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It is September 1 9 9 0 and Detroit Motors of Detroit, Michigan, is considering establishing an assembly plant in Latin America for a new
It is September and Detroit Motors of Detroit, Michigan, is considering establishing an assembly plant in Latin America for a
new utility vehicle it has just designed. The cost of the capital expenditures has been estimated at $ There is not much
of a sales market in Latin America, and virtually all output would be exported to the United States for sale. Nevertheless, an
assembly plant in Latin America is attractive for at least two reasons. First, labor costs are expected to be half what Detroit Motors
would have to pay in the United States to union workers. Since the assembly plant will be a new facility for a newly designed vehicle,
Detroit Motors expects minimal resistance from its US union in establishing the plant in Latin America. Secondly, the chief financial
officer CFO of Detroit Motors believes that a debtforequity swap can be arranged with at least one of the Latin American countries
that has not been able to meet its debt service on its sovereign debt with some of the major US banks.
The September issue of Barron's indicated the following prices cents on the dollar on Latin American bank debt:
The CFO is not comfortable with the level of political risk in Brazil and Argentina, and has decided to eliminate them from
consideration. After some preliminary discussions with the central banks of Mexico, Venezuela, and Chile, the CFO has learned that
all three countries would be interested in hearing a detailed presentation about the type of facility Detroit Motors would construct, how
long it would take, the number of locals that would be employed, and the number of units that would be manufactured per year.
Since it is timeconsuming to prepare and make these presentations, the CFO would like to approach the most attractive candidate
first. He has learned that the central bank of Mexico will redeem its debt at percent of face value in a debtforequity swap,
Venezuela at percent, and Chile percent. As a first step, the CFO decides an analysis based purely on financial
considerations is necessary to determine which country looks like the most viable candidate. You are asked to assist in the analysis.
What do you advise?
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