Which of the Following Statements About Determining the Appropriate Cost

question 26

Multiple Choice

Which of the following statements about determining the appropriate cost of capital for a foreign subsidiary of a U.S. corporation (owned by U.S. investors) is true?

• A)It is both simpler and more appropriate to use the cost of capital of the U.S.-based operations to evaluate projects to be undertaken by a foreign subsidiary.
• B)A U.S. corporation should consider how its foreign operations covary with the U.S. stock market when calculating the cost of capital for a foreign subsidiary.
• C)A U.S. corporation should consider how its foreign subsidary's cash flows covary with the exchange rate for the currency of the country in which that subsidiary is located when
• Calculating the cost of capital for a foreign subsidiary.
• D)In calculating a foreign subsidiary's cost of capital, a U.S. corporation needs to determine how its projects covary with the global market.

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Definitions:

Provisions

Liabilities of uncertain timing or amount, recorded to account for future obligations or potential losses.

Contingent Liabilities

Possible obligations that arise from past events and whose existence will be confirmed only by the occurrence or non-occurrence of one or more uncertain future events not wholly within the control of the entity.

Contingent Assets

Possible assets that arise from past events and whose existence will be confirmed only by the occurrence or non-occurrence of certain future events not wholly within the control of the company.

Constructive Obligation

An obligation that derives from an entity’s actions where: (a) by an established pattern of past practice, published policies or a sufficiently specific current statement, the entity has indicated to other parties that it will accept certain responsibilities; and (b) as a result, the entity has created a valid expectation on the part of those other parties that it will discharge those responsibilities.