GLOBAL COST OF CAPITAL: THE CASE OF GLOBAL COMPUTER SYSTEMS

Global Computer Systems (GCS) is a hypothetical multinational company in the IT industry. The company is a major player in the industry catering to clients from a variety of industries. GCS has different segments specializing in major areas of its operation. The case provides an opportunity to examine various issues that need consideration while making capital budgeting decisions. One of the significant issues is that of determining the cost of capital on the basis of which the hurdle rate is calculated in deciding whether a project is worth accepting. This forms the central issue around which the case is structured. This case is suitable for use in a core Finance courses of MBA programs, and for use in MBA and under-graduate senior level international finance courses. Ideally, the case should be distributed well before the session so that students have adequate preparation time to go through the case and visit relevant internet sources mentioned therein. The case discussion may take up anywhere between 60 minutes to 90 minutes depending on the depth to which the students are intellectually stimulated to delve into. Gordon Crown, Chief Financial Officer of GCS, would like you to help him develop a company-wide cost of capital policy that is consistent with modern finance theoretical constructs. He would also like you to provide your recommendation on the acceptability of the projects. He also feels that since stock prices often fluctuate, it would be advisable to use book value weights in computing the component capital costs and the cost of capital. However, his young deputy, Helen Chang who is a recent MBA graduate, feels that market prices are very important indicators of the health of the company and they provide very good signals to the corporation in terms of the future directions. As such, she feels that the market value weights approach would be the best approach. She is also of the opinion that the Required Rate of Return on any given project, in addition to the WACC, should also include various risk premiums like stand-alone or project specific risk which can be further broken down into political risk, repatriation risk, exchange rate risk etc. Further, she believes that the required rate of return should be increased by about 1% to allow for capital investment projects that have no cash inflows, such as pollution control equipment and safety equipment.