This exercise is based on a business that you could easily create: a business that teaches individuals in a non-U.S. country to speak English. Although this business is very basic, it still requires the same types of decisions faced by large MNCS. Assume that you live in the United States and invest $60,000 to establish a language school called Escuela de Ingls in Mexico City, Mexico. You set up a small subsidiary in Mexico with an office and an attached classroom that you lease. You hire local indivi- duals in Mexico who can speak English and teach it to others. Your school offers two types of courses: a 1-month structured course in English and a 1-week intensive course for individuals who already know English but want to improve their skills before visiting the United States. You advertise both types of teaching services in local newspapers. All revenue and expenses associated with your business are denominated in Mexican pesos. Your subsidiary sends most of the profits from the business in Mexico to you at the end of each month. Although your expenses are fairly stable, your revenue varies with the number of clients who sign up for the courses in Mexico. This background is sufficient to enable you to answer the questions that are asked about your business throughout the term. Answer each question as if you were serving on the board or as a manager of the business. The questions in the early chapters force you to assess the firm's opportunities and exposure, and those in later chapters force you to consider potential strategies that your business might pursue. BACKGROUND One of the best ways to learn the broad concepts presented in this text is to put yourself in the position of an MNC manager or board member and apply the concepts to finan- cial decisions. Although board members normally do not make the decisions discussed here, they must have the conceptual skills to monitor the policies that are implemented by the MNC's managers. Thus, they must frequently consider what they would do if they were making the managerial decisions or setting corporate policies. ER 17 a. Assume that your business is considering expanding in Mexico. You plan to invest a small amount of U.S. dollar equity into this project and to finance the remainder with debt. You can obtain debt financing for the expansion in Mexico, but Mexican interest rates are higher than U.S. rates. Yet if you use mostly U.S. debt financing, you will be more exposed to exchange rate risk. Explain why. b. You want to assess the feasibility of the new project in Mexico if you use mostly U.S. debt financing versus mostly Mexican debt financing. You also want to capture possible exchange rate effects on your cash flows over time. How can you use capital budgeting to conduct your comparison? c. You prefer to avoid using Mexican debt to finance your expansion in Mexico because the interest rates are high. A consultant suggests that you seek one or more investors in Mexico who would be willing to take an equity position in your business. You would provide them with periodic dividends, and they would be partial owners of your company. The consultant suggests that this strategy would circumvent the high cost of capital in Mexico because it uses equity financing instead of debt financing. Is the consultant correct?