Question

1. A firm based in Mexico has found that its growth is restricted by the limited liquidity of the Mexican capital market. List the firm’s options for raising money on the global capital market. Discuss the pros and cons of each option, and make a recommendation. How might your recommended options be affected if the Mexican peso depreciates significantly on the foreign exchange markets over the next two years?

2. Happy Company wants to raise $2 million with debt financing. The funds are needed to finance working capital, and the firm will repay them with interest in one year. Happy Company’s treasurer is considering three options: (a) Borrowing U.S. dollars from Security Pacific Bank at 8 percent, (b) Borrowing British pounds from Midland Bank at 14 percent, and (c) Borrowing Japanese yen from Sanwa Bank at 5 percent. If Happy borrows foreign currency, it will not cover it; that is, it will simply change foreign currency for dollars at today’s spot rate and buy the same foreign currency a year later at the spot rate that is in effect. Happy Company estimates the pound will depreciate by 5 percent relative to the dollar and the yen will appreciate 3 percent relative to the dollar in the next year. From which bank should Happy Company borrow?

Answer 1

ans.....
ans part 1.
Firm can raise capital via two ways
1.)issue equity in global market thorugh an IPO
2.)Finance through global bond markets
Equity
pro-
a.Capital can be raised without using leverage.
b.No fixed cost burden in the form of interest payments.
C.Highly liquid
con-
A.Increased probabilty of hostile takeover
B.Dilution of control.
Financing in global bond market
Pro-
1.interests on debt are tax deductible
con-
1.global bond market provides less protection in case of default.
Recommendation:Issue Equity rather than using bonds.
however if mexican pesos depreciate,investors are likely to dispose off the stock due to reduce returns and can jeopardize the company.