Question Details

Interaction Between Financing and Investment



1. Interaction Between Financing and Investment. Charleston Corp. is considering establishing a
subsidiary in either Germany or the United Kingdom. The subsidiary will be mostly financed with
loans from the local banks in the host country chosen. Charleston has determined that the revenue
generated from the British subsidiary will be slightly more favorable than the revenue generated
by the German subsidiary, even after considering tax and exchange rate effects. The initial outlay
will be the same, and both countries appear to be politically stable. Charleston decides to establish
the subsidiary in the United Kingdom because of the revenue advantage. Do you agree with its
decision? Explain.
2. Financing Decision. In recent years, several U.S. firms have penetrated Mexico- market. One of
the biggest challenges is the cost of capital to finance businesses in Mexico. Mexican interest rates
tend to be much higher than U.S. interest rates. In some periods, the Mexican government does not
attempt to lower the interest rates because higher rates may attract foreign investment in Mexican
securities.
a. How might U.S.-based MNCs expand in Mexico without incurring the high Mexican interest
expenses when financing the expansion? Are any disadvantages associated with this strategy?
b. Are there any additional alternatives for the Mexican subsidiary to finance its business itself
after it has been well established? How might this strategy affect the subsidiary- capital
structure?



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