Assume That an MNC Has Very Stable Cash Flows and Uses

question 19

Multiple Choice

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.

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Definitions:

Abnormal Return

Abnormal return is the difference between the actual return of a security and its expected return, based on risk and market performance, indicating performance indicative of events or conditions unique to that security.

Bonds

A type of fixed-income investment where an investor loans money to an entity (corporate or governmental) which borrows the funds for a defined period at a variable or fixed interest rate.

Asset Allocation

The strategy of distributing investments among various classes of assets to manage risk and enhance returns.

Abnormal Return

Abnormal Return is the difference in the actual return of a security over a set period of time from its expected return based on the market or model prediction.