Activity I

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 stream generated from the British subsidiary will be slightly more favorable than the revenue stream 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.

Activity II

Financing Foreign Business with Foreign Debt An energy company based in Houston, Texas has substantial operations in Canada, and generates much revenue in Canadian dollars. It borrows funds denominated in Canadian dollars (rather than U.S. dollars) to finance its Canadian operations. Write a short essay that explains the potential benefits from such a strategy. Explain the possible disadvantages that might occur when some U.S.-based MNCs attempt this strategy in a country where interest rates are high. Also, consider the alternative solutions such as selling forward contracts, or not hedging.