FAKULTAS EKONOMI DAN BISNIS

UNIVERSITAS UDAYANA
Made Reina Candradewi, S.E., M.Sc.

BIAYA MODAL DAN STRUKTUR

MODAL MULTINATIONAL
Manajemen Keuangan Internasional – Pertemuan 9 - 10
 TOPIK PERKULIAHAN
1 Pendahuluan
2 Aliran Dana Internasional
3 Pasar Keuangan Internasional
4 Penentuan Nilai Tukar
5 Derivatif Mata Uang
6-7 Eksposur Nilai Tukar
8 Penganggaran Modal Multinational
9 - 10 Biaya Modal dan Struktur Modal Multinational
11 Pendanaan Jangka Panjang
12 Pendanaan Perdagangan Internasional
13 Pendanaan Jangka Pendek
14 Kasus: Keputusan Keuangan Perusahaan Multinasional
OUTLINE
1. Konsep dasar biaya modal

2. Biaya modal domestic vs MNC

3. Biaya modal antar Negara

4. Biaya modal proyek asing

5. Keputusan struktur modal MNC

6. Pembiayaan modal anak dan induk MNC

Made Reina Candradewi, S.E., M.Sc.

INDIKATOR PENCAPAIAN

 Mahasiswa paham dan mampu menjelaskan konsep dasar biaya

modal, biaya modal domestic vs MNC, biaya modal antar negara,
biaya modal proyek asing, keputusan struktur modal MNC,
pembiayaam modal anak dan induk MNC

Made Reina Candradewi, S.E., M.Sc.

BIAYA MODAL MULTINASIONAL

Made Reina Candradewi, S.E., M.Sc.

Cost of Capital

 A firm’s capital consists of equity (retained earnings and funds

obtained by issuing stock) and debt (borrowed funds).

 The cost of equity reflects an opportunity cost, while the cost of

debt is reflected in interest expenses.

 Firms want a capital structure that will minimize their cost of capital,
and hence the required rate of return on projects.
Cost of Capital

 A firm’s weighted average cost of capital

 The cost of an MNC’s capital (referred to as kc) can be measured as the
cost of its debt plus its cost of equity, with appropriate weights applied in
order to reflect the percentage of the MNC’s capital represented by debt
and equity, respectively:
Cost of Capital

 The interest payments on debt are tax deductible. However, as

interest expenses increase, the probability of bankruptcy will
increase too.

 It is favorable to increase the use of debt financing until the point at

which the bankruptcy probability becomes large enough to offset
the tax advantage of using debt.
Cost of Capital

Debt’s Tradeoff
Cost of Capital

Debt Ratio
Cost of Capital Domestic Firms VS MNCs

 The cost of capital for MNCs may differ from that for domestic
firms because of the following differences.
 Size of Firm. Because of their size, MNCs are often given preferential
treatment by creditors. They can usually achieve smaller per unit
flotation costs too.
 Access to International Capital Markets. MNCs are normally able to
obtain funds through international capital markets, where the cost of
funds may be lower.
 International Diversification. MNCs may have more stable cash inflows
due to international diversification, such that their probability of
bankruptcy may be lower.
Cost of Capital Domestic Firms VS MNCs

 Exposure to Exchange Rate Risk. MNCs may be more exposed to

exchange rate fluctuations, such that their cash flows may be more
uncertain and their probability of bankruptcy higher.

 Exposure to Country Risk. MNCs that have a higher percentage of

assets invested in foreign countries are more exposed to country
risk.
Summary of Factors that Cause the Cost of Capital of
MNCs to Differ from that of Domestic Firms
Cost of Capital for MNCs

 The capital asset pricing model (CAPM) can be used to

assess how the required rates of return of MNCs differ from
those of purely domestic firms.

 According to CAPM

ke = Rf + b (Rm – Rf )

Where
Ke =the required return on a stock
Rf =risk-free rate of return
Rm = market return
b = the beta of the stock
Cost of Capital for MNCs

 A stock’s beta represents the sensitivity of the stock’s returns to

market returns, just as a project’s beta represents the sensitivity of
the project’s cash flows to market conditions.

