cost of capital

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? What impact does the globalization of capital markets have on a manager's estimate of an appropriate cost of capital used to estimate the value of a subsidiary headquartered in a foreign country?
Globalization of capital markets usually has a positive effect on the manager's estimate of the cost of capital used to estimate the value of subsidiary headquartered in a foreign company. Before globalization of capital markets, the subsidiary would either have to be financed by the head office in accordance to the agreement with the government of the foreign company or would have to depend on the local capital markets/local banks. This increases the estimate of cost of capital. On the other hand if the subsidiary can raise capital outside the foreign country, it has a choice and an opportunity to lower its cost of capital.
? What are the characteristics of a cyclical company? How does the valuation of a cyclical company differ from the valuation of a noncyclical company? Compare and contrast the differences of evaluating firms in the electric generation industry compared to firms in the automotive manufacturing industry.
The cyclical company is one whose stock is highly correlated to the fluctuations of the economy. Usually, consumer durables fall into this category. The valuation of a cyclical company takes into account the direction in which the economy is moving and the expected change in the direction of the economy. For instance, such companies will be highly valued during the expansionary phase of the business cycle. On the other hand the valuation of a non-cyclical firm remains stable. As the performance of non-cyclical companies outperforms the performance of the economy, such companies may be valued at higher value during recession. While evaluating electric generation company that is non-cyclical, its present performance is maintained throughout the economic ...