Suppose that Kittle Co. is a U.S. based MNC that is considering setting up a subsidiary in Singapore. Kittle would like this subsidiary to produce and sell guitars locally in Singapore and needs assistance with capital budgeting. The duration of this project is four years. Kittle is deliberating between using parent financing or subsidiary financing when taking out a loan for a large office building for the subsidiary in Singapore.

In this case, if the rate on the loan to the parent is much higher than the rate on the loan to the subsidiary then, all else equal, parent financing will be (more, less) desirable than subsidiary financing.

If Kittle elects to use subsidiary financing then, all else equal, exchange rate risk is likely to be (higher,lower) than if it used parent financing.