Because Some Countries Have a Lower Withholding Tax on Interest

question 12

Multiple Choice

Because some countries have a lower withholding tax on interest than they do for dividends, multinational corporations may finance foreign operations with debt rather than equity. What additional reason may an MNC have for using this investment strategy?

• A) Interest is generally a deductible expense, whereas dividends paid are not.
• B) Dividends require a cash outflow but interest does not.
• C) Cash flows from dividends must be discounted using the cost of capital, which is not the case for interest.
• D) All of the above

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Definitions:

Interest Expense

The cost incurred by an entity for borrowed funds, often reflected as an expense on the income statement.

Time Value

is the concept that money available at the present time is worth more than the identical sum in the future due to its potential earning capacity.

Money

Money is a medium of exchange in the form of coins and banknotes; by which goods and services are valued and exchanged.

Present Value

The current financial value of money or cash flows that will be obtained in the future, factored by a particular rate of return.