. To what extent do average capital structures vary across different countries?

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. To what extent do average capital structures vary across different countries?

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With the growth in demand for exotic foods, Possum Inc.’s CEO Michael Munger is considering expanding the geographic footprint of its line of dried and smoked low-fat opossum, ostrich, and venison jerky snack packs. Historically, jerky products have performed well in the southern United States, but there are indications of a growing demand for these unusual delicacies in Europe. Munger recognizes that the expansion carries some
risk. Europeans may not be as accepting of opossum jerky as initial research suggests, so the expansion will proceed in steps. The first step will be to set up sales subsidiaries in France and Sweden (the two countries with the highest indicated demand), and the second is to set up a production plant in France with the ultimate goal of product distribution throughout Europe.
 
Possum Inc.’s CFO, Kevin Uram, although enthusiastic about the plan, is nonetheless concerned about how an international expansion and the additional risk that entails will affect the firm’s financial management process. He has asked you, the firm’s most recently hired financial analyst, to develop a 1-hour tutorial package that explains the basics of multinational financial management. The tutorial will be presented at the next board of directors meeting. To get you started, Uram has supplied you with the following list of questions:
k. To what extent do average capital structures vary across different countries?

Explanation & AnswerSolution by a verified expert

Sample Response

Capital structure resembles the components by which the investments in the business are funded. Some companies prefer substantial debt components while some may rely on equity. Multinational corporations have their business in various countries. It is often observed that the same businesses have different capital structure in different countries. This is because countries often follow different accounting standards in different countries.
 
A study was conducted to control the differences in the average capital across the countries. From this study, it was interpreted that variations in accounting practices can explain much of cross country variations in the capital structure. When these differences in the accounting practices are considered for adjustment of the capital structure of the business, it is similar across the countries.

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