Estimating the Cost of Capital with Debt Financing in a Foreign Currency

18 Pages Posted: 30 Jun 2003

See all articles by Joseph Tham

Joseph Tham

Educational Independent Consultant

Date Written: May 2003

Abstract

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

Tham, Joseph, Estimating the Cost of Capital with Debt Financing in a Foreign Currency (May 2003). Available at SSRN: https://ssrn.com/abstract=411740 or http://dx.doi.org/10.2139/ssrn.411740

Joseph Tham (Contact Author)

Educational Independent Consultant ( email )

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