| Course | FIN-3340 International Finance |
|---|---|
| Module | Module 5 |
| Paper type | Written assignment 5: financing the global firm |
| Length | About 642 words, 5 pages |
| Format | APA 7 student paper |
| School | Thomas Edison State University |
| Program | B.S.B.A. in Finance |
| Updated | October 2026 |
Free sample paper for FIN 3340 Module 5
Borrowing in Pesos or Dollars: Financing Raritan Hearth's Chilean Subsidiary
Student Name
B.S.B.A. in Finance, Thomas Edison State University
FIN-3340: International Finance
Mentor Name
Month Day, Year
Borrowing in Pesos or Dollars: Financing Raritan Hearth's Chilean Subsidiary
The Cost of Equity
With a U.S. riskless rate of 4.4 percent, a beta of 1.1 for a small equipment maker and an equity risk premium of 5.5 percent, Raritan's own cost of equity is 4.4 + 1.1 × 5.5 = 10.45 percent. Investing in Chile adds country risk: the possibility of policy changes, capital controls or economic shocks beyond those in the United States. A common approach adds a country risk premium based on the spread of the country's government bonds over U.S. Treasuries, adjusted for equity volatility (Eiteman et al., 2022). Chile has an investment-grade sovereign rating, among the strongest in Latin America, so its premium is modest; this analysis uses 1.0 percent, giving a dollar cost of equity of 11.45 percent. The cost of equity uses the capital asset pricing model of Sharpe (1964), and Froot et al. (1993) explain why financing choices that reduce cash flow volatility can protect investment.
The Cost of Debt
Chile's corporate income tax rate of 27 percent applies to the subsidiary, so interest paid in Chile is deductible at that rate.
| Option | Rate | After-tax cost, Chilean tax at 27% |
|---|---|---|
| Dollar loan from Raritan's U.S. bank, guaranteed by the parent | 6.2% | 4.53% |
| Peso loan from a Chilean bank | 8.4% | 6.13% |
The Weighted Average Cost of Capital
With 40 percent debt in dollar terms:
WACC = 0.60 × 11.45% + 0.40 × 4.53% = 6.87% + 1.81% = 8.68%.
That rate, in dollars, is the discount rate for the subsidiary's dollar cash flows in the final project. In peso terms, adjusting for expected inflation differences of about one point a year, the equivalent rate is about 9.74 percent.
Dollar or Peso Debt?
The dollar loan looks cheaper, 6.2 against 8.4 percent, but the comparison is misleading. Interest rate differences between currencies largely reflect expected exchange rate changes, the international Fisher effect. If the peso weakens about 2 percent a year relative to the dollar, a peso borrower repaying with cheaper pesos pays about the same in dollar terms as a dollar borrower. More importantly, the subsidiary's revenues and assets will be in pesos. Borrowing in dollars creates a mismatch: a weaker peso would raise the peso cost of servicing dollar debt just as the subsidiary's peso earnings were worth less in dollars. Borrowing in pesos matches liabilities to assets and reduces both operating and translation exposure.
A Currency Swap
If Raritan can borrow dollars more cheaply than its subsidiary can borrow pesos, a currency swap can combine the two advantages. Raritan borrows dollars at 6.2 percent and enters a swap with a bank: it exchanges the dollar principal for pesos at the start, pays peso interest to the bank and receives dollar interest, then reverses the principal exchange at maturity at the original rate. The subsidiary ends up with peso funding and peso interest payments, hedging its assets, while Raritan pays a peso rate set by the swap market, often close to what interest rate parity implies, plus a small spread. Swaps are widely used because they let firms borrow where they have an advantage and convert to the currency they need.
International Capital Markets
Larger multinationals raise funds in global bond markets, issuing Eurobonds outside their home country, or list shares on foreign exchanges. For a firm of Raritan's size, these markets are out of reach; its realistic sources are its U.S. bank, Chilean banks, trade financing and, for the subsidiary, retained earnings. As it grows, a relationship with a bank that operates in both countries would ease both lending and hedging.
