Estimating the Cost of Capital with Debt Financing in a Foreign Currency
18 Pages Posted: 30 Jun 2003
Date Written: May 2003
Many firms have debt financing in a foreign currency. What are the tax implications of the foreign loan for the calculation of the Weighted Average Cost of Capital (WACC)? With a foreign loan, there are two effects. First, there is the standard tax savings from the interest deduction with the foreign loan. Second, we assume that changes in the value of the loan in the foreign currency can be listed in the income statement for tax purposes. In this teaching note, we examine how the WACC must be properly used to take into account both of the effects: the interest deduction and the change in the value of the foreign debt.
Note: This paper is available in Vietnamese at http://ssrn.com/abstract=423060
Keywords: WACC, foreign loan, cost of debt
JEL Classification: D61, G31, H43
Suggested Citation: Suggested Citation