When a country's risk-free rate rises, the cost of equity to an MNC in that country _____, and the cost of debt to an MNC in that country ____, other things held constant.
A) increases; increases
B) increases; is not affected
C) is not affected; increases
D) is not affected; is not affected

Question

Quizplus · Accepted Answer

The cost of equity to an MNC in a country increases because risk-free rate serves as a benchmark for the required return on investment. When the risk-free rate increases, investors require a higher return on their investments, which increases the cost of equity capital. Similarly, the cost of debt to an MNC in that country also increases because lenders demand higher interest rates to compensate for the increased risk associated with lending in that country. Therefore, both the cost of equity and debt to an MNC in a country increase when its risk-free rate rises.

When a Country's Risk-Free Rate Rises, the Cost of Equity