Typically, the cost of capital is lower in the global capital market than in dom
ID: 405200 • Letter: T
Question
Typically, the cost of capital is lower in the global capital market than in domestic capital markets. Other things being equal, firms will likely prefer to finance their investments by borrowing from the global capital market. However, such borrowing may be restricted by host-country regulations or demands. Discuss the point at which firms should consider using the global equity markets to finance foreign investments and operations in lieu of the global debt markets. Are firms likely to encounter restrictions in the equity markets and what are the effects of such restrictions likely to be on a firmExplanation / Answer
solution: the point at which firms should consider using the global equity markets to finance foreign investments and operations in lieu of the global debt markets are as follows
GLOBAL DEBT MARKETS
Leverage represents the degree to which a firm funds the growth of its business through borrowing (debt). Leverage is often perceived as the most cost-effective route to capitalization because the interest companies pay on debt is a tax-deductible expense, whereas the dividends paid on equity (stocks or shares) are not. However, excessive reliance on long-term debt increases financial risk and thus requires a higher rate of return for investors. In addition, foreign subsidiaries may have limited access to local capital markets, making it difficult for an MNE to rely on debt to fund asset acquisition. Different tax rates, dividend remission policies and exchange controls also affect a firm
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