Capital Structure

The proportion of debt and equity in the total capital invested in a business entity Significant decision due to
The Leverage Affect of Debt The Tax advantage of Debt The Financial distress caused by Debt Low Cost Advantage of Debt The Control which debt exercises over Managers The agency costs related to equity issues

The Capital Structure Decision

It is taken at the strategic level, wherein the Debt:Equity ratio is decided keeping in view the long term wealth maximisation It is taken at the operational level also, wherein the focus is on bringing in capital at the lowest possible cost

International Capital Structure

When a domestic firm raises foreign debt or equity, the capital structure becomes international capital structure. MNCs which have subsidiaries across the globe also have an international capital structure

Issues for Domestic Firm

To raise cheaper debt from developed nations To create a natural hedge for its foreign exchange risk To meet its foreign currency capital investments To internationalise its equity shareholding

Issues for an MNC

Should it conform to Parent Companys Norms? Should it conform to Local Subsidiarys Norms? Should it apply a mixed approach to reap the various benefits? Worldwide Capital Structure

Factors influencing the MNC Capital Structure Decision

Stability of Cashflows Credit Risk Access to Retained Earnings Agency issues in the host country Stock holding restrictions in the host country Interest Rate in Host country Host country Currencys strength Political risk in the host country Witholding Taxes Repatriation Taxes Corporate Taxes