BP (the United Kingdom) and Mexicana Oil (Mexico) severed a long-term joint venture in 1993, with Mexicana

Question:

BP (the United Kingdom) and Mexicana Oil (Mexico) severed a long-term joint venture in 1993, with Mexicana buying out BP with $75 billion in cash and a 30% interest (equity interest) in Mexicana itself. Mexicana financed a large part of the buyout by borrowing heavily. The following year, November 1994, BP received a dividend on its ownership interest in Mexicana of MXN 30 billion. But Mexicana’s performance had been declining, as was the Mexican peso. The winter of 1994–1995 in Europe was a relatively mild one and Europe’s purchases of Mexicana’s oil output had fallen, as had the price of oil. Mexicana’s total sales were down, and the peso had clearly fallen dramatically

(see previous table). And to add debt to injury, Mexicana was due to make a payment of USD22.5 billion in 1995 on its debt from the BP buyout.

a. Assuming a spot rate of MXN3.443 = USD1.00 in November 1994, how much was the dividend paid to BP in U.S. dollars?

b. If Mexicana were to pay the same dividend in January 1995, and the spot rate at that time was MXN6.30 = USD1.00, what would BP receive in U.S. dollars?

c. If the combination of Western trade tariffs against Mexico and lower oil prices truly sent the Mexican economy into recession, and the spot rate was MXN7.50 = USD1.00 in November 1995, what might BP’s dividend be in November 1995?

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