Question
The Sports Exports Company continues to focus on producing footballs in the U.S. and exporting them to the United Kingdom. The exports are denominated in
The Sports Exports Company continues to focus on producing footballs in the U.S. and exporting them to the United Kingdom. The exports are denominated in pounds, which has continually exposed the firm to exchange rate risk. It is now considering a new form of expansion where it would sell specialty sporting goods in the U.S. If it pursues this U.S. project, it would need to borrow long-term funds. The dollar-denominated debt has an interest rate that is slightly lower than the pound-denominated debt. What is an advantage of using equity to support the subsidiary? What is a disadvantage? If Jim decided to use long-term debt as its primary form of capital to support this subsidiary, should he use dollar-denominated debt or pound-denominated debt?
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