 The lower a project’s beta, the lower its systematic risk, and the
lower its required rate of return, if its unsystematic risk can be
diversified away.
Cost of Capital for MNCs

 An MNC that increases its foreign sales may be able to reduce its
stock’s beta, and hence the return required by investors. This
translates into a lower overall cost of capital.

 However, MNCs may consider unsystematic risk as an important

factor when determining a foreign project’s required rate of return.

 Hence, we cannot be certain if an MNC will have a lower cost of

capital than a purely domestic firm in the same industry.
Costs of Capital Across Countries

 The cost of capital may vary across countries, such that:

 MNCs based in some countries may have a competitive advantage

over others;

 MNCs may be able to adjust their international operations and

sources of funds to capitalize on the differences; and

 MNCs based in some countries may have a more debt-intensive

capital structure.
Costs of Capital Across Countries

 The cost of debt to a firm is primarily determined by

 the prevailing risk-free interest rate of the borrowed currency

 the risk premium required by creditors.

 The risk-free rate is determined by the interaction of the supply and

demand for funds. It may vary due to different tax laws,
demographics, monetary policies, and economic conditions.
Costs of Capital Across Countries

 The risk premium compensates creditors for the risk that the
borrower may be unable to meet its payment obligations.

 The risk premium may vary due to different economic conditions,

relationships between corporations and creditors, government
intervention, and degrees of financial leverage.

 Although the cost of debt may vary across countries, there is some
positive correlation among country cost-of-debt levels over time.
Costs of Capital Across Countries

14
Canada
12
10
U.S.
8
Costs of Debt (%)

6
4 Germany
Japan
2
0
1990 1992 1994 1996 1998 2000 2002
Costs of Capital Across Countries

 A country’s cost of equity represents an opportunity cost – what

the shareholders could have earned on investments with similar risk
if the equity funds had been distributed to them.

 The return on equity can be measured by the risk-free interest rate

plus a premium that reflects the risk of the firm.
Costs of Capital Across Countries

 A country’s cost of equity can also be estimated by applying the

price/earnings multiple to a given stream of earnings.

 A high price/earnings multiple implies that the firm receives a high

price when selling new stock for a given level of earnings. So, the
cost of equity financing is low.

 The costs of debt and equity can be combined, using the relative
proportions of debt and equity as weights, to derive an overall cost
of capital.
Using the Cost of Capital
for Assessing Foreign Projects

 Foreign projects may have risk levels different from that of the
MNC, such that the MNC’s weighted average cost of capital
(WACC) may not be the appropriate required rate of return.

 There are various ways to account for this risk differential in the
capital budgeting process.
Using the Cost of Capital
for Assessing Foreign Projects

 Derive NPVs based on the WACC.

 The probability distribution of NPVs can be computed to

determine the probability that the foreign project will generate a
return that is at least equal to the firm’s WACC.

 Adjust the WACC for the risk differential.

 The MNC may estimate the cost of equity and the after-tax cost
of debt of the funds needed to finance the project.
 STRUKTUR MODAL
MULTINASIONAL

Made Reina Candradewi, S.E., M.Sc.

The MNC’s
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.

 The capital structure decision involves the choice of debt versus

equity financing, and is influenced by both corporate and country
characteristics.
The MNC’s
Capital Structure Decision
Corporate Characteristics

 Stability of cash flows. MNCs with more stable cash flows can handle more
debt.

 Credit risk. MNCs that have lower credit risk have more access to credit.

 Access to retained earnings. Profitable MNCs and MNCs with less growth
may be able to finance most of their investment with retained earnings.

 Guarantees on debt. If the parent backs the subsidiary’s debt, the

subsidiary may be able to borrow more.

 Agency problems. Host country shareholders may monitor a

subsidiary, though not from the parent’s perspective.
The MNC’s
Capital Structure Decision
Country Characteristics
 Stock restrictions. MNCs in countries where investors have less investment
opportunities may be able to raise equity at a lower cost.
 Interest rates. MNCs may be able to obtain loanable funds (debt) at a lower
cost in some countries.
 Strength of currencies. MNCs tend to borrow the host country currency if
they expect it to weaken, so as to reduce their exposure to exchange rate
risk.
 Country risk. If the host government is likely to block funds or confiscate
assets, the subsidiary may prefer debt financing.
 Tax laws. MNCs may use more local debt financing if the local tax rates
(corporate tax rate, withholding tax rate, etc.) are higher.
Interaction Between Subsidiary and
Parent Financing Decisions
Increased debt financing by the subsidiary

A larger amount of internal funds may be available to the parent.

