978-1337269964 Chapter 18 Lecture Notes

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subject Pages 1
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subject Authors Jeff Madura

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Chapter 18
Long-Term Debt Financing
Lecture Outline
Debt Denomination Decision of Foreign Subsidiaries
Foreign Subsidiary Borrows Its Local Currency
Foreign Subsidiary Borrows Dollars
Debt Denomination Analysis: A Case Study
Identifying Debt Denomination Alternatives
Analyzing Debt Denomination Alternatives
Estimating the Cost of Financing
How Currency Swaps and Parallel Loans Facilitate Financing
Using Currency Swaps
Using Parallel Loans
Debt Maturity Decision
Assessment of the Yield Curve
Financing Costs of Loans with Different Maturities
Fixed Versus Floating-Rate Debt
Financing Costs of Fixed Versus Floating-Rate Loans
Hedging Interest Payments with Interest Rate Swaps
Chapter Theme
When the MNC considers long-term debt financing, it must decide the currency for denominating its
debt. This is a critical decision for the MNC. While there is no clear-cut solution, this chapter illustrates
how such a problem can be analyzed. A suggested method of presenting this analysis is to run through an
example under assumed exchange rates. Then stress that future exchange rates are not known with
certainty. Therefore, the firm should consider the possible costs of financing under a variety of exchange
rate scenarios.

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