Assume the Parent of a U

question 32

Multiple Choice

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

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Definitions:

Interest Rate

The percentage of a loan amount charged by the lender to the borrower for the use of money, expressed as a yearly rate.

Postemployment Benefits

These are benefits, such as pensions or health insurance, which employees are entitled to receive after their employment has ended.

GAAP

Widely recognized accounting norms and guidelines that are practiced within the United States.

Projected Benefit Obligation

An actuarial measurement of the present value of the pension benefits earned by employees, accounting for expected future salary increases.