I’m studying for my Business class and need an explanation.
International Financial Management 11th Edition
Read Chapters 16, 17 & 18
Answer the following questions using the “TURNITIN” link directly below these instructions. Late work is not accepted. Refer to the Class Schedule for due dates.
a. Review the political risk factors, and identify those that could possibly affect your business. Explain how your cash flows could be affected?
b. Explain why any threats of terrorism due to friction between two countries could possibly your business, even if the terrorism has no effect on the relations between the U.S. and Mexico.
c. Assume there is an upcoming election in Mexico that may result in a complete change in government.
d. Explain why such an election can have significant effects on your cash flows.
a. Assume that your business is considering expansion within Mexico. You plan to invest a small amount of U.S. dollar equity into this project, and finance the remainder with debt. You can obtain debt financing for the expansion in Mexico , but the interest rates in Mexico are higher than in the U.S. Yet, if you used mostly U.S. debt financing, you are more exposed to exchange rate risk. Explain why.
b. If you pursue a new project in Mexico , you want to assess the feasibility of the project if you use mostly U.S. debt financing, versus mostly Mexican debt financing. Yet, you also want to capture possible exchange rate effects on your cash flows over time. How can you use capital budgeting to conduct your comparison?
c. You would prefer to avoid using Mexican debt to finance your expansion in Mexico because the interest rates are high. A consultant suggests that you seek one or more investors in Mexico who would be willing to take an equity position in your business. You would provide them with periodic dividends and they would be partial owners of your company. The consultant suggests that this strategy circumvents the high cost of capital in Mexico because it uses equity financing instead of debt financing. Is the consultant correct?
a. Recall from the previous chapter that your business is considering expansion within Mexico. Recall that you plan to invest a small amount of U.S. dollar equity into this project, and finance the remainder with debt. You can obtain debt financing for the expansion in Mexico , but the interest rates in Mexico are higher than in the U.S. Today, you receive credit offers from different banks. You can either obtain a fixed-rate loan in the U.S. at 8 percent for the life of this project, or a floating-rate loan (rate changes each year in response to market interest rates) in Mexico at 10 percent. Explain how you could estimate the net present value of the project for each alternative financing method. Include in your explanation how you would account for the uncertainty of future interest rate movements of the Mexican debt.