course material

1. Agree or disagree 1
Agree or disagree 1Post writer: Lisa LumleyCost of capital and international
competitivenessThe analysis of cost of capital is essential in the firm’ s capital budgeting
process. Cost of capital is the cost of funds used for financing a business venture (Demirkan,
et al, 2012). A company decides to source capital either through equity or cost of
debt. Many companies practice using a combination of both, in order to finance their
business ventures. A company must overcome its cost of capital before it can make revenue
and create value. Cost of capital is used to determine the profitability of a project before the
company proceeds with undertaking it.Every multinational company thrives to be
competitive in the international market. Without this competitiveness, companies will fail
at achieving profitability and value.The cost of capital can both negatively and positively
affect a firm’ s international competitiveness as it affects the overall cost of
production. Salvatore (2012), states that cost of capital is one of the main factors to affect
international competitiveness, as seen in the 1980s. if the cost of capital is high then this
would negatively impact the repayment of the lending rates for the capital due to
inflation. The high cost of capital would greatly increase the repayment cost as inflation
would add significant amount of dollars to the interest rate. The high repayment costs
would negatively impact the firm’ s profit and make it less competitive in international
markets and even in its local market.Most companies find it necessary to seek funding for
capital through borrowing, and are then faced with high interest rates which affect their
ability to repay at these high interest rates as well as realizing a substantial profit for the
company. This has caused many firms to fail in the international market as they find it
increasingly difficult to compete with more financially viable businesses.Companies who
have to carry out high levels of Research and Development such as pharmaceutical
companies such as GlaxoSmithKline and AstraZeneca are finding it difficult to stay ahead in
the market due to the high capital cost. The cost of introducing a new drug into the market
costs approximately US $1.8 billion (Herper, 2012).Interest rates and investment
opportunitiesAs we have seen, interest rates affect the competitiveness of firms, they also
affect the opportunities firms have for investing capital.There are two forms of interest
rates – nominal and real.Nominal interest rates are interest rates quoted before taking
inflation into consideration. This rate is used in negotiating bonds etc., but are not effective
in determining the overall costs of doing business in international markets or for calculating
actual costs of capital.Real interest rates are affected by inflation and such are highly
fluctuated (Salvatore, 2012). This gives a more ” real” impact on cost due to inflationary

2. effects. This is the rate considered when determining international competitiveness.The
increase in demand for real interest rates can lead to investment opportunities in an
economy facing budget deficits. Interest rates become high due to increased demand for
borrowing and lower supply of loanable funds (Salvatore, 2012). This creates a deficit in
the economy which leads to lower savings rate in order to attract
investments.ConclusionThe demand for loans affects the interest rates charged which also
will affect the investment opportunities available to the firms. Companies can however
counter the negative effects of high interest rates by creating efficiency in their
industry.References:Demirkan, et al (2012). “ Discretionary Accruals Quality, Cost of
Capital, and Diversification” . Journal of Accounting, Auditing and Finance 27(4) 486-
526.Herper, M. (2012).” The truly staggering costs of inventing new drugs” .Salvatore, D.
(2012).’ ’ Managerial economics in a global economy” . 7th ed. New York: Oxford University
Press.