The cost of retained earnings and the cost of new equity are both costs. The costs of retained earnings is generally higher than the cost of new equity because of flotation costs. Firms attempt to use the capital structure, or mix of capital components, that will minimize their cost of capital. There is an advantage to using equity rather than debt financing because dividend payment are tax deductible. An MNC's cost of capital may differ from that of domestic firms because of their access to international capital markets, their exposure to exchange rate risk, and other characteristics. Generally speaking, MNC's size, its access to international capital markets, and international diversification are unfavorable to an MNC's cost of capital. The capital asset pricing model (CAPM), can be used to assess how required rates of return of MNCs differ from those of purely domestic firms. The capital asset pricing model (CAPM) suggests that the required return on a firm's stock is a positive function of the risk-free rate of interest and the market rate of retum and a negative function of the stock's beta. Beta measures the sensitivity of a stock's return to market returns. Capital asset pricing theory would most likely suggest that the MNC cost of capital is lower than that of domestic firms because MNCs probably have lower betas than purely domestic firms. Country differences, such as differences in the risk-free interest rate and differences in risk premiums across countries can cause the cost of capital to vary across countries. Countries with younger populations are likely to experience higher interest rates since younger households tend to save less and borrow more. Because their economic conditions are more favorable, the cost of debt in industrialized countries is much higher than the cost debt in many less developed countries