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Essay / Research Paper Abstract
This 20 page paper examines the different ways of calculatingthe cost of capital for a multinational company where there are many different risk factors that can impact on costs, such as exchange rate risks. The paper considers the methods which include looking at the cost of equity and the cost of debt, with consideration of how the CAPM (capital asset pricing model), can satisfy the calculations for the cost of equity and the variation for an international capital asset pricing model ICAPM. The use of the ICAPM is assessed looking at empirical evidence that suggests there may be some differences. The paper looks at how these differences may be included in equation and then at the evidence that may suggest that domestic CAPM is just as efficient as ICAPM for MNO’s. The bibliography cites 20 sources.
Page Count:
20 pages (~225 words per page)
File: TS14_TEcostc1.rtf
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Unformatted sample text from the term paper:
share capital, such as dividends, or in interest on loan payments. Cost of capital in any organisation, international or domestic is the return expressed as an interest rate the company
pays on all of the capital which is used in the financing of its activities. Where the organisation is a multinational organisation these cost may be complicated by increased international
risks, such as fluctuating exchange rate and dynamic variations in economic conditions. Therefore when looking at cost of capital calculations from an international perspective, the domestic and the variant
models need to be considered. However, it is also worth knowing that great deal of recent evidence appears to support the idea that the domestic models are suitable for use
to calculate the costs for international companies, work such as that of Koedijk and Van Dijk, (2002), De Santis and G?rard (1998) support this hypothesis. Therefore, when considering international
calculation the domestic models can be used as a basis on which to build understanding and the same basis remains. As the capital originates from a range of sources,
such as share capital (also known as equality), loan capital and debt. The cost of capital is a combination of all of these factors. There are many debates over which
combination will result in the lowest or highest cost of capital, with gearing increasing the debt repayments, but potentially increasing risk and increasing the demand for a return on the
shares and as such capital costs can be increased and counteract and decrease that a lower debt rate may create. The approach to calculating the cost of capital may
take place in several ways both in domestic companies and MNOs. For example, the calculation of the cost of equity and the cost of loans and debt which is then
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