Posted: April 26th, 2016

What are the advantages of internal debt over internal equity in financing a foreign subsidiary?

One stylized fact of multinational corporations is that foreign subsidiaries are capitalized with as little equity as possible and with as much intrafirm debt as possible.

a. What are the advantages of internal debt over internal equity in financing a foreign subsidiary?

b. How do the tax rate in the home and the host country affect the decision to use internal debt instead of internal equity?

c. How would you choose the currency denomination of the internal debt?

d. To what extent dos the capital structure (debt versus equity) of the subsidiary really matter? Carefully explain your reasoning.