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Autovista Inc., a U . S . firm with a significant subsidiary in Mexico, is exploring financing options for its operations in the country. The
Autovista Inc., a US firm with a significant subsidiary in Mexico, is exploring financing options for its operations in the country. The cost of debt in Mexico for firms with strong credit ratings, such as Autovista, stands at approximately percent. To circumvent the impact of highinterest expenses, a consultant proposes that Autovista consider equity financing in Mexico. He suggests that since Autovistas cost of equity in the US is about percent, so Mexican investors would find a return of approximately percent acceptable as well.
What is the flaw in the consultant's advice?
Choose all of the answer choices that apply:
AThe consultant assumes Autovista's cost of equity in Indonesia would be lower than its cost of debt.
B The consultant overlooks the risk associated with debt financing.
C The consultant ignores the fact that investors in Indonesia will demand a higher return on equity compared to holding debt to compensate for the perceived risk associated with holding shares.
D The consultant fails to consider Autovista's credit rating in Indonesia.
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