Cost of Foreign Debt Versus Equity. Time Inc. is a U.S. firm that has a large subsidiary in Indonesia. It wants to finance the subsidiarys operations in Indonesia. However, the cost of debt is presently about 30 percent there for firms like Time or government agencies that have a very strong credit rating. A consultant suggests to Time that it should use equity financing there to avoid the high interest expense. He suggests that since Times cost of equity in the U.S. is about 14 percent, so the Indonesian investors should be satisfied with a return of about 14 percent as well. The consultant's advice is not logical. Why is it that Times cost of equity in Indonesia would not be less than Times cost of debt in Indonesia?

	The risk-free interest rate is about 30 percent so Indonesian investors are not going to invest in Verona Inc. for less than the risk-free rate.
	The risk-free interest rate is about 14 percent so Indonesian Investors are not going to invest in Verona Inc. for less than the risk-free rate.
	The risk-free rate has no affect on the answer.
	None of the above.