Financing and Exchange Rate Risk The parent of Nester Co. (a U.S. firm) has no international business but plans to invest $20 million in a business in Switzerland. Because the operating costs of this business are very low, Nester Co. expects this business to generate large cash flows in Swiss francs that will be remitted to the parent each year. Nester will finance half of this project with debt. It has these choices for financing the project: Obtain half of the funds needed from parent equity and the other half by borrowing dollars. Obtain half of the funds needed from parent equity and the other half by borrowing Swiss francs. Obtain half of the funds that are needed from parent equity and obtain the remainder by borrowing an equal amount of dollars and Swiss francs. The interest rate on dollars is the same as the interest rate on Swiss francs. Which choice will result in the most exchange rate exposure? Which choice will result in the least exchange rate exposure? If the Swiss franc were expected to appreciate over time, which financing choice would result in the highest expected net present value?

FindFind

International Financial Management

14th Edition
Madura
Publisher: Cengage
ISBN: 9780357130698
FindFind

International Financial Management

14th Edition
Madura
Publisher: Cengage
ISBN: 9780357130698

Solutions

Chapter 18, Problem 16QA
Textbook Problem

Financing and Exchange Rate Risk The parent of Nester Co. (a U.S. firm) has no international business but plans to invest $20 million in a business in Switzerland. Because the operating costs of this business are very low, Nester Co. expects this business to generate large cash flows in Swiss francs that will be remitted to the parent each year. Nester will finance half of this project with debt. It has these choices for financing the project:

Obtain half of the funds needed from parent equity and the other half by borrowing dollars.

Obtain half of the funds needed from parent equity and the other half by borrowing Swiss francs.

Obtain half of the funds that are needed from parent equity and obtain the remainder by borrowing an equal amount of dollars and Swiss francs.

The interest rate on dollars is the same as the interest rate on Swiss francs.

  1. Which choice will result in the most exchange rate exposure?
  2. Which choice will result in the least exchange rate exposure?
  3. If the Swiss franc were expected to appreciate over time, which financing choice would result in the highest expected net present value?

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.