Assume an MNC Establishes a Subsidiary Where It Has No

question 63

Multiple Choice

Assume an MNC establishes a subsidiary where it has no other existing business. The present value of parent cash flows from this subsidiary is more sensitive to exchange rate movements when:

• A) the subsidiary finances the entire investment by local borrowing.
• B) the subsidiary finances most of the investment by local borrowing.
• C) the parent finances most of the investment.
• D) the parent finances the entire investment.

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Definitions:

Compounded

Refers to the process where the value of an investment grows exponentially over time as earnings or interest are reinvested to generate additional earnings.

Dividend Yield

A ratio indicating the amount of dividends a company distributes annually in relation to its share price.

Constant Growth Model

A model that estimates the value of a dividend-paying stock by assuming constant growth in dividends at a consistent rate.

Gordon Model

A financial model used to determine the value of a stock by considering the current dividend, the expected growth rate of dividends, and the required rate of return.