A country, as well as a corporate characteristic, extensively affects the cost of capital for multinational corporations. The effect on the MNS is however different across countries as well as costs of capital.
Uncompetitive regulations forced Jason Starks 3P Turbo founder to pursue the Brazilian market. During this period, Brazil was experiencing a critical economic turmoil resulting from corruption scandals that had inflicted the then President Dilma Rousseff as well as other prominent politicians and influential businesspersons. Also, the financial crisis was produced by two recession decades in China’s economy that exacerbated the slow moving of export commodities. Jason certainly had a significant decision to make on whether to still venture the Brazilian market albeit the current political and economic risks.
P Turbo case study presents three important types of Costs of Capital. These types include the 3 P Turbo equity comprising of the company’s funds that were accrued through the sale of stock as well as retained profitability that Jason purposed to use for a business venture in Brazil. Moreover, Jason strategized on securing borrowed funds in his pursuit for a new market. Debt is also a different type of cost of capital. In the case study, 3 P Turbo cost of capital is an essential indicator of an existing opportunity cost in the Brazilian market.
On the other hand, the borrowed funding which Jason projected to acquire indicated interests which virtually are expenses. Like other multinational firms, 3 P Turbo targeted to establish a capital structure that would significantly minimize the cost of capital. For this reason, the company established projects on the required rate of return.
Based on the case study, the cost of capital for purely domestic firms and multinational corporations significantly differs due to various factors. The first determinant resulting in differences in the cost of capital is the size of the respective firms. MNC with their large firm size is in numerous scenarios offered partisan treatment by creditors because of their sizes, for example in the case study. Also, the cost of each unit flotation is often low. Other determinant factors include MNC’s ability to access the global capital industry, increased exposure to risks associated with exchange rates and exposure to risks associated with a country such as political instability or financial turmoil.
Hedging FX risks for organizations establish value within those organizations because it enables a firm to forecast the future and prospective cash flows effectively. Acquisition of more knowledge in regards to the future financial prospects of an organization is critical because it enables and empowers the firms financially. Also, the organization’s future cash flows are guaranteed based on the appropriate decisions made by the organization.
Herding FX rates are also imperative in the sense that a significant amount of trades, international investments as well as corporate dealings are primarily shelved by the existence of the willingness by different concerned parties to undergo risks in foreign exchange. Thus, it is imperative for a business to effectively administer the risks associated with foreign exchange for purposes of ascertaining that the businesses augment their efforts and input on eliminating risks that are not within their trade as well as improving their effectiveness in organizational activities that are good in producing.
The FX Hedging rates are rendered redundant in a scenario where similar types of transactions are put under different types of currencies. In this case study, for instance, Hedging FX rates have been extensively involved in the depreciation of the US currency value. The global economy subsequently suffered as a result of the crisis case. Consequently, the currency depreciation resulted in increased depreciation that eventually led to high inflation rates. Payment on loans was as well significantly affected.
Interest rates and inflation rates can potentially have adverse impacts on the exchange rate. As such, the value of MNC’s is extensively affected by the two factors. It is therefore critical for financial managers as well as prospect business ventures to deeply comprehend how both the interest rates and the rates of inflation affects the exchange rates for purposes of establishing strategic approaches imperative in anticipating how the MNC would be affected.
The purchasing power parity is caused by the rise in the country’s rate of inflation that subsequently results to decline in the currency value. Such necessitates the need by the country to augment their imported product levels. These two economic forces have a primary effect of placing downward pressures on the country’s current particularly due to high rates of inflation. This exchange rate-inflation relationship is quantified by the integration of the purchasing power parity.
In an absolute form of purchasing power parity, it is argued that international trade barriers do not exist. As such, consumers are given the market freedom to shift their demand prices to exceedingly higher or lower prices than the normal. Like in this case study, it is suggested that the prices of products in the same basket but two different countries when assessed using a common currency should be equal. The existence of discrepancies in product prices that are within the same basket using the same currency implies that there is a convergence in demand shift.
Like other commodities, this case study has shown that currencies can be bought and sold. The selling and purchase of currencies in economics are known as foreign exchange markets. The value of currencies is based on the assessment of whether the currencies are solely determined in free markets. Another method of creating value in this market is through agreements between different countries. Currency demand is primarily derived from the evaluation of a country’s significant demand by countries abroad.
Understanding the prevailing interest rates and exchange rates in the market is imperative because the occurrence of changes in the market particularly regarding the country’s interest rates affects the currency. For example, in this case, study, relative to other countries, a higher interest rate can make a country an attractive venture for potential investors. Subsequently, such would result in increased demand in the invested country especially in the financial assets thus augmenting the market for the specific currency used in that particular country. Conversely, a decrease in the interest rates in a country-comparative to other countries would imply an increase in supply. Speculators would then sell the currency in their efforts to purchase currencies aligned with increased rates of interests. As a result of these speculative flows, such a country would experience a critical but short-term impact on the exchange rates.
Fiscal and monetary policies refer to the government’s austerity measures in regulating spending of government’s resources. The government integrates these policies to ensure that the taxes not only grow but also the economy is not slowed down. As the case study has demonstrated, there are three critical methods in which fiscal and monetary policies can affect exchange rates including interest rates, changes in income as well as changes in the pricing system.
Independent monetary and fiscal policies can extensively affect political risks. In a case of recession, monetary policies will mainly be driven in cutting down the increasing rate of interest as well as also trying to stimulate government spending in investments. Additionally, such policies as the case study have suggested results to a weakened rate of exchange that mainly helps exporters.