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E D k WACC k e k d (1 t) V V
Where kWACC = weighted average cost of capital ke kd t E D V = risk adjusted cost of equity = before tax cost of debt = tax rate = market value of equity = market value of debt = market value of firm (D+E)
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k e k rf (k m k rf )
Where
ke
krf km
The normal calculation for cost of debt is analyzing the various proportions of debt and their associated interest rates for the firm and calculating a before and after tax weighted average cost of debt
Copyright 2009 Pearson Prentice Hall. All rights reserved.
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Tridents WACC
Maria Gonzales, Tridents CFO, believes that Carlton has access to global capital markets and because it is headquartered in the US, that the US should serve as its base for market risk and equity risk calculations
kd
t E/V D/V
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Exhibit 12.3 Estimating the Global Cost of Equity for Nestl (Switzerland)
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Exhibit 12.6 Alternative Estimates of Cost of Equity for a Hypothetical U.S Firm Assuming = 1 and krf = 4%
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Market Segmentation
Capital market segmentation is a financial market imperfection caused mainly by government constraints, institutional practices, and investor perceptions Other imperfections are
Asymmetric information Lack of transparency High securities transaction costs Foreign exchange risks Political risks Corporate governance differences Regulatory barriers
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Exhibit 12.7 Market Liquidity, Segmentation, and the Marginal Cost of Capital
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Another barrier was the lack of equity analysts in Denmark following Danish companies
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Exhibit 12.8 Novos B-Share Prices Compared with Stock Market Indices
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An MNE should have a lower cost of capital because it has access to a global cost and availability of capital This availability and cost allows the MNE more optimality in capital projects and budgets compared to its domestic counterpart
Copyright 2009 Pearson Prentice Hall. All rights reserved.
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Exhibit 12.9 The Cost of Capital for MNE and Domestic Counterpart Compared
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Exhibit 12.10 Do MNEs Have a Higher or Lower WACC than Their Domestic Counterparts?
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