20 cost of foreign debt versus equity carazona inc is a u s 64257 rm that has a larg 1319212

20.   Cost of Foreign Debt versus Equity.  Carazona, Inc.,  is a U.S. firm that has a large subsidiary in Indone- sia. It wants to finance the subsidiary’s operations in Indonesia. However, the cost of debt is currently about 30 percent there for firms like Carazona or government agencies that have a very strong credit rating. A consultant suggests to Carazona that it should use equity financing there to avoid the high interest expense. He suggests that since Carazona’s cost of equity in the United States is about 14 per- cent, the Indonesian investors should be satisfied with a return of about 14 percent as well. Clearly explain why the consultant’s advice is not logical. That is, explain why Carazona’s cost of equity in Indonesia would not be less than Carazona’s cost of debt in Indonesia.

 

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