Question

In regards to International Financial Management compare and contrast the main differences between a domestic and Multi National Company (international) firm? Example are WACC, Risk Analysis, Capital Budgeting, Long term debt financing, Capital Structure, and Cost of Capital.

Answer 1

In terms of WACC, international companies has more access to debt at a lower rate of interest while domestic companies have to finance the debt at the current domestic rate. Hence WACC in case of International companies can be lower as compared to most of the domestic companies. This will in term impact their enterprise value.

In term of Capital budgeting, international companies may have a longer payback period as the investment outlay can be higher. While in case of domestic companies, payback period is less as initial investment is comparatively low.

In term of risk factors, international companies faces all three risks that is Transaction risk, Translation risk and Operational risk. While in case of domestic companies, the only risk to be faced is operational risk. Transaction risk is associated with the impact of fluctaution in exchange rate on the transactions done in foreign country. Transalation risk is the risk of currency fluctuation involved in converting foreign earnings into domestic currency. Operational risk is the risk of products becoming cheaper or dearer as a result of currency fluctuation.

In term of Capital structure, International companies will like to go for more debt as they have access to capital from majority of the countries in the world. They can access debt from countries where interest rates are lower. While in case of domestic companies, it depends on the domestic interest rate that will determine the optimal capital structure of these companies.