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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Quizplus · Accepted Answer

The cost of capital for the MNC overall could change because the cost of debt and equity can vary significantly across different countries due to differences in tax rates, interest rates, and risk. Therefore, shifting debt between the subsidiary and the parent company could impact the overall cost of capital for the MNC.

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