An argument for an MNC to have a debt-intensive capital structure is that:
A) it can reduce the MNC's exposure to exchange rate risk on earnings remitted by subsidiaries to the parent.
B) it can reduce the chance of bankruptcy.
C) it spreads the shareholder base.
D) it forces subsidiaries to pay dividends to shareholders.

Question

Quizplus · Accepted Answer

A debt-intensive capital structure can reduce an MNC's exposure to exchange rate risk on earnings remitted by subsidiaries to the parent. This is because debt payments are fixed and do not fluctuate with exchange rate movements, whereas equity payments do. Therefore, the MNC can use debt financing to hedge against exchange rate risk, which can ultimately benefit shareholders.

An Argument for an MNC to Have a Debt-Intensive Capital