a. Assume that your business is considering expansion within Mexico. You plan to invest a small amount of U.S. dollar equity into this project, and finance the remainder with debt. You can obtain debt financing for the expansion in Mexico, but the interest rates in Mexico are higher than in the U.S. Yet, if you used mostly U.S. debt financing, you are more exposed to exchange rate risk. Explain why.
b. If you pursue a new project in Mexico, you want to assess the feasibility of the project if you use mostly U.S. debt financing, versus mostly Mexican debt financing. Yet, you also want to capture possible exchange rate effects on your cash flows over time. How can you use capital budgeting to conduct your comparison?
c. You would prefer to avoid using Mexican debt to finance your expansion in Mexico because the interest rates are high. A consultant suggests that you seek one or more investors in Mexico who would be willing to take an equity position in your business. You would provide them with periodic dividends and they would be partial owners of your company. The consultant suggests that this strategy circumvents the high cost of capital in Mexico because it uses equity financing instead of debt financing. Is the consultant correct?