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Therefore, the specific amount of debt within the firm has a strong impact on the determining the accurate weighted cost of capital. Actually, the determination of a firm's WACC is dependent on the debt value together with the value of equity.
While debt capital is the lower cost source of capital, debt is usually borrowed from sources outside the multinational enterprises since subsidiaries tend to borrow directly from markets. Therefore, multinational enterprises don't highly leverage their capital structure because of the source of debt. Moreover, MNEs don't highly leverage their capital structure because this is one of the most complex aspects of financial decision making that is closely linked to other financial decision variables ("Leverage and Capital Structure," n.d.). These enterprises don't highly leverage because poor capital structure decisions can contribute to high cost of capital, which in turn lowers the net present value of projects and makes them increasingly unacceptable.
Generally, the Weighted Average Cost of Capital is primarily dependent on the firm's capital structure, which is the amount of each source of funding for the company ("Weighted Average Cost of Capital," n.d.). The company's high level of debt is relative to its outstanding equity and will...
Therefore, excessive levels of debt have considerable impact on the weighted average cost of capital since an increase in the amount of debt contributes to a proportional increase in the risk of the company. Excessive levels of debt results in a reduction of the weighted average cost of capital.
References:
"Cost of Capital." (n.d.). Chapter 14. Retrieved from University of Windsor website:
http://web2.uwindsor.ca/courses/business/assaf/512lect1.pdf
Drake, P.P. (n.d.). The Cost of Capital. Retrieved from James Madison University website:
http://educ.jmu.edu/~drakepp/principles/module7/coc.pdf
11, 2012, from http://wps.aw.com/wps/media/objects/222/227412/ebook/ch11/chapter11.pdf
"Weighted Average Cost of Capital -- WACC." (n.d.). Ultimate Calculators. Retrieved September 11, 2012, from http://www.ultimatecalculators.com/weighted_average_cost_of_capital_WACC_calculator.html
2012, from http://www.sbp.org.pk/departments/ihfd/days/Day3-04-P12.pdf
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