Explore key points from Multinational business finance, Ch. 13.
Gaining access to global capital markets should allow a firm to lower its cost of capital. This can be achieved by increasing the market liquidity of its shares and by escaping from segmentation of its home capital market.
The cost and availability of capital is directly linked to the degree of market liquidity and segmentation. Firms having access to markets with high liquidity and a low level of segmentation should have a lower cost of capital and greater ability to raise new capital.
A firm is able to increase its market liquidity by raising debt in the euromarket—by selling security issues in individual national capital markets and as euroequities—and tapping local capital markets through foreign subsidiaries. Increased market liquidity causes the marginal cost of capital line to “flatten out to the right.” This results in the firm being able to raise more capital at a lower marginal cost.
A national capital market is segmented if the required rate of return on securities in that market differs from the required rate of return on securities of comparable expected return and risk that are traded on other national securities markets.
Capital market segmentation is a financial market imperfection caused by government constraints and investor perceptions. Segmentation results in a higher cost of capital and less availability of capital.
If a firm is resident in a segmented capital market, it can still escape from this market by sourcing its debt and equity abroad. The result should be a lower marginal cost of capital, improved liquidity for its shares, and a larger capital budget.
Whether or not MNEs have a lower cost of capital than their domestic counterparts depends on their optimal financial structures, systematic risk, availability of capital, and the optimal capital budget.
Focus on the identified methods for calculating the global cost of capital for an international organization.
Evaluate reasons why global financing and domestic financing differ and why corporations need to understand this when securing global financing.
Write a summary.