Multinational Cost of Capital Literature review

Multinational Cost of Capital - Literature review Example The paper argues that existing financial paradigms are inadequate to the phenomenon of multinational companies. Additionally, the paper discusses the influence of different features of internationalized markets on the cost of capital of multinational companies. According to Adler, in its simplest form, a multinational company is a parent company that has at least one subsidiary abroad (Adler 1973). Conversely, when debating the financial challenges of multinational companies, most scholars normally assume that there are at least two affiliates abroad and the parent company at home forming the multinational company (Etienne 1977).  From a legal perspective, most multinational subsidiaries are independent companies (Kuemmerle 2005). On the other hand, from an ownership viewpoint multinational subsidiaries link directly or through an intermediate subsidiary to the parent company (Choi 1981). Therefore, multinational companies are an amalgamation of companies led by the parent company and connected by shareholdings between the companies.  A firm’s capital structure consists of debt and equity (Buttler 2012). The cost of retained earnings mirrors an opportunity cost, which is what shareholders would have earned if they received dividends and invested themselves. Firms’ cost of issuing new stock also mirrors an opportunity cost, which are the foregone earnings that shareholders would have earned by investing elsewhere other than in the stock (Berk 2007). The cost of issuing new stock exceeds the cost of retained