Assume an MNC establishes a subsidiary in a country where it has no other existing business. The present value of parent cash flows from this subsidiary is more sensitive to exchange rate movements when:
A) the subsidiary finances the entire investment by local borrowing.
B) the subsidiary finances most of the investment by local borrowing.
C) the parent finances most of the investment.
D) the parent finances the entire investment.

Question

Assume an MNC establishes a subsidiary in a country where it has no other existing business. The present value of parent cash flows from this subsidiary is more sensitive to exchange rate movements when:​
A) ​the subsidiary finances the entire investment by local borrowing.
B) ​the subsidiary finances most of the investment by local borrowing.
C) ​the parent finances most of the investment.
D) ​the parent finances the entire investment.

Quizplus · Accepted Answer

When the parent finances the entire investment, the cash flows are more exposed to exchange rate fluctuations, as the returns need to be converted back to the parent company's currency, increasing sensitivity to exchange rate movements.

Assume an MNC Establishes a Subsidiary in a Country Where