Assume a subsidiary is forced to borrow in excess of the MNC's optimal capital structure. Also assume that the parent company reduces its debt financing by an offsetting amount. Under this scenario, the cost of capital for the MNC overall could not have changed.

Question

Quizplus · Accepted Answer

The cost of capital for the MNC overall could change because the subsidiary's increased borrowing might have a different cost of debt compared to the parent company's reduced debt, affecting the overall weighted average cost of capital.

Assume a Subsidiary Is Forced to Borrow in Excess of the MNC's