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Financing Decision: Financing a Czech Investment

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

a. 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 in-formation do you need to know to answer this question?

b. How can borrowing koruna locally from a Czech bank reduce the exposure of Cuanto to exchange rate risk?

c. How can borrowing koruna locally from a Czech bank reduce the exposure of Cuanto to political risk caused by government regulations?

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Question A
The decision on what currency to finance the investment of Cuanto in the Czech Republic depends on the company's expectations of the future exchange rates between the U.S. dollars and the koruna. If the company expects that the dollar will significantly ...

Solution Summary

This solution assists with a financial decision.

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