Assume that an MNC has very stable cash flows and uses very little debt. Its cost of debt should be:
A) lower than its cost of equity.
B) higher than its cost of equity.
C) lower than the country's risk-free rate.
D) lower than its credit risk premium.

Question

Quizplus · Accepted Answer

Since the MNC uses very little debt, it is likely to have a low credit risk and hence a low cost of debt. As a result, the cost of equity would be higher than the cost of debt due to the higher inherent risk associated with equity investments.

Assume That an MNC Has Very Stable Cash Flows and Uses