Over wive international finance

International Finance ,[object Object],[object Object],[object Object],[object Object],[object Object]

Financial Management for a Multinational Firm ,[object Object],[object Object],[object Object]

Cost of Capital ,[object Object],[object Object],Where K = ___________ average cost of capital k e = cost of equity capital for a levered firm i = pretax cost of debt  = % of debt, debt to total market value ratio  = _____________ corporate income tax rate

The Firm’s Investment Decision and the Cost of Capital ,[object Object],[object Object],cost of capital (%) Investment ($)

Cost of Capital in Segmented vs. Integrated Markets ,[object Object],[object Object],where

Segmented vs. Integrated Markets ,[object Object],versus Clearly integration or segmentation of international financial markets has major implications for determining the cost of capital.

Does the Cost of Capital Differ among Countries? ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]

Cross-Border Listings of Shares ,[object Object],[object Object],[object Object]

Cross-Border Listings of Shares ,[object Object],[object Object],[object Object],[object Object],[object Object]

Cross-Border Listings of Shares ,[object Object],[object Object],[object Object],[object Object]

Cross-Border Listings of Shares ,[object Object],[object Object]

Cross-Border Listings of Shares Selected Foreign Firms listed on the NYSE

The Effect of Foreign Equity Ownership Restrictions ,[object Object],[object Object],[object Object]

Pricing-to-Market Phenomenon ,[object Object],[object Object],[object Object],[object Object]

Foreign Ownership Restrictions: Nestlé ,[object Object],[object Object],[object Object],[object Object],[object Object]

Nestlé’s Foreign Ownership Restrictions Source: Financial Times , November 26, 1988 p.1. Adapted with permission. SF 12,000 10,000 8,000 6,000 4,000 2,000 0 11 20 31 9 18 24

Foreign Ownership Restrictions: Nestlé ,[object Object],[object Object],[object Object],[object Object]

Foreign Ownership Restrictions: Nestlé ,[object Object],[object Object]

The Financial Structure of Subsidiaries. ,[object Object],[object Object],[object Object],[object Object]

Review of Capital Budgeting ,[object Object],Where: CF t = expected incremental after-tax cash flow in year t , TV T = expected after tax cash flow (terminal value) in year T , including return of net working capital, C 0 = initial investment at inception, K = weighted average cost of capital. T = economic life of the project in years.

Review of Capital Budgeting ,[object Object],R t is incremental revenue OC t is incremental operating cost D t is incremental depreciation I t is incremental interest expense  is the marginal tax rate

Review of Capital Budgeting ,[object Object]

Review of Capital Budgeting ,[object Object],to rewrite the NPV equation as:

The Adjusted Present Value Model ,[object Object]

The Adjusted Present Value Model ,[object Object],[object Object]

Domestic APV Example ,[object Object],The unlevered cost of equity is r 0 = 10%: 0 1 2 3 4 -$1,000 $125 $250 $375 $500

Domestic APV Example ,[object Object],[object Object],[object Object]

Domestic APV Example ,[object Object]

Capital Budgeting from the Parent Firm’s Perspective ,[object Object]

APV Example ,[object Object],The optimal capital structure is 80% equity and 20% debt. GBP is expected to depreciate by 2% per year vis-à-vis USD. Depreciation is 5 million GBP during first 5 years. Today's exchange rate is USD/GBP $2.00. The applicable marginal tax rate in the UK and US 40%, borrowing rate in USD is 8% and 10% in GBP, the unlevered cost of equity is 12%. IDS borrows in the US market to finance the project. Should IDS undertake the project? YEAR 0 1 2 3 4 5 5+ -26.5 2.2 3.3 5.6 6.3 6.3 19.0

APV Example ,[object Object],$ cash flows. $CF = FX(t) * GBP CF(t) Present value. Use CF and NPV worksheets. Present value = YEAR 0 1 2 3 4 5 5+ $2.00 YEAR 0 1 2 3 4 5 5+

APV Example ,[object Object],Interest write-off tax shield YEAR 0 1 2 3 4 5 n/a

Risk Adjustment in the Capital Budgeting Process ,[object Object],[object Object],[object Object]

Sensitivity Analysis ,[object Object],[object Object],[object Object]

Real Options ,[object Object],[object Object],[object Object],[object Object],[object Object]

Over wive international finance

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Over wive international finance