Why might the cost of capital fall if financial markets are no longer Essay

Why might the cost of capital fall if financial markets are no longer segmented What evidence is there of this effect - Essay Example Last two decades witnessed greater segmentation of financial markets. The major causes of increased financial market segmentation can be attributed to economic and regulatory barriers that raise difficulties in full market integration. In the opinion of Buch (179), although direct regulatory restrictions such as capital controls to financial market integration have been eradicated, some complex forms of indirect regulatory controls are still in force. When the financial markets are largely concentrated, it will certainly increase the costs associated with international financial transactions. This paper will discuss why the cost of capital falls if financial markets are no longer segmented. Factors affecting cost of capital From a company’s point of view, the return on investment which is required to satisfy the investor’s interests is called cost of capital. Cost of capital consists of several factors such as equity capital, debt holders, and hybrid securities (Cost of capital). In order to understand the fluctuations in cost of capital associated with financial market segmentation, it is necessary to evaluate the factors affecting cost of capital. There are controllable and uncontrollable factors that affect cost of capital. A. Controllable factors As the term indicates, the company has a control over these factors and it is grouped into three such as capital structure policy, dividend policy, and investment policy. 1. Capital structure policy As discussed above, equity capital is a component of cost of capital. When more equity is issued, normally, cost of equity increases and thereby cost of capital. A similar process repeats when more debt is issued. 2. Dividend policy The dividend policy affects the cost of capital and it can be controlled by adjusting firm’s payout ratio. Since the firm has control over its payout ratio, MCC schedule’s breakpoint can also be effectively changed (CFA level 1- Factors affecting the cost of capit al). 3. Investment policy When a company formulates investment decisions, it deals with some degree of risk and it causes to change the structure of cost of debt and cost of equity. Consequently, it produces a proportional change in cost of capital also. B. Uncontrollable factors It also affects the cost of capital and the company has no control over these factors. It mainly includes level of interest rates and tax rates. In the view of Kapil (280), economic and market conditions also contribute to the change in cost of capital and these elements also fall under the head uncontrollable factors. 1. Level of interest rates â€Å"The level of interest rates will affect the cost of debt and, potentiality, the cost of equity (CFA level 1†¦..)†. For instance, level of interest rates has a direct impact on cost of debt by which an increase in interest rates causes a proportional increase in cost of debt and which in turn increases cost of capital. 2. Tax rates Cost of debt afte r taxation is clearly affected by changing tax rates. When tax rates increase, it is obvious that cost of debt would decrease further causing a decline in cost of capital. Lack of financial market segmentation and cost of capital fall When national financial markets are largely segmented, it becomes small and inactive. According to Errunza and Miller, as a result of this increased capital market segmentation, most of the domestic investors holding large number of local shares were included in these concentrated segments. The authors argue that this situation led to the rise in cost of capital. According to this argument, cost of capital falls if financial markets are no longer segmented. In the opinion of Buchanan (as cited in The trade news), if the capital market traders have good knowledge

Marketing - Governmental Structure Essay Example | Topics and Well Written Essays - 1000 words

Marketing - Governmental Structure - Essay Example The four major political parties of Canada are the Liberal Party, Conservative Party, New Democratic Party, and Bloc Quebecois. Canada is currently stable politically. The political risk index of Canada on a 1-10 scale is 9.5 (CountryWatch, 2011). A high number in the scale is a desirable outcome. The nature of Kudler Fine Foods business and the existence of NAFTA pretty much ensure that there are not going to be any political barriers that might prohibit the entrance of the company into Canada. Food is a first necessity item. Kudler Fine Foods should keep track of the actions of the Federal government of Canada since they are responsible for international relations. A risk factor for Kudler Fine Foods is if the Canadian government decides to impose additional taxes to the corporations or higher sales taxes on food items. There is no risk of tariffs being imposed on US imports due the existence of NAFTA. Inflation, currency exchange, and monetary and fiscal policies The national curr ency of Canada is the Canadian dollar. The current currency exchange rate between the US dollar and the Canadian dollar is 1: 0.973 (Xe, 2011). The Canadian dollar has been a currency that has been historically stable. A sign of stability in a currency is illustrated by the inflation rate of the country. The inflation rate of Canada between 1915 and 2010 was 3.26% (Tradingeconomics, 2011). Canada has a great business relationship with the United States evidence by the fact that 80% of Canadian exports go to the United States. The monetary and fiscal policies of Canada can influence the decisions of Kudler Fine Foods. If the government reduces the cost of money the company can take advantage of the situation to borrow money at a lower cost. In order to minimize risk of loss of purchasing power when interest rates go up the firm should invest in bonds. Technology factor There are various technologies that can help Kudler Fine Foods improve their financial performance and operational e fficiency. A technology that can help the company improve its supply chain and logistics is radio frequency identification tags (RFID). RFID tags can be used to tract the movement of merchandise while in transit in Canada. The company can provide up to the minute updates to their clients about the approximate time when the food items are going to be delivered to the stores. Another technology that can help the company establish a presence in Canada is the internet. The internet can be used to develop a online marketing campaigns to attract Canadian customer to purchase our new Too Fresh to Go product line. Social and demographic factors, diversity Canada is bilingual country that speaks both English and French. Kudler Fine Foods must prepare their packaging for Canada in a box that has both English and French instructions and advertising messages. The population of Canada is small in comparison with the size of the country. Canada has a multicultural population that has a different composition than the United States, but both countries are rich in terms of diversity. Diversity can be used by Kudler Fine Foods to improve innovation and creativity among its staff. In order to beat the language constraint Kudler Fine Foods will need to hire bilingual employees. The costs associated with acquiring the skills and abilities necessary to establish an operation in