INTERNATIONAL CAPITAL

STRUCTURE AND THE

COST OF CAPITAL
 E S
I V
C T
J E 01 Explain the basic concept of

B
international capital
structure and cost of capital

O 02
Identify the various implications
of internationalizing capital
structure of the firm

Understand the differences of

03 cost capital across countries

Distinguisg the effects of foreign

04 equity ownership restrictions
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C Basic Concept of
01 International
Capital Structure
and Cost of Capital
INTERNATIONAL CAPITAL STRUCTURE
International capital structure refers to how a multinational corporation allocates
and manages its financial resources among its subsidiaries or operations in
different countries. It involves deciding the mix of equity and debt financing and
the currency denomination for each subsidiary.

The capital structure of a firm is typically represented as a ratio of debt to equity.

2
The formula for the capital structure is:

Capital Structure = Debt / (Debt + Equity)

COST OF CAPITAL

The cost of capital is the rate of return a firm must earn on its investments to satisfy its
investors. It's a weighted average of the cost of equity and the cost of debt, taking into
account the firm's capital structure.

Formula and Computation (Cost of Capital):

The cost of capital can be calculated using the weighted average cost of capital (WACC)
formula:

WACC = (E/V) * Re + (D/V) * Rd * (1 - Tc)

Where:
E= Market value of equity
D= Market value of debt
V= Total market value of the firm (E + D)
Re= Cost of equity
Rd= Cost of debt
Tc= Corporate tax rate
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C Implications of
02 Internationalizing
Capital Structure
DIVERSIFICATION OF FUNDING SOURCES

• Internationalizing capital structure allows diversification

by raising capital from various countries.
CURRENCY RISK MANAGEMENT

• Firms must manage currency risk due to fluctuations in

exchange rates.
TAX IMPLICATIONS

• Different tax systems impact the cost of capital.

MARKET TIMING

• Market conditions vary, impacting the timing and cost of

financing
LEGAL AND REGULATORY COMPLIANCE

• Varying regulations affect financing strategies.

DIVERSIFICATION OF FUNDING SOURCES

• Internationalizing capital structure allows diversification

by raising capital from various countries.
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C Differences in Cost
03 of Capital Across
Countries
INTEREST RATES CURRENCY RISK
• Higher interest rates lead to a higher • Exchange rate fluctuations affect the
cost of capital. cost of capital.

INFLATION RATES MARKET LIQUIDITY

• Higher inflation rates may result in • Liquid markets offer more favorable
higher nominal interest rates. financing terms.

ECONOMIC & REGULATORY

POLITICAL STABILITY ENVIRONMENT
• Stable countries tend to have lower • Regulations impact the cost of capital
risk and lower cost of capital. by influencing financing options.
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C Effects of Foreign
04 Equity Ownership
Restrictions
EQUITY FINANCING CONTRAINTS - Restrictions can limit the ability to raise equity
capital locally.

RISK ASSESSMENT - Ownership restrictions can introduce additional

country-specific risks, increasing the required rate
of return.

ACCESS TO LOCAL FINANCING - Restrictions reduce access to local sources of

financing.

MARKET LIQUIDITY AND RISK PREMIUM - Limited ownership can reduce market liquidity,
ti tl e
increasing required rreturns.
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Add yo

CURRENCY RISK & HEDGING COSTS - Foreign ownership restrictions can result in
currency exposure, leading to higher costs related
to currency hedging.
 n t
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o n Formula (Market Risk and Beta):
C
Beta (β) measures the sensitivity of a stock's returns to market movements and is a
component of the cost of equity in the WACC formula.
It can be calculated as:

β = Covariance(Stock Returns, Market Returns) / Variance(Market Returns)

THANKS！