accordingly the appropriate cost of equity should betake into account. If the subsidiary is
held 100 per cent by the group, the cost of equity capital of the subsidiary is equal to that
of the parent group.
Alternatively, the cost of the capital of the parent group may be adapted, commensurate
with the level of risk incurred by the subsidiary. The cost increases with increase in the
risk level and decreases with decrease in the risk level. Likewise, if the subsidiary is
located in a risky country, a higher WACC can be applies.
K 0 = 129.6 million × 100 = 0.12.96 per cent
1000 million
The FINANCIAL STRUCTURE OF MULTINATIONAL GROUPS reflects the
mode of financing the assets of the parent group, worldwide. The group will like to attain
optimal capital structure at which the overall cost of capital is minimum or value of the
firm is maximum.
This nature of WACC enables the multinational groups to have a certain margin of
maneuverability to attain the optimal/sound financial structure. For the purpose, they
may follow either of the two approaches: (i) adapt the financial structure of foreign
subsidiaries to the financial, economic and monetary environment of the country in which
they are located, or (ii) attempt to modify capital structures of its various subsidiaries in a
manner so that at the level of the consolidated balance sheet of the group, it tends towards
the desired structure.
- Different ways of settling foreign operations
Foreign operations entail the adoption of a currency of invoicing, require specific
methods of settlement and benefit from certain specific types of financing.
- Currency of invoicing
The choice may be between:
- National currency of the exporter;
- National currency of the importer;
- A third currency.
In several countries, exporters have a preference for their national currency as the
currency of invoicing as it avoids the exchange rate risk.
Since exporters often have greater power than importers as far as the choice of currency
is concerned, it is the importing firms that suffer more from exchange rate risk.