Recommendation
Finance the subsidiary with roughly 40 percent debt, mainly in pesos, either directly from a Chilean bank or through a dollar loan swapped into pesos, whichever is cheaper. Use 8.68 percent in dollars as the hurdle rate for the investment decision.
References
Eiteman, D. K., Stonehill, A. I., & Moffett, M. H. (2022). Multinational business finance (16th ed.). Pearson.
Froot, K. A., Scharfstein, D. S., & Stein, J. C. (1993). Risk management: Coordinating corporate investment and financing policies. Journal of Finance, 48(5), 1629-1658. https://doi.org/10.1111/j.1540-6261.1993.tb05123.x
Sharpe, W. F. (1964). Capital asset prices: A theory of market equilibrium under conditions of risk. Journal of Finance, 19(3), 425-442. https://doi.org/10.1111/j.1540-6261.1964.tb02865.x
Reading the FIN 3340 Module 5 assignment instructions
The fifth module asks how a firm abroad raises and prices its capital. Expect questions on the cost of capital for multinationals and foreign projects, country risk premiums, the choice of currency for debt, currency and interest rate swaps and access to international debt and equity markets. The CAPM, from Sharpe's work, is the usual starting point for the cost of equity. The company, rates and premium here are illustrative; actual country risk premiums change with market conditions. Expect questions on financing a foreign subsidiary and estimating its cost of capital, including country risk. Some versions compare local and dollar financing directly.
How this FIN 3340 Module 5 example is built
The paper builds the cost of equity from the CAPM and adds a country risk premium with its reasoning. A table compares dollar and peso debt after Chilean tax, and the WACC is computed with each step shown, in dollar and peso terms. The currency choice section explains why the cheaper rate can be the riskier loan, using the international Fisher effect and the matching principle. A currency swap is explained step by step, and the paper closes with the realistic sources of capital for a small multinational and a recommendation. The cost of capital is built step by step from its components. A recommendation on financing closes the answer.
Reading the FIN 3340 Module 5 grading rubric
A Chilean cost of capital with a defended country risk adjustment earns the most. Mentors look for a correct cost of capital with a justified country risk adjustment, a currency choice that goes beyond comparing nominal rates and an accurate explanation of swaps. Recognizing that interest rate differences reflect expected currency moves, and that matching the currency of debt to assets reduces exposure, demonstrates the depth expected. APA citations are required by the syllabus. Mentors check the cost of capital arithmetic and look for a reasoned choice of currency for the subsidiary's debt. A reasoned choice between peso and dollar debt earns credit. Cost of capital answers that adjust for country risk and explain the adjustment show the judgment the module asks for.
FIN 3340 Module 5 help: mistakes that cost marks
Financing answers lose points for choosing the debt with the lower nominal rate without considering expected exchange rate changes, for using the home country's tax rate on foreign interest and for adding country risk to the discount rate without explanation. Build the cost of equity step by step and justify any country premium. Use the host country's tax rate. Compare debt currencies on expected dollar cost and exposure. Explain how a swap would change the subsidiary's position. A free first sample of your own FIN-3340 Module 5 assignment is available on request. Explain where the country risk premium comes from and how it enters the discount rate. Show the weights used in the cost of capital.
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FIN 3340 Module 5 questions, answered
Where can I find a free FIN 3340 Module 5 sample paper?
The deck oven exporter paper above estimates a Chilean subsidiary's cost of capital with a country risk premium, compares dollar and peso debt and explains a currency swap.
What is a country risk premium?
An addition to the cost of capital for investing in a particular country, often based on its government bond spread over U.S. Treasuries.
Why borrow in a currency with a higher interest rate?
To match debt to assets and revenues in that currency, reducing exposure, since rate differences largely reflect expected currency changes.
What is a currency swap?
A deal to trade principal and interest in one currency for the same in another, turning dollar debt into peso debt, say.
How do you calculate WACC for a foreign subsidiary?
Weight the cost of equity, including any country premium, and the after-tax cost of debt at the host country's tax rate by their shares of capital.