Sabre Computer Corporation is a UK-based company that plans to participate in joint ventures in Brazil and in Hungary. Each joint venture involves the development of a small subsidiary that helps produce computers. Sabre's main contributions are the technology and a few key computer components used in the production process. The joint venture in Brazil specifies joint production of computers with a Brazilian company owned by the government. The computers have already been ordered by educational institutions and government agencies throughout Brazil. Sabre has a contract to sell all the computers it produces in Brazil to these institutions and agencies at a price that is tied to inflation. Given the potentially high and volatile inflation levels in Brazil, Sabre wanted to assure that the contracted price would adjust to cover rising costs over time.

The venture will require a temporary transfer of several managers to Brazil plus the manufacturing of key computer components in a leased Brazilian plant. Most of these costs will be incurred in Brazil and will therefore require payment in pesos. Sabre will receive 30% of the revenue generated (in pesos) from computer sales. The Brazilian partner will receive the remainder. The joint venture in Hungary specifies joint production of personal computers with a Hungarian computer manufacturer. The computers will then be marketed to consumers throughout Eastern Europe. Similar computers are produced by some competitors, but Sabre believes it can penetrate these markets because its products will be competitively priced. Although the economies of the Eastern European countries are expected to be somewhat stagnant, demand for personal computers is reasonably strong. The computers will be priced in Hungary's currency, the forint, and Sabre will receive 30% of the revenue generated from sales. 

Required:

 Assume that Sabre plans to finance most of its investment in the Brazilian subsidiary by borrowing Brazilian real and to finance most of its investment in the Hungarian subsidiary by borrowing forint. The cost of financing is influenced by the risk-free rates in the respective countries and the risk premiums on funds borrowed. 

Explain how these factors will affect the relative costs of financing both ventures. Address this question from the perspective of the subsidiary, not from the perspective of Sabre's parent. 

Answer rating: 100% (QA)

The relative costs of financing both ventures Brazilian subsidiary and Hungarian subsidiary for Sabre Computer Corporation will be influenced by several factors including riskfree rates in the respect... View the full answer