Section 3: Sourcing capital (10 marks; maximum 500 words) The US dollar, USD, has greatly strengthened in value. It has gained in value not only against the euro, yen and yuan, but also against most currencies worldwide (the Malaysian ringgit, the Indian rupee and so on). These other currencies have fallen in value against it. The New York Times says this appreciation is affecting "the profitability of multinational companies." You may see this other article for the reasons behind this appreciation. A related development: in response to rising inflation in the US, the American Federal Reserve Bank has increased America's official interest rate from 0.25% in March 2022 to 1.75% in June 2022. The European Union (EU) has also increased its official interest rate, but only from 0% to 0.5%, and only recently, in July 2022 . In Japan, official interest rates have remained unchanged since 2016, at 0.1%. This has implications for borrowing costs. You work for Old Balance, an American company selling sports shoes. It is not a domestic company with only domestic operations. Old Balance is a multinational corporation: - It has its own factories that make shoes (manufacturing subsidiaries) in the EU and Asia, including in Japan. - It sells most of its shoes overseas, in the EU and Asia: 80% of Old Balance's sales and earnings occur in China, India, Southeast Asia and the EU, not in the US. - Its sales subsidiaries (e.g., its stores) in those foreign countries convert the currencies and remit the earnings back to the parent company in the US. - Sports shoes are items with erratic sales. This means that during good times, people buy a lot of them. During difficult times such as inflationary periods worldwide, people reduce spending money on sports shoes (to buy essentials or pay off rent or home loans). This could have implications for a company's cash flows. - The Tax Justice Network found irrefutable evidence that Old Balance has a taxhaven bank account sitting in the Bahamas, with a very large positive bank balance. Question The company needs to raise money to upgrade of its factories in the EU and Asia. The machinery is old, not as efficient as those used by its rivals, and need repair or replacement. You are the company's chief financial officer. 1. Evaluate the matters that this company must consider in financing this upgrade project in terms of capital structure and cost of capital. What are the issues involved? Discuss. Refer to the background information above. Refer also to your textbook reading on the effects of country characteristics, corporate characteristics, and other matters found in that reading. You may also refer to Internet sources to enrich your answer but cite your sources. Section 3: Sourcing capital (10 marks; maximum 500 words) The US dollar, USD, has greatly strengthened in value. It has gained in value not only against the euro, yen and yuan, but also against most currencies worldwide (the Malaysian ringgit, the Indian rupee and so on). These other currencies have fallen in value against it. The New York Times says this appreciation is affecting "the profitability of multinational companies." You may see this other article for the reasons behind this appreciation. A related development: in response to rising inflation in the US, the American Federal Reserve Bank has increased America's official interest rate from 0.25% in March 2022 to 1.75% in June 2022. The European Union (EU) has also increased its official interest rate, but only from 0% to 0.5%, and only recently, in July 2022 . In Japan, official interest rates have remained unchanged since 2016, at 0.1%. This has implications for borrowing costs. You work for Old Balance, an American company selling sports shoes. It is not a domestic company with only domestic operations. Old Balance is a multinational corporation: - It has its own factories that make shoes (manufacturing subsidiaries) in the EU and Asia, including in Japan. - It sells most of its shoes overseas, in the EU and Asia: 80% of Old Balance's sales and earnings occur in China, India, Southeast Asia and the EU, not in the US. - Its sales subsidiaries (e.g., its stores) in those foreign countries convert the currencies and remit the earnings back to the parent company in the US. - Sports shoes are items with erratic sales. This means that during good times, people buy a lot of them. During difficult times such as inflationary periods worldwide, people reduce spending money on sports shoes (to buy essentials or pay off rent or home loans). This could have implications for a company's cash flows. - The Tax Justice Network found irrefutable evidence that Old Balance has a taxhaven bank account sitting in the Bahamas, with a very large positive bank balance. Question The company needs to raise money to upgrade of its factories in the EU and Asia. The machinery is old, not as efficient as those used by its rivals, and need repair or replacement. You are the company's chief financial officer. 1. Evaluate the matters that this company must consider in financing this upgrade project in terms of capital structure and cost of capital. What are the issues involved? Discuss. Refer to the background information above. Refer also to your textbook reading on the effects of country characteristics, corporate characteristics, and other matters found in that reading. You may also refer to Internet sources to enrich your answer but cite your sources