Accounting and Finance for International Business - Assignment Example

Accounting and finance for international business Student’s Name: Instructor’s Name: Course Code: Date of Submission: Executive Summary This report discussed the cost of equity capital and how it has been influenced by globalization. The cost of equity capital is the return on investment which is paid to the investors. Equity costs are important for globalized firms as they help to improve the growth of the organisation as well as developing long term financing for an organisation. The arguments of Stultz according to this report still apply in the global business. This is because the cost of equity is influenced by globalization which helps to manage the business risks as a result of attracting the global investors to diversify the risks hence it is applicable in the current global business. Listing in the US stock exchange helps to improve the performance of an organisation. Introduction The accounting department of any organisation is important as it helps to manage the financial resources of the company and this leads to competitive advantage. Due to increased competition in the domestic markets, companies are contemplating of going global so that they can exploit the opportunities in the foreign markets. The factors which have led to globalization include technology which has improved communication between the companies and their customers and also the management of companies from the head office. The cost of equity capital has therefore been affected by the globalization (Chew & Parkinson 2013). Due to benefits of globalization, companies are contemplating on the best ways they can manage their finances by operating in the international market. In this effect, this report will discuss the main concepts of cost of equity capital and the effects of globalization on the cost of equity capital like the benefits of equity capital as a result of being listed in the US stock exchanges. Cost of equity capital The cost of equity capital is the return which is paid to the investors who are the shareholders of the company. The return is intended to compensate the investors for the risk they have taken to invest in the business by using their capital. It is important for any organisation to effectively compensate the investors so that they can be satisfied with their investment and be encouraged to invest more which enables the company to raise capital for its expansion purposes (Chew & Parkinson 2013). A firm can raise capital in two ways which are lenders and equity investors. The lenders gain interest while the equity investors gain dividends from the company. Importance of equity capital costs for globalized firms In the first place, it helps to improve the capital base for firms which operate globally and have all forms of operations. This is because there are no fixed financing. The equity capital cost does not increase the fixed assets of the company which can be a burden when paying the investors. On the other hand, the financial base of the company can be stabilized as a result of deferring the dividends to be paid later. Instead, the capital can be directed towards identified opportunities and developing requirements to exploit the opportunities (Stulz 1999). Therefore the equity capital cost helps to increase the financial stability of the business leading to global competitive advantage. In addition, the equity capital costs helps to improve the reputation of an organisation in the global business for an organisation which operates in some specific subsidiaries. This is because the investors do not require providing collateral instead the available assets serve as the collaterals. This does not only benefit the investors but also the company since it can take up the international loans to expand the company’s operations (Stulz 1999). According to Capital Asset Pricing Model, an organisation should view itself from the global context and not the local economy. This helps to improve the reputation of the company since it will be able to manage the global risks. In this regard therefore, the equity capital costs enables an organisation to access the international funding by using the assets to acquire long terms loans from the international financing organizations. Moreover, the equity capital costs help to improve the long term financing of an organisation which operates globally with variety of operations. The management of an organisation can decide to attract global investors by ensuing effective cost of equity capital. Instead of focusing on the interest payments, the cost of equity capital can enable an organisation to engage in long term financing by attracting the investors (Stulz 1999). This helps to improve the future financial stability of the organisation even if there is global financial crisis like the one that happened in the year 2008 which affected the success of many organizations and this improves the future performance of the company. Moreover, the growth of the organisation which operates several subsidiaries can be enhanced by the cost of equity capital. The management of an organisation has the option of manipulating the cost of equity to ensure its growth. The organisation can defer the payment of the dividends after identifying an opportunity so that it can raise capital for undertaking the project which can help to improve the growth of the company (Stulz 1999). This is because the dividends are not fixed and they can be postponed by the management of the company to raise capital for an immediate project. The end result is that it helps to improve the competitiveness of an organisation which can improve the positioning of the company in the global market. In this effect therefore, the cost of equity capital is important to an organisation which operates globally and has variety of operations as it helps to improve its performance in the global context. Relevance of arguments of Stultz that globalization has led to a lower cost of equity for firms I believe that the arguments of Stultz are still applicable in the global business today. Due to globalization, there are various impacts which can be realized by organizations operating in the global context concerning the cost of equity for firms. This implies that international financial markets have been integrated and have become single global capital market. This has led to increased prices of the stock both in the developing and developed economies (Copeland et al 1990). In this context, companies which have managed to attract and retain global investors are enjoying the lower cost of capital. This is in the case that the company has the global investors who are diversified thus improving the performance of the company as a result of lowering the cost of capital. This concept is still applicable in the current global business (Shefrin & Statman 2000). The global companies which have the global investors tend to enjoy the lower cost of capital due to wider investor base that have developed confidence to invest in the company which has managed to operate in the global context. The equity value according to Stultz is affected mainly by two reasons. In the first place, the global investors tend to influence the risks associated with the organisation. When the