Economics Homework Help

What do theory and empirical evidence say about capital structure and the cost of capital for MNEs versus their domestic counterparts?

According to Madura (2010), MNCs that are well‑diversified across countries would have somewhat stable cash flows and may therefore be able to handle a high level of debt. They may use substantial foreign debt financing to reduce their subsidiary exposure to exchange rate risk and country risk. MNCs that are highly exposed to exchange rate movements or have subsidiaries located in politically unstable countries may experience very volatile cash flows. These MNCs could not handle high periodic debt payments and may be better off with an equity-intensive capital structure.

Reference

Madura, J. (2010). International financial management: 2010 custom edition (10^th ed.). Mason, OH: South-Western, Cengage Learning.