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 economic conditions in the U.K.
C) the parent's cost of capital.
D) A and B

Question

Quizplus · Accepted Answer

The discount rate used in capital budgeting analysis should reflect the parent's cost of capital, which is the rate of return required by investors in the parent company. The funding for the British subsidiary is coming from retained earnings in the U.S. operations and not borrowed funds, so the cost of borrowing funds in the U.K. is not relevant. Economic conditions in the U.K. may affect the subsidiary's operations but do not directly impact the discount rate used in the capital budgeting analysis. Therefore, the choice that best reflects the impact on the discount rate is option C.

Assume the Parent of a U