Consider Hurd Co., a U.S.-based MNC with a subsidiary in Mexico that deals in Mexican pesos...

 

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Consider Hurd Co., a U.S.-based MNC with a subsidiary in Mexico that deals in Mexican pesos (MXP). The subsidiary requires MXP200,000,000 to finance its operations over the next three years. Assume the current spot rate of the peso is $0.10, which means financing needs amount to $0.10 x MXP 200,000,000 20,000,000 in U.S. dollars. Hurd and the subsidiary are considering two choices: 1. A loan of MXP200,000,000 with a rate of 12.00%. The subsidiary would pay interest payments for each of the three years, and then also pay the principal balance in the third year as well. 2. A loan of $20,000,000 with a rate of 7.00%. The subsidiary would pay interest payments for each of the three years and then also pay the principal balance in the third year as well. The subsidiary could convert these dollars to pesos at the spot rate of $0.10. Complete the first row of the following table, filling in the amount of pesos that the subsidiary must pay back in each of the three years (including the principal in the third year) if the peso loan is taken. Then, complete the second row of the table, filling in the number of dollars the subsidiary must pay back in each of the three years (including the principal in the third year) if the dollar loan is taken. Year 1 Peso Loan of MXP200,000,000 at 12.00% MXP Dollar Loan of 20,000,000 at 7.00% $ Year 2 Year 3 MXP MXP $ Consider Hurd Co., a U.S.-based MNC with a subsidiary in Mexico that deals in Mexican pesos (MXP). The subsidiary requires MXP200,000,000 to finance its operations over the next three years. Assume the current spot rate of the peso is $0.10, which means financing needs amount to $0.10 x MXP 200,000,000 20,000,000 in U.S. dollars. Hurd and the subsidiary are considering two choices: 1. A loan of MXP200,000,000 with a rate of 12.00%. The subsidiary would pay interest payments for each of the three years, and then also pay the principal balance in the third year as well. 2. A loan of $20,000,000 with a rate of 7.00%. The subsidiary would pay interest payments for each of the three years and then also pay the principal balance in the third year as well. The subsidiary could convert these dollars to pesos at the spot rate of $0.10. Complete the first row of the following table, filling in the amount of pesos that the subsidiary must pay back in each of the three years (including the principal in the third year) if the peso loan is taken. Then, complete the second row of the table, filling in the number of dollars the subsidiary must pay back in each of the three years (including the principal in the third year) if the dollar loan is taken. Year 1 Peso Loan of MXP200,000,000 at 12.00% MXP Dollar Loan of 20,000,000 at 7.00% $ Year 2 Year 3 MXP MXP $

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