)?Access to capital in global markets allows a MNE to low
8、er its cost of equity and debt compared with most domestic firms.It also permits a MNE to maintain its desired debt ratio,even when significant amounts of new funds must be raised.In other words,a multinational firms marginal cost of capital is constant for considerable ranges of its capital budget.
9、This statement is not true for most small domestic firms because they do not have access to the national equity or debt markets.They must either rely on internally generated funds or borrow for the short-and medium-term from commercial banks.Multinational firms domiciled in countries that have illiq
10、uid capital markets are in almost the same situation as small domestic firms unless they have gained a global cost and availability of capital.They must rely on internally generated funds and bank borrowing.If they need to raise significant amounts of new funds to finance growth opportunities,they m
11、ay need to borrow more than would be optimal from the viewpoint of minimizing their cost of capital.This is equivalent to saying that their marginal cost of capital is increasing at higher budget levels.60 Moffett/Stonehill/Eiteman Fundamentals of Multinational Finance,Third Edition 4.Diversified Ca
12、sh Flows.If a multinational firm is able to diversify its sources of cash inflow so as to receive those flows from several countries and in several currencies,do you think that tends to increase or decrease its weighted average cost of capital?The theoretical possibility exists that multinational fi
13、rms are in a better position than domestic firms to support higher debt ratios because their cash flows are diversified internationally.The probability of a firms covering fixed charges under varying conditions in product,financial,and foreign exchange markets should increase if the variability of i
14、ts cash flow is minimized.By diversifying cash flows internationally,the MNE might be able to achieve the same kind of reduction in cash flow variability as portfolio investors receive from diversifying their security holdings internationally.Returns are not perfectly correlated between countries.In
15、 contrast,a domestic German firm would not enjoy the benefit of cash flow international diversification but would have to rely entirely on its own net cash inflow from domestic operations.Perceived financial risk for the German firm would be greater than for a multinational firm because the variabil
16、ity of its German domestic cash flows could not be offset by positive cash flows elsewhere in the world.5.Ex-Post Cost of Borrowing.Exhibit 14.2 in the text shows that Deutsche Bank borrowed funds at a nominal cost of 9.59%per annum,but at a later date that debt was selling to yield 7.24%.Near the o
17、ther extreme,the Kingdom of Thailand borrowed funds at a nominal cost of 8.70%but after the fact found the debt was sold in the market at a yield of 11.87%.What caused the changes,in this case in opposite directions,and what might management do to benefit(as Deutsche Bank did)rather than suffer(as t
18、he Kingdom of Thailand did)?Changes in foreign exchange rates caused the ex-post cost of borrowing to increase or decrease from what was originally expected.Management can only guess at future foreign exchange risk.Therefore,they could either borrow only in their functional currency or diversify by
19、currency their sources of borrowing.6.Local Norms.Should foreign subsidiaries of multinational firms conform to the capital structure norms of the host country or to the norms of their parents country?Discuss.Main advantages of localization.The main advantages of a finance structure for foreign subs
20、idiaries that conforms to local debt norms are as follows:A localized financial structure reduces criticism of foreign subsidiaries that have been operating with too high a proportion of debt(judged by local standards),often resulting in the accusation that they are not contributing a fair share of
21、risk capital to the host country.At the other end of the spectrum,a localized financial structure would improve the image of foreign subsidiaries that have been operating with too little debt and thus appear to be insensitive to local monetary policy.A localized financial structure helps management
22、evaluate return on equity investment relative to local competitors in the same industry.In economies where interest rates are relatively high as an offset to inflation,the penalty paid reminds management of the need to consider price level changes when evaluating investment performance.In economies
23、where interest rates are relatively high because of a scarcity of capital,and real resources are fully utilized(full employment),the penalty paid for borrowing local funds reminds management that unless return on assets is greater than the local price of capitalthat is,negative leveragethey are prob
24、ably misallocating scarce domestic real resources such as land and labor.This factor may not appear relevant to management decisions,but it will certainly be considered by the host country in making decisions with respect to the firm.Chapter 14 Financial Structure and International Debt 61 Main disa
25、dvantages of localization.The main disadvantages of localized financial structures are as follows:A MNE is expected to have a comparative advantage over local firms in overcoming imperfections in national capital markets through better availability of capital and the ability to diversify risk.Why sh
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