Question

Explain how characteristics of MNCs can affect the cost of capital.

Answer 1

The characteristics of MNC that affect the cost of capital :

• The size of the MNC : As the MNC's are larger in size, they are sometimes provided relief from the creditors and they can achive a smaller floatation costs while computing the costs of capital.
• Easy access to international funds: the MNC's can easily access funds , through the international market at a lower cost.
• Exposure to exchange rate fluctuations : as the MNC's have a higher exposure to exchange rate fluctuations, there might be instances when the cash flows are uncertain and the rate of bankruptcy is higher.
• A higher exposure to country risk : As the MNC's are internationally invested and a higher proportion of their assets are invested in the foreugn countries, they have a higher country risk.
• MNC's have international diversification : As the MNC's have a benefit of international diversification, the cash flows are more stable and the probability of bankruptcy is lower.