Assume the parent of a U.S.-based MNC plans to completely finance the establishment of its British subsidiary with existing funds from retained earnings from U.S. operations. According to the text, the discount rate used in the capital budgeting analysis on this project will be most affected by:
A) the cost of borrowing funds in the United Kingdom.
B) the economic conditions in the United Kingdom.
C) the parent's cost of capital.
D) the cost of borrowing funds in the United Kingdom AND the economic conditions in the United Kingdom.
Answer Key

Question

Quizplus · Accepted Answer

The parent's cost of capital is the discount rate used in the capital budgeting analysis for the project, as the funds for the project are to be financed through retained earnings from U.S. operations. The cost of borrowing funds in the United Kingdom and the economic conditions in the United Kingdom may impact the subsidiary's operations, but they will not directly affect the discount rate used in the capital budgeting analysis.

Assume the Parent of a U