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.

Question

Quizplus · Accepted Answer

When a country's risk-free rate rises, it indicates that the overall risk of investing in that country has increased. As a result, investors will demand higher returns to compensate for the increased risk, which will lead to an increase in the cost of equity for an MNC operating in that country. The cost of debt is also likely to increase, as lenders will also demand higher returns to compensate for the increased risk. Therefore, both the cost of equity and the cost of debt are likely to increase when a country's risk-free rate rises.

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