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Assess current borrowing rates, new projects, capital rationing

1. Besides the rate of return, what additional factors should a firm consider in its capital expenditure decisions for its international subsidiaries and JVs?

2. Based on the current borrowing rates, why would (or wouldn't) a firm want to invest in international capital projects today? In today's economic environment, would one expect the firm's discount rate to be higher, lower or the same as it was three years ago and why?

3. What is meant by capital rationing? Why is capital rationing an important concept in business finance? In particular, what techniques would you use to assess capital projects under capital rationing? Which projects would you invest in and why?

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Answer 1

A firm invests in different international subsidiaries and joint ventures (JVs). A number of factors are considered to make a capital expenditure decision for its international subsidiaries and JVs. These are as below-

Technology- Technology is an important factor that is considered to make a capital expenditure decision. A firm invests in those subsidiaries that provide a firm, a greater technology opportunity. By this a firm can update its technology with the technologies of subsidiary (Gleason, Lee & Mathur, 2002).

Future growth opportunities- A firm make its capital expenditure on those subsidiaries that generates more future growth opportunities for the business such as possibility for improvement in the profitability and firm size (Gleason, Lee & Mathur, 2002).

Economic of scope- A firm also considers the economies of scope before making capital expenditure decision in different subsidiaries. It is because; a firm can use its specific set of skills for its subsidiaries' or JVs' operation process without additional costs. It will increase firm's profitability by facilitating economies of scope (Depapphilies, 2009).

Cost of capital- Another factor that is considered by the firms for capital expenditure decisions for its subsidiaries is the cost of capital. It is because; the expansion decision requires huge amount of money that may cause an increase in overall cost of capital as a firm obtain capital from different source. ...

Solution Summary

The expert examines assess current borrowing rates, new projects and capital a rationing.