The company finances foreign operations with debt from a number of different countries. It does this on the basis of the parent company's credit rating, which illustrates that the implicit understanding with respect to the parent company default guarantee of subsidiary debt holds across different debt markets (Stern & Chew, 2003, 394). There are also times when the capital structure is determined more by strategic considerations than any other. Many firms operate foreign subsidiaries as joint ventures, for example, because this gives the firm greater access to foreign capital markets and usually reduces the country risk and market risk associated with the subsidiary, when compared to a greenfield subsidiary. There is evidence that firms using this tactic do so in part to reduce the costs associated with foreign market entry, including financing costs. Hennart's (1991, 483) study of Japanese subsidiaries in the United States showed that transaction costs played a critical role in the choice of capital structure for Japanese firms entering the United States. Local partners were found not only when this had strategic benefits but also when it would reduce the cost of capital. When a reduction of costs is not obtainable from a joint venture, a joint venture is typically not pursued. Toyota, which moved into the United States in the early 1980s, is an example of this theory in practice. Access to the U.S. market also gave the company access to U.S. capital markets, including the New York Stock Exchange. In this case, Toyota adopted the cost reduction strategy when it finally...
When moving into foreign markets, firms typically seek to lower their cost of capital by adjusting their capital structure to local conditions. Joint ventures give firms access to local capital markets, for example. Utilizing the home country capital structure places constraints on the subsidiary that could impact on its profitability so that option is not typically pursued. The literature does not support the idea that firms conform to the capital structure norms of the foreign country -- indeed to do so would compel the firm to surrender any competitive advantage on the cost of capital it might have. The literature in general suggests that firms only use a local capital structure when it would accrue cost savings from doing so.
Capital Structure For a small business, there are two major forms of financing. Debt is when the company borrows money. Debt for small businesses usually comes from a bank, and it often has a fixed schedule of repayments, and there is interest as well. The other form is equity, which is ownership in the business (Parker, 2012). Each has its advantages and disadvantages. Debt is risky, and indeed it increases the
Capital Structure The three companies selected for this report are eBay, Clorox, and Darden Restaurants. eBay is an online auction website, acting as an intermediary between buyers and sellers. Clorox is described as being a manufacturer and marketer of consumer and institutional cleaning and household products. Some of its brands are the eponymous cleaners, Brita water filters, Burt's Bees and a variety of other brands as well. Darden Restaurants operates casual
Capital Structure A company's capital structure is the balance of different methods of financing that provides funding for the company's operations. The basic breakdown is between debt and equity, but preferred shares may also factor into the capital structure. Debt includes all forms of liabilities, including both long-term debt and current liabilities. Equity includes both the book value of shares issued and the company's retained earnings. The market value of the
Capital Structure Decision and Cost of Capital In basic terms, capital structure has got to do with how companies finance their overall operations using various sources of funds. In this text, I recommend what is in my opinion the optimal capital structure for the three companies selected for purposes of this discussion. The companies that will be used for purposes of this discussion are: Alaska Air Group, the Clorox Group, and
Capital Structure Modigliani and Miller argued that capital structure is irrelevant, all other things being equal, but in the real world those other things are never equal. The factors that are ruled out of MM are neutral taxes, no capital market frictions, symmetric access to credit markets, and that firm finance policy reveals no information. Normally, arguments against the irrelevance of capital structure are based on these factors that MM assumed
Capital Structure A project should not be evaluated in terms of capital structure. The financing of a project is a decision that is independent of the decision to undertake a project. This flows from the Modigliani and Miller Theorem where the choice of financing is irrelevant to the returns of the asset, all other factors being equal (Investopedia, 2012). The firm may have a preference for one type of financing or
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