 The need for debt financing by the parent may be reduced.

 The revised composition of debt financing may affect the interest

charged on debt as well as the MNC’s overall exposure to exchange
rate risk.
Interaction Between Subsidiary and
Parent Financing Decisions
Reduced debt financing by the subsidiary

A smaller amount of internal funds may be available to the parent.

 The need for debt financing by the parent may be increased.

 The revised composition of debt financing may affect the interest

charged on debt as well as the MNC’s overall exposure to exchange
rate risk.
 Interaction Between Subsidiary and
Parent Financing Decisions

Internal Amount of
Amount of Local
Funds Debt
Host Country Conditions Debt Financed by
Available to Financed by
Subsidiary
Parent Parent
Higher Country Risk Higher Higher Lower
Lower Interest Rates Higher Higher Lower
Expected Weakness of Local
Higher Higher Lower
Currency
Blockage of Funds Higher Higher Lower
Higher Taxes Higher Higher Lower

Made Reina Candradewi, S.E., M.Sc.

Using a Target Capital Structure on a Local
versus Global Basis

 An MNC may deviate from its “local” target capital structure as

necessitated by local conditions.

 However, the proportions of debt and equity financing in one

subsidiary may be adjusted to offset an abnormal degree of financial
leverage in another subsidiary.

 Hence, the MNC may still achieve its “global” target capital
structure.
Using a Target Capital Structure on a Local
versus Global Basis

 Note that a capital structure revision may result in a higher cost of

capital.
 Hence, an unusually high or low degree of financial leverage should
only be adopted if the benefits outweigh the overall costs.
Using a Target Capital Structure on a Local
versus Global Basis

 The volumes of debt and equity issued in financial markets vary

across countries, indicating that firms in some countries (such as
Japan) have a higher degree of financial leverage on average.

 However, conditions may change over time. In Germany for example,

firms are shifting from local bank loans to the use of debt security
and equity markets.
Impact of Multinational Capital Structure
Decisions on an MNC’s Value

Parent’s Capital Structure

Decisions

m 
n 
E CFj , t  E ER j , t 
 j 1 
Value =   
t =1  1  k  t

 
E (CFj,t ) = expected cash flows in currency j to be received by the U.S.
parent at the end of period t
E (ERj,t ) = expected exchange rate at which currency j can be converted to
dollars at the end of period t
k = weighted average cost of capital of the parent
Chapter Review

 Introduction to the Cost of Capital

 Comparing the Costs of Equity and Debt
 Cost of Capital for MNCs
 Size of Firm
 Access to International Capital Markets
 International Diversification
 Exposure to Exchange Rate Risk
 Exposure to Country Risk
Chapter Review
 Cost of Capital for MNCs … continued
 Cost of Capital Comparison Using the CAPM
 Implications of the CAPM for an MNC’s Risk
Chapter Review
 Costs of Capital Across Countries
 Country Differences in the Cost of Debt
 Country Differences in the Cost of Equity
 Combining the Costs of Debt and Equity
 Using the Cost of Capital for Assessing Foreign Projects
 Derive NPVs Based on the WACC
 Adjust the WACC for the Risk Differential
Chapter Review
 The MNC’s Capital Structure Decision
 Influence of Corporate Characteristics
 Influence of Country Characteristics
 Interaction Between Subsidiary and Parent Financing
Decisions
 Impact of Increased Debt Financing by the Subsidiary
 Impact of Reduced Debt Financing by the Subsidiary
Chapter Review
 Using a Target Capital Structure on a Local versus Global
Basis
 Offsetting a Subsidiary’s Abnormal Degree of Financial
Leverage
 Limitations of Offsets
 Differences in Financing Tendencies Among Countries
 Impact of Capital Structure Decisions on an MNC’s Value
DAFTAR PUSTAKA

 Jeff Madura, 2012, International Financial Management, 10th

edition, South-Western Cengage Learning: USA
THANK YOU