Capital structure is the balance of the firm’s debt, and equity and international operations allow for diversification and lower the overall risk of a business, which signifies the importance of international capital structure (Loth, 2019). However, different states may apply different principles when calculating the debt to total assets, which means that comparing the capital structures of companies operating in different countries is complicated. Because multinational companies can leverage their capital and be more cost-effective, they have an advantage when compared to local businesses (DeBenedetti, n.d.).
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Risks when working with cash involve the exchange rates of currencies (Brigham & Ehrhardt, 2017). To accurately calculate the future cash flows, one has to correctly project the future exchange rates, since the cashflows will be turned to the parent company in United States dollars. Exchange rate risk premium added to the domestic cost of capital. In general, all cash flow calculations for the foreign subsidiaries are more complicated when compared to estimates made for the local firm. Although the same approach to cash flow management is used for domestic and international firms, the difference in geographical distance may obstruct the collection of cash and result in delays, making it essential to use lockboxes or money transfers.
Credit is associated with the acquisition of debt capital on the global market and its contingencies. The main risks here are the interest rate and the company’s debt obligations (Brigham & Ehrhardt, 2017). A business can experience difficulties when selling asset-based securities if the market is contracting. The cost of debt may be different in different countries as well. The assumption here is that the firm sells its securities in financial markets. Inventory management is also affected by the exchange rates and calculations associated with it because the parent company has to predict the risk and account for it accurately.
Brigham, E. F., & Ehrhardt, M. C. (2017). Financial management: Theory and practice [with MindTap] (15th ed.). Mason, OH: South-Western.
DeBenedetti, J. (n.d.). The capital structure for a multinational corporation. Web.
Loth, R. (2019). Analyzing a company’s capital structure. Web.