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:

Question

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Since the parent company plans to finance the British subsidiary with retained earnings from its U.S. operations, there will be no borrowing cost in the United Kingdom. The economic conditions in the United Kingdom may affect the subsidiary's performance but may not affect the discount rate used to evaluate the investment. Therefore, the most significant factor affecting the discount rate would be the parent company's cost of capital.

Assume the Parent of a U