Cost of capital



Assignment 1: Cost of capital

Introduction

Companies that operate in other countries, having a centralized Head Office for global management are termed as Multinational Corporation. These Multinational comprises of big budgets due to operations across the globe. Multinational Cost of capital differs with the Cost of capital domestic firms for many reasons. The aim of this paper is to describe a leading steel company seeking foreign capital in order to expand their overseas operations and exports.

Discussion

The cost of capital of Multinational differs due to firm size, entrance in to International Capital Markets, International Diversification and Exposure to Exchange Rate and Country Risk. In order to calculate cost of capital, there are two approaches which are suitable for multinational corporations. These two methods are CAPM model and WACC. CAPM is used for valuing equity (stock and portfolio) while through WACC which will results in capital cost. Moreover, these indicate the returns.

WACC undertake measures of average return which is expected by investors. CAPM can offers a theoretically and convenient coherent estimated set of returns where Systematic and unsystematic risk are highlighted. As we know that cost of capital is the minimum rate that company must earn in order obtain fund from market and investment by investors, he assure the rate of return, so companies has to state the return to the investors that if they invest in the company so at what rate they will be benefited. Hence, the average cost which is provided on the investment is call cost of capital (James C. Baker, 1987).

We have already state two methods which are suitable for the multinational corporations. CAPM is determined as:

CAPM: Risk free rate + (market return - risk free rate) x Beta

As we are looking how the multinational will determine their cost of capital the formula ...