Why is Cost of Capital different across countries? Explain how does the Cost of Capital for MNCs differ from that for domestic firms.
An understanding of why cost of capital varies across different countries provides an insight into the reasons for competitive superiority of some MNCs in some countries. Knowledge of differences in cost of capital in different countries may enable an MNC to formulate suitable strategy regarding procurement of funds from those countries where they are available at lower cost. An appreciation of cost of capital across the globe can throw light on the differences existing in the pattern of capitalization of different MNCs.
Country Differences in the Cost of Debt:
Cost of debt to an MNC is the function of two variables, viz; risk-free rate of interest in the currency borrowed and the premium for additional risk required by creditors. Since risk-free interest rate and risk premium differ from country to country, cost of capital will not be the same in different countries. There are various reasons for country differences in the risk-free rate and in the risk premium.
Some reasons of these differences:
Country Differences in the Risk free Rate
Country Differences in the Risk Premium
Country Differences in the Cost of Equity
DETERMINING CUT OFF RATE FOR FOREIGN PROJECT APPRAISAL
Cut-off rate is the minimum rate of
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