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Lecture notes Multinational financial management - Dr. Umara Noreen

This lecture introduces the multinational corporation as having similar goals to the purely domestic corporation, but a wider variety of opportunities. With additional opportunities come potential increased returns and other forms of risk to consider. The potential benefits and risks are introduced. The commonly accepted goal of an MNC is to maximize shareholder wealth. Financial managers throughout the MNC have a single goal of maximizing the value of the entire MNC. | When the risk level of a foreign project is different from that of the MNC, the MNC’s weighted average cost of capital (WACC) may not be the appropriate required rate of return for the project. There are various ways to account for this risk differential in the capital budgeting process. 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. As economic and political conditions and the MNC’s business change, the costs and benefits of each component cost of capital will change too. An MNC may revise its capital structure in response to the changing conditions. For example, some MNCs have revised their capital structures to reduce their withholding taxes on remitted earnings. A larger amount of internal funds may be available to the parent. The need for debt financing by the parent may be reduced.