Discussion 5

Business Finance

Part 1: Please respond with a min of 200 words

Determine key reasons why a multinational corporation might decide to borrow in a country such as Brazil, where interest rates are high, rather than in a country like Switzerland, where interest rates are low. Provide support for your rationale.

Part 2: Please comment and give your opinion on the post in a min of 100 words

Whenever a corporate tries to borrow funds in a different country, they will be basically looking at the interest rates, exchange rates, ability of the investors in that economy to invest in such bonds, local government restrictions. An economy like Brazil with higher interest rates is normally plagued with high inflation rates. This consequently resulted in deterioration of exchange rates over a period. If a certain amount is borrowed in such an economy like Brazil, The amount after conversion of such borrowed funds could be utilised for investment to earn returns in home country say US. Due to high inflation rates and consequent adverse impact on exchange rates of Brazilian currency, the MNC will be spending lesser amount in Dollars while repaying the amount. This will result in a net positive return for the MNC.

Part 3: Please comment and give your opinion on the post in a min of 100 words

The companybs subsequent attempts to improve its capital-investment decision process illustrate the organizational challenges CFOs face as they move from domestic to foreign markets. In order to improve the quality of valuations, AES required managers to incorporate sovereign spreads into their discount rates. Sovereign spreads measure the difference between the rates at which two countries can borrow in the same currency, and they are widely tacked on to discount rates in order to adjust for country risk. Although this method created the semblance of tremendous precision, it came with some curious incentives, particularly for managers charged with securing deals in emerging markets. Knowing that their projects would face very high discount rates, managers forecasted inflated cash flows to compensate. For managers keen to complete transactions, as some at AES were, excessive penalties and precision can result in a less robust process.

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