Question

Discuss factors that influence a MNCs cost of capital.   

Answer 1

The factors that affects an MNC's cost of capital is :

1. The tax laws: the tax laws are different for different countries. The tax laws in some country provide more incentives to save. This supply of savings affects the interest rates and thus affect the cost of capital.
2. The exposure to exchange rates : the MNC exposure to the exchange rate risks is high which makes the cash flows received by the MNC highly volatile and so the cost of capital of the MNC's could rise.
3. The extent of diversification : the cost of capital of a company is affected by it's probability to go bankrupt. If the company is a MNC, the cash inflows come from all across the world as a result of which the cash flows are stable as it is not affected by a single economy. This means the cash flows are less variable as a result the cost of capital decreases.
4. Access to the international markets : as the MNC's have a lot of access to the international markets , this may allow it to have a lower cost of capital than that paid by the domestic firms.
5. Character of the MNC's : the MNC's enjoy a high reputation and low credit risk which makes them access debt at a lower cost. So, the cost of capital is also low.