What factors should be considered in deciding whether the cost of capital for a foreign affiliate should be higher lower or the same as the cost of capital for a comparable domestic operation?

Answer 1

Key factors include whether the cash flows of the affiliate are closely tied to the state of the local economy

or to the world economy, the correlation between the local and domestic economies, and the volatility of the foreign

affiliate's cash flows relative to that of the domestic operation. The greater (lesser) each of these factors, the higher(lower) the foreign affiliate's cost of capital relative to that of the domestic operation. In general, the closer these factors

are to each other, the closer their costs of capital