5. What are the variables that go into estimating multinational costs of capital?

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Answer 1

Answer #1

The variables that go into estimating multinational costs of capital are as follows:

Size of firm: Preferential treatment from the creditors helps in reducing the cost of capital as MNCs are engaged in borrowing the capital frequently. Overall flotation cost also reduced as a result of very large amount of equity and debt issuance.
Access to international capital market: MNCs have access to international market. So, it is easy to obtain funds from the international market at low cost as different market vary in the interest rate. Subsidiaries can also obtain funds locally at lower cost.
International diversification: As MNCs are more diversified portfolio, it results in lower cost of capital as it's operations doesn't rest on one kind of economy. MNCs have different type of operations in various countries with different economy, therefore the returns are more stable which reduce the overall cost of capital.
Exposure to exchange rate risk: MNCs are more exposed to exchange rate risk in comparison to domestic company of the host country. If US currency is stronger than other countries than the cash flow to US from subsidiaries will be of lower worth.
Exposure to country risk: Country risk relates to policies of the host country's government. There is a risk of seizing the assets of the subsidiary company by the host country's government which increases the probability of bankruptcy of multinational company.

Answer 2

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