“Multinational Capital Structure and Optimal Capital Structure” Please respond to the following:
From the case study and your knowledge of both the cost of capital and capital structure for MNCs, predict the likely outcome of a Blades expansion into Thailand. Determine whether Blades’ cost of capital will be higher or lower than it would be for a manufacturer operating solely in the U.S. Provide a rationale for your response.
With the risk that is involved in operating in Thailand, the cost for capital for the company would become relatively higher than for other manufactures operating solely in the US. As the case study mentions, the amount of debt in the country is about 15 percent in comparison to 8 percent in the US. The cost of equity also is higher since it isn’t as developed as it is in the US. One factor that would assist in increasing the company’s cost of capital the exchange rate risk involved. The baht is predicted to depreciate in the next few years which causes risk in the company’s cost of capital.
From the case study and the readings, predict the major effects of an expansion of Blades into Thailand on the required rate of return for the company. Suggest whether or not Blades should use the new required rate of return, which entails using the capital asset pricing model (CAPM) when discounting the cash flows from the Thai subsidiary to determine the net present value (NPV) of a project there. Provide a rationale for your response.
Based off the week’s readings, the company will lose investment in the Thailand project. Before the investment, the rate of return was 19 percent which is now reduced to 17.6 percent. Centered on the CAPM calculation, the ROA would decrease. This isn’t what was predicted in the increased cost of capital that the company would acquire with the expanded operations in Thailand. This is due to CAPM not considering unsystematic risks such as inflation and any other risks that may come from expanding.
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