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)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 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)A and B

Quizplus · Accepted Answer

The discount rate used in the capital budgeting analysis should reflect the parent's cost of capital, which takes into account the risk and return expectations of its investors. In this case, the funding for the British subsidiary is coming from retained earnings from U.S. operations, so the parent's cost of capital will be the primary determinant of the discount rate used in the analysis. While economic conditions and borrowing costs in the UK may impact the subsidiary's operations, they will not directly impact the discount rate used in the capital budgeting analysis.

Assume the Parent of a U