Debt Financing Decision Marks Co. (a U.S. firm) considers a project in which it will establish a subsidiary in Zinland, which would be expected to generate large earnings in zin (the currency). However, the Zinland government’s policy is to block all funds transfers so that earnings cannot be remitted to the U.S. parent for at least 10 years; furthermore, the blocked funds cannot earn interest. The zin is expected to weaken by 20 percent per year against the dollar over time. Marks Co. will borrow some funds to finance the subsidiary. Should the company (a) obtain a dollardenominated loan and convert the loan into zin, (b) obtain a zin-denominated loan, or (c) obtain half of the funds needed from each possible source? (Assume that the interest rate from borrowing zin is the same as the interest rate from borrowing dollars.) Briefly explain.

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 32QA
Textbook Problem

Debt Financing Decision Marks Co. (a U.S. firm) considers a project in which it will establish a subsidiary in Zinland, which would be expected to generate large earnings in zin (the currency). However, the Zinland government’s policy is to block all funds transfers so that earnings cannot be remitted to the U.S. parent for at least 10 years; furthermore, the blocked funds cannot earn interest. The zin is expected to weaken by 20 percent per year against the dollar over time. Marks Co. will borrow some funds to finance the subsidiary. Should the company (a) obtain a dollardenominated loan and convert the loan into zin, (b) obtain a zin-denominated loan, or (c) obtain half of the funds needed from each possible source? (Assume that the interest rate from borrowing zin is the same as the interest rate from borrowing dollars.) Briefly explain.

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