Consider the following business that you could easily create: a business that teaches individuals in a non-U.S. country to speak English. While this business is very basic, it still requires the same type of decisions faced by large MNCs. Assume that you initially establish this business in Mexico. Details of Your Business. You live in the U.S. You invested $60,000 to establish a business of a language school called EI (Escuela de Ingles) in Mexico City, Mexico. You hire local individuals in Mexico who can speak English and train others how to speak English. You have a small subsidiary in Mexico, which has an office and an attached classroom that you lease. Clients can come to your subsidiary for a 1-month structured course in English, taught by your employees. You advertise in the local newspapers to promote the teaching services offered by your business. You also serve some individuals from Mexico who have taken English classes and want to come to the U.S. for a one-week intense course in which they can improve and practice their English and practice it. All revenue and expenses associated with your business are denominated in Mexican pesos. Most of the profits from the business in Mexico are sent to you by your subsidiary at the end of each month. While your expenses are somewhat stable, your revenue varies with the number of clients who sign up for the English-speaking courses in Mexico. You only need to know this background so that you can answer the related questions that are asked about your business. Answer each question as if you were serving on the board of your business or as a manager of the business. Question 1a. Review the political risk factors, and identify those that could possibly affect your business. Explain how your cash flows could be affected? b. Explain why any threats of terrorism due to friction between two countries could possibly your business, even if the terrorism has no effect on the relations between the U.S. and Mexico. c. Assume there is an upcoming election in Mexico that may result in a complete change in government. d. Explain why such an election can have significant effects on your cash flows. Question 2 a. Assume that your business is considering expansion within Mexico. You plan to invest a small amount of U.S. dollar equity into this project, and finance the remainder with debt. You can obtain debt financing for the expansion in Mexico , but the interest rates in Mexico are higher than in the U.S. Yet, if you used mostly U.S. debt financing, you are more exposed to exchange rate risk. Explain why. b. If you pursue a new project in Mexico , you want to assess the feasibility of the project if you use mostly U.S. debt financing, versus mostly Mexican debt financing. Yet, you also want to capture possible exchange rate effects on your cash flows over time. How can you use capital budgeting to conduct your comparison? c. You would prefer to avoid using Mexican debt to finance your expansion in Mexico because the interest rates are high. A consultant suggests that you seek one or more investors in Mexico who would be willing to take an equity position in your business. You would provide them with periodic dividends and they would be partial owners of your company. The consultant suggests that this strategy circumvents the high cost of capital in Mexico because it uses equity financing instead of debt financing. Is the consultant correct? Question 3 a. Recall from the previous chapter that your business is considering expansion within Mexico. Recall that you plan to invest a small amount of U.S. dollar equity into this project, and finance the remainder with debt. You can obtain debt financing for the expansion in Mexico, but the interest rates in Mexico are higher than in the U.S. Today, you receive credit offers from different banks. You can either obtain a fixed-rate loan in the U.S. at 8 percent for the life of this project, or a floating-rate loan (rate changes each year in response to market interest rates) in Mexico at 10 percent. Explain how you could estimate the net present value of the project for each alternative financing method. Include in your explanation how you would account for the uncertainty of future interest rate movements of the Mexican debt.