investors are diversified, the risks can be shared which cannot affect the performance of the organisation and this lowers the cost of equity capital. This is because high risk businesses increase the cost of the equity capital than an organisation which has little risks (Francis 2004). The risk premiums for companies which have diversified and globalized investors fall due to little risks involved. In this regard therefore, the cost of equity is influenced by the globalization and this benefits companies which have access to the global markets. This concept is still relevant in today’s business although there are some changing circumstances which can affect the cost of equity to increase for organisations which have access to global markets like global financial crisis which mostly affect the global companies (De Brouwer 2009). Moreover due to globalization, when organisations in less developed capital market countries raise their capital from the global investors like from the developed capital markets, they enjoy the low cost of capital (Bodie 2008). This is because the currency in the developed markets is strong than in the developing countries thus it is cheap to acquire the cost of capital when investors from developed economies invest in the less developed economies. In addition, the firms in the developing countries tend to import the technology and systems which are applied in the developed economies and this improves the performance of the firm as a result of effective management of finances. This will improve the confidence of the investors which helps to attract and retain the global investors thus lowering the cost of capital because of the less risks involved since they are shared among the global investors (Arnold 2005). Globalization influences the corporate governance of the global organisations due to systems and technologies imported. The equity of a firm is influenced by the contribution of the stock towards the global market portfolio. The global companies which are more tied to the local economy than the global economy apply the Capital Asset Pricing Model to determine the cost of capital. This is because it is not possible to diversify the local risk instead the risks can be diversified in the global economy (French 2003). In this effect, the cost of capital of global companies can be evaluated using the CAPM it helps the management of the company to view the company from the global perspective and not the local perspective thus influencing the cost of equity capital. Therefore, the Stultz’s arguments are still applicable in the current global business to ensure effective management of the cost of equity capital. CAPM helps to lower the global risks thus attracting the global investors which in turn help to improve the performance of the company. Do firms operating globally have an advantage for their cost of equity if they list on U.S. stock exchanges? Yes they have due to the following reasons listed below. To start with we have market exposure. Through listing the name of accompany on U.S stock exchange, it will help the company to be known better and it will attract more to invest in this stock exchange. Another reason for having market exposure it will attract and retain its customers such as buyers, sellers’ institutional trader and mutual funds (Zack 2009). Therefore for affirm to invest in this stock exchange by listing the available opportunities it will enable it to highly increase capital investment thus lowering the cost of capital. In addition we also have advertising via market listings. This is another advantage of listing a business on stock exchange in that it assists to pay money for registration and also fees. Also advertising a business on stock exchange it improves the company name while on the other hand listing a business on stock exchange it helps in association. Hence a business being associated with stock exchange has helped to advertise itself both internally and externally (Hitchner 2002). In other words this will assist the business to gain exposure and this will attract more investors and customers hence this business will grow rapidly. Another advantage for listing a business on stock exchange is to have improved brand equity through listing. To attain a business has to have qualifications standards for it to be listed in stock exchange. Hence this is advantageous as it adds creditability of that business and this will lead to improved brand equality. In other words customers and clients’ perception to the stock exchange will also improve and this will increase the relationship which exists among them (Brennan & Mary 2007). Also from having creditability results it is easier to obtain financial information that might be needed in budgeting. Conclusion Globalization has led to great impacts regarding the cost of equity capital. Many organisations are going global due to availability of technology and global integration which has attracted the attention of many of the local companies to go global. An organisation which goes global has the ability to enjoy the low cost of capital due to diversified risks unlike when operating in the local economy. Equity capital is important for globalized firms since it helps to manage the business risks, helps to improve the financial base of the company and also helps to get access to long term financing as well as improving the competitive advantage of an organisation over local companies. The arguments of Stultz are still applicable in the current global business since the cost of capital is influenced by the risks the business exposed to. Being listed in the US stock exchange helps to expose the organisation to global aspects like the global investors thus lowering the cost of capital. References Arnold, G. (2005). Corporate financial management (3. ed. ed.). Harlow [u.a.]: Financial Times/Prentice Hall. Bodie, Z. Kane, A & Marcus, A. J. (2008). Investments (7th International ed.). Boston: McGraw-Hill. Brennan , N & Mary, M. (2007). “ Financial Statement Fraud: Some Lessons from US and European Case Studies .” Australian Accounting Review, Vol. 17, No. 42, pp. 49-102. Chew, L & Parkinson, A. (2013). Making Sense of Accounting for Business. Harlow: Pearson Copeland, T. Koller, T. Murrin, J. (1990). How to value a multinational business, Planning Review, Vol. 18, No. 3, pp. 16 – 41. De Brouwer, Ph. (2009). "Maslowian Portfolio Theory: An alternative formulation of the Behavioural Portfolio Theory". Journal of Asset Management Vol. 9, No. 6, pp. 359–365. Francis, J (2004). "Costs of Equity and Earnings Attributes". The Accounting Review Vol. 79, No. 4, pp. 967–1010. French, C. W. (2003). "The Treynor Capital Asset Pricing Model". Journal of Investment Management Vol. 1, No. 2, pp. 60–72. Hitchner , J. R. (2002). Financial Valuation: Applications and Methods, Second Edition Hoboken, NJ : John Wiley & Sons. Shefrin, H & Statman, M. (2000). "Behavioral Portfolio Theory". Journal of Financial and Quantitative Analysis, Vol. 35, No. 2, pp. 127–151. Stulz, R. (1999). Globalizations, Corporate Finance and the Cost of Capital, Rene M RM Stulz, Journal of Applied Corporate Finance,Vol.12, No. 3, pp. 8-25. Zack, G. M. (2009). Fair Value Accounting Fraud: New Global Risks and Detection Techniques. Hoboken, NJ: John Wiley & Sons. Read More