Skip to content

ACCA Strategic Professional · Advanced Financial Management · Strategic business and financial planning for multinational organisations

A multinational with subsidiaries in several countries is assessing how a sustained rise in the domestic interest rates of a host country is likely to affect its strategic plan for that market. Which of the following is the most direct effect on the subsidiary's financial planning?

A sustained rise in host-country interest rates raises the subsidiary's cost of local-currency borrowing and therefore the required return on locally financed projects. Strategic plans need higher hurdle rates. Tax rates, the parent's cost of equity and transfer pricing rules are not changed automatically by this.

  1. AThe subsidiary's cost of local-currency borrowing rises, which raises the required return on projects financed locallyCorrect
  2. BThe subsidiary's tax rate falls automatically because interest is deductible
  3. CThe parent's home-currency cost of equity falls because foreign rates have risen
  4. DTransfer pricing rules cease to apply to the subsidiary

Explanation

Higher host-country interest rates raise local borrowing costs and the discount rate for locally financed projects, so strategic plans must use higher hurdle rates. Tax rates are set by legislation, not by interest rates, and the parent's cost of equity does not fall because foreign rates rise. Transfer pricing rules are unaffected.

Did you get it right without looking?

One question tells you little. A timed set on Strategic business and financial planning for multinational organisations shows your real accuracy, how long you take and where you lose marks.

Practise Strategic business and financial planning for multinational organisationsFree diagnostic mock

More Strategic business and financial planning for multinational organisations questions