Multinational Finance Essay Example | Topics and Well Written Essays - 1750 words

Multinational Finance - Essay Example The cost of capital is the expected return that is required on investments to compensate you for the required risk. However, the cost of capital of a company is affected by various factors. All these factors are discussed in detailed in the forthcoming paragraphs. Capital Structure decisions are a significant managerial decision which influences the risk and return of the investors. Basically, the main goal of any company would be none other than maximization of present shareholder value. In order to achieve this goal, the capital structure decisions that are taken by a company should result in positive net present value which means that the "present value of the expected cash inflow less the present value of the required capital expenditures (NetMBA.com, 2002)." The company will have to plan its capital structure at the time of promotion itself and also subsequently whenever it has to raise additional funds for various new projects (Blackwell publishing, 2003). Wherever the company needs to raise finance, it involves a capital structure decision because it has to decide the amount o finance to be raised as well as the source from which it is to be raised. The advent of globalization has also got its influence on the cost of equity capital of a company. Let us suppose that a firm is planning to raise equity in order to finance a particular investment. ... In order to succeed in this process, the managers initially need to convince the shareholders that the investment is worthwhile and it would yield cash flows that are expected but in reality, managers face a plethora of difficulties in convincing the shareholders. This is because due to the advent of globalization, the knowledge levels of managers of modern organizations have grown drastically and they have the information about the investments of the firm which the shareholders lack (Stulz, 1999). There are very many global risk factors which affect the cost of capital of a company. In order to investigate the effect of such factors over the cost of capital, alternative asset pricing models like international Capital asset pricing model etc, need to be assessed (Koedijk, et al., 2004)(Nagel, 2007). Exchange rates also have an impact on the cost of capital. Studies reveal that exchange rate flucutation have an impact on the relative wealth position of different countries of the world and hence they inturn effect the Foreign Direct Investment (FDI) (Munisamy Gopinath, 1998). The wealth position of international investors/firms is increased in contrast with that of domestic investors when the dollar depreciates. This is becasue they hold their investments in non-dollar denominated currencies. However, this aspect reduces the relative cost of capital of international firms (Munisamy Gopinath, 1998). Net present value is the most important criteria on which most of the firms rely when planning to invest or undertake a new project. Some firms alternatively rely upon rules like the Internal Rate of Return (IRR), Payback period and Profitability index