Debt Financing Decision
Response to the following problem:
Marks Co. (a U.S. firm) considers a project in which it will establish a subsidiary in Zinland, and it expects that the subsidiary will generate large earnings in zin (the currency). However, it is the Zinland government's policy to block all funds so that earnings cannot be remitted to the U.S. parent for at least 10 years; furthermore, the blocked funds cannot earn interest. The zin is expected to weaken by 20 percent per year against the dollar over time. Marks Co. will borrow some funds to finance the subsidiary.
Should the company
(a) obtain a dollar-denominated loan and convert the loan into zin,
(b) obtain a zin-denominated loan, or
(c) obtain half of the funds needed from each possible source?
(Assume that the interest rate from borrowing zin is the same as the interest rate from borrowing dollars.) Briefly explain.