Qs.)

In 1990, Ms Grace Vineyard, the newly appointed Senior Executive Vice President for Finance and Administration for Connection de Chile (CC), found the telephone company in the middle of a challenging financial dilemma. CC had embarked upon an aggressive expansion program that required substantial capital resources (20 million $). The expansion program had been approved under Alan Green, an Australian entrepreneur. The plan included reducing substantially the time to get telephone service and expanding capabilities to provide some of the latest high-tech capabilities that telecommunications had to offer. However, while himself facing significant financial difficulties, Mr. Green sold his stake in the telephone company in April of 1990. CC was currently looking for new investors who could provide the necessary operating capital to continue its expansion. In seeking the investors, CC had several options, but all had their drawbacks. CC could try to raise money from the local stock market. However, there were questions about whether there was sufficient capital in the market to finance fully CC's needs. It could try to raise money from Chilean banks, but the small size of these banks and the legal restrictions they faced in being exposed to any one credit could prove problematic. Foreign commercial bankers had the necessary capital, but they shied away from making investments in Latin America a region in which they faced massive loan write-offs from the debt crisis of the 1980s. CCs chief financial officer, Ms Grace Vineyard, appears to be on the horns of dilemma. The companys capital expenditure requirements exceed what it can sustain with internally generated cash or that it can fund locally. Cutting capital expenditures would mean reneging on CCs commitment to the nation to grow and improve its telephone service. You, the financial consultant to CC, have been asked to assist the company in this situation. A careful look at the available data reveals that the expected market price of a share is Chilean peso 150 (Face Value Chilean peso 50), three shares shall underly each depository receipt (if that option is suggested) and shall be priced at 5% discount to market price. The expected exchange rate is Chilean peso 722/$. The estimated floatation cost is 1%. a. Suggest a method to CC for raising equity from overseas. Explain the process systematically to the management. (15 points) b. Compute the number of financial instruments (shares or depository receipts, based on your answer above) to be issued. (5 points)