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 in U.S.operations. According to the text,the discount rate used in the capital budgeting analysis on this project should be most affected by:
A) the cost of borrowing funds in the U.K.
B) the cost of borrowing funds in the U.S.
C) the parent's cost of capital.
D) A and B

Question

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 in U.S.operations.  According to the text,the discount rate used in the capital budgeting analysis on this project should be most affected by:
A) the cost of borrowing funds in the U.K.
B) the cost of borrowing funds in the U.S.
C) the parent's cost of capital.
D) A and B

Quizplus · Accepted Answer

The discount rate used in capital budgeting analysis on this project should be based on the parent's cost of capital since the funds are being provided from the parent's retained earnings. The cost of borrowing funds in either the U.K. or U.S. would not directly affect the discount rate in this scenario.

Assume the Parent of a U