Literature Review of multinational cost of capital 2233 Essay

Literature Review of multinational cost of capital 2233 - Essay Example The common equity highlights the opportunity cost that is obtained from the funds and invest the amounts in other stocks. The cost exceeds the retained earnings as it includes the expenses that are linked with the sale of new stocks (Durand, 1963; Heston and Rouwenhorst, 1994). The cost of debt of a multinational can be measured easily as it incurs the interest expense that results from the borrowing funds. The multinationals are observed to use specific mix of capital components and employ appropriate capital structure, which has the ability to reduce its cost of capital (Kraus and Litzenberger, 1973). When cost of capital of multinationals is low, the rate of return on projects is also observed to be low. The companies predict their cost of capital before conducting any capital budgeting technique as they have to calculate their net present value of the project. This net present value is dependent on cost of capital (Kraus and Litzenberger, 1973). The multinational companies encounter intricate cost of capital problems as compared to their domestic counterparts. This complexity offers higher opportunity to the firms to reduce their cost of capital. In the last 50 years, the application of financial management has changed to a great extent. This is reflected on the ownership structure and size of the company. This has also altered the functions of financial systems and the instruments that are used for depicting the financial structure of the company (Modigliani and Miller, 1958). This research paper aims at highlighting the different aspects of multinational cost of capital by emphasising on the opinions of different authors. The multinational companies have the ability to raise capital for its operation from different capital markets around the world, despite its domestic opportunity. It is well identified that the multinational companies often encounter difficulty in the foreign country due to the difference in cost of capital between the