Financing in a High-lnterest Rate Country Fairfield Corp., a U.S. firm, recently established a subsidiary in a less developed country that consistently experiences an annual inflation rate of 80 percent or more. The country does not have an established stock market, but loans by local banks are available with a 90 percent interest rate. Fairfield has decided to use a strategy in which the subsidiary is financed entirely with funds from the parent. It believes that in this way it can avoid the excessive interest rate in the host country. What is a key disadvantage of using this strategy that may cause Fairfield to be no better off than if it paid the 90 percent interest rate?

FindFind

International Financial Management

14th Edition
Madura
Publisher: Cengage
ISBN: 9780357130698
FindFind

International Financial Management

14th Edition
Madura
Publisher: Cengage
ISBN: 9780357130698

Solutions

Chapter 17, Problem 20QA
Textbook Problem

Financing in a High-lnterest Rate Country Fairfield Corp., a U.S. firm, recently established a subsidiary in a less developed country that consistently experiences an annual inflation rate of 80 percent or more. The country does not have an established stock market, but loans by local banks are available with a 90 percent interest rate. Fairfield has decided to use a strategy in which the subsidiary is financed entirely with funds from the parent. It believes that in this way it can avoid the excessive interest rate in the host country. What is a key disadvantage of using this strategy that may cause Fairfield to be no better off than if it paid the 90 percent interest rate?

This textbook solution is under construction.

Expert Solution

Want to see the full answer?

Check out a sample textbook solution.

Want to see this answer and more?

Experts are waiting 24/7 to provide step-by-step solutions in as fast as 30 minutes!*

*Response times vary by subject and question complexity. Median response time is 34 minutes and may be longer for new subjects.