COST OF CAPITAL
The cost of capital for foreign investment projects (like domestic capital budgeting projects) should be based on the weighted verge cost of long-term sources of finance. While computing the cost of capital, cash flows warrant adjustment not only for corporate taxes but also for foreign exchange risk, withholding taxes on repatriations made and 50 on. The determination of the A’CC requires calculation of specific C0 5t~ of different sources of long-term funds. Tile procedure of computing various
The computation of cost of debt (k) is similar 10 the one used by domestic firms when subsidiary borrows in the host country. consider Example 36.S. The Indian subsidiary of an American ENC has raised Rs SO million to finance us vestrymen requirements y ls.~using 8-year, 12 per cent debentures in the Indian market, While interest is 10 be paid annually, the ‘I Example 136£ debentures are 10 be redeemed AL year-end 8, at 4 per cent premium.
Filial lion costs are estimated AL 2 per .- cent. Assume hat tax laws in India allow full amortization of flotation Cols~ in the first year itself, payment of premium in the year in which it is aid and corporate lax of 35 per cent. Determine the effective cost of deb! of the Indian subsidiary. ‘ . Sol Tint Cost of debt is determined by solving the following equation: