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

question 8

True/False

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.

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Definitions:

Variable Interest Rate

An interest rate that can change over the duration of a loan based on the market conditions or an index.

Index Rate

A benchmark interest rate used by financial institutions to determine the rate charged on loans or the return on investment.

APR

Annual Percentage Rate, a measure of the cost of credit, expressed as a yearly interest rate including fees and charges.

Dodd-Frank Wall Street Reform

A comprehensive package of financial regulations passed in 2010 aimed at preventing the recurrence of the financial crisis, enhancing consumer protection, and ensuring financial stability.