A U.S.-based company is establishing a project in a politically unstable country. It is considering two possible sources of financing. Either the parent could provide most of the financing, or the subsidiary could be supported by local loans from banks in that country. Which financing alternative is more appropriate to protect the subsidiary (explain your answer)?
A U.S.-based company is establishing a project in a politically unstable country. It is considering two possible sources of financing. Either the parent could provide most of the financing, or the subsidiary could be supported by local loans from banks in that country. Which financing alternative is more appropriate to protect the subsidiary (explain your answer)?
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Related questions
Which of the following statements is CORRECT?
The cash flows relevant for a foreign investment should, from the parent company's perspective, include the financial cash flows that the subsidiary can legally send back to the parent company plus the cash flows that must remain in the foreign country. | ||
When considering the risk of a foreign investment, a lower risk might arise from exchange rate risk and political risk while higher risk might result from international diversification. | ||
The United States and most other major industrialized nations currently operate under a system of floating exchange rates. | ||
LIBOR is an acronym for London Interbank Offer Rate, which is an average of interest rates offered by London banks to smaller U.S. corporations | ||
Due to advanced communications technology and the standardization of general procedures, working capital management for multinational firms is no more complex than it is for large domestic firms. |
Question 3 a) Explain what risks must be considered by multinational corporations (MNCs) when deciding their long-term financing strategy, and discuss how these risks may be managed. [13 per cent] b) James Inc is based in the USA but has a subsidiary in Switzerland. James Inc wishes to obtain a loan of 71 million euros for three years. A French company, Anton Cie, that has some operations in the USA wishes to obtain a US dollar loan of $100 million, also for three years. The current exchange rate is 0.71 euro = $1. James Inc has been offered a dollar loan at 5% and a euro loan at 3.0%. Anton Cie has been offered a dollar loan at 5.5% and a euro loan at 2.5%. Show how both companies can achieve cheaper foreign loans by entering into a fixed rate currency swap, and discuss the factors that both parties should consider before deciding to enter into the swap arrangement. [12 per cent]
Question 4 a) Discuss the reasons why multinational corporations may prefer to borrow a foreign currency rather than the home currency. What are the main criteria to be considered in deciding which currency, or currencies, to borrow? [11 per cent] b) Moffett plc is a UK-based firm that needs £500,000. The company is considering one-year financing with Swiss francs because the annual interest rate would be 1.5 per cent versus 5 percent in the United Kingdom. Moffett has no business in Switzerland and does not plan to cover its exposure. It is anticipated that the Swiss franc will appreciate over the coming year by either 6 per cent, 4 per cent, or 2 per cent, with equal probability of each occurrence. On the basis of this information, determine the probability distribution of the effective financing rate if Moffett decides to finance with Swiss francs and advise the company whether it should do so. [7 per cent] c) A multinational corporation is considering borrowing a portfolio of Japanese yen and US dollars to finance its operations. The following information is available concerning the mean effective financing rate of the two currencies:
US dollar | Yen | |
Mean effective financing rate | 2.5% | 1.5% |
Standard deviation of effective financing rate | 0.05 | 0.07 |
Correlation coefficient of effective financing rates for US$ and Yen (0.23) |
Calculate the mean effective rate on a portfolio of funds financed 60% by US dollars and 40% by Japanese yen. Calculate also the variance and standard deviation of the portfolio. [7 per cent]