Financing Decision Cuanto Corp. is a U.S. drug company that has attempted to capitalize on opportunities to expand in Eastern Europe. The production costs in most Eastern European countries are very low, often less than one-fourth of the costs in Germany or Switzerland. Furthermore, there is a strong demand for drugs in Eastern Europe. Cuanto penetrated the Eastern European market by purchasing a 60 percent stake in Galena, a Czech firm that produces drugs. Should Cuanto finance its investment in the Czech firm by borrowing dollars from a U.S. bank that would then be converted into koruna (the Czech currency) or by borrowing koruna from a local Czech bank? What information do you need to know to answer this question? How can borrowing koruna locally from a Czech bank reduce Cuanto’s exposure to exchange rate risk? How can borrowing koruna locally from a Czech bank reduce Cuanto’s exposure to political risk caused by government regulations?

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 8QA
Textbook Problem

Financing Decision Cuanto Corp. is a U.S. drug company that has attempted to capitalize on opportunities to expand in Eastern Europe. The production costs in most Eastern European countries are very low, often less than one-fourth of the costs in Germany or Switzerland. Furthermore, there is a strong demand for drugs in Eastern Europe. Cuanto penetrated the Eastern European market by purchasing a 60 percent stake in Galena, a Czech firm that produces drugs.

  1. Should Cuanto finance its investment in the Czech firm by borrowing dollars from a U.S. bank that would then be converted into koruna (the Czech currency) or by borrowing koruna from a local Czech bank? What information do you need to know to answer this question?
  2. How can borrowing koruna locally from a Czech bank reduce Cuanto’s exposure to exchange rate risk?
  3. How can borrowing koruna locally from a Czech bank reduce Cuanto’s exposure to political risk caused by government regulations?

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