Capital Structure Decision – Global Financing Mix

Should an MNC have 0% Debt (Apple style) or 90% Debt (Retail style)? The "Capital Structure" is the mix of Debt and Equity.

1. Influence of Host Country Norms

MNCs often follow the "When in Rome, do as the Romans" rule.

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2. Factors Affecting the Decision

1. Cash Flow Stability: If the subsidiary has stable sales (e.g., Unilever selling soap), it can afford High Debt.
2. Credit Risk: If the host country is unstable, Parent will invest Equity (Does not want to default on external loans).
3. Taxation:
   • If Host Country Tax Rate is High -> Use Debt (Interest saves tax).
   • If Host Country Tax Rate is Low -> Use Equity (No need for tax shield).

3. Exam Notes: Writing the Answer

Question: "What factors determine the Capital Structure of an MNC?" (10 Marks)

Answering Strategy:

1. Definition: Debt-Equity Mix.
2. Factors:
   • Interest Rates.
   • Tax Laws (High Tax = High Debt).
   • Country Risk.
   • Agency Costs.

Summary

• No Uniformity: An MNC does not have ONE capital structure.
• Localized: It has a Global Consolidated Structure, but each Subsidiary has a localized structure based on local tax and risk.

Quiz Time! 🎯

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