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Chapter
Cost of Capital
A firms capital consists of equity (retained
earnings and funds obtained by issuing
stock) and debt (borrowed funds).
Cost of Capital
A firms weighted average cost of capital
kc = ( D ) kd ( 1 _ t ) + ( E ) ke
D+E
D+E
where D
E
kd
t
ke
Cost of Capital
The interest payments on debt are tax
deductible. However, as interest expenses
increase, the probability of bankruptcy will
increase too.
A17 - 5
A17 - 6
where
Rf
Rm
ke
=
=
=
A17 - 11
A17 - 15
A17 - 17
A17 - 18
The MNCs
Capital Structure Decision
The overall capital structure of an MNC is
essentially a combination of the capital
structures of the parent body and its
subsidiaries.