Case study

at BI Norwegian Business School

- Case 1: The Procter & Gamble Company: Mexico 1991-

Exam code and name:
GRA 6544 – Multinational Corporate Finance

Hand out date:
11.09.2012

Hand in date:
25.09.2012

Study place:
BI Oslo

Table of Contents Abstract: ii 1. Mexican economic conditions 1 a. Change in Mexican economic and political conditions during the 1970s and 1980s 1 b. Mexico’s economic and political climate in 1991 2 2. Financing options 2 3. Financing risk, foreign exchange risk and business risk 8 4. Attractiveness of Mexico’s capital market 9 5. Conclusion: 10 References: 11

Abstract:
Procter & Gamble (P&G) needs to borrow an average of $55 million over the next
(www.naftanow.org) This set of undertakings resulted in regained economic growth (estimated expansion in GDP by 4%-5 %), increased social spending and a huge drop in inflation (to 8% per 22.09.1991 from 52% in 1988).

2. Financing options
In order to pursuit its growth strategy in Mexico, Procter & Gamble (P&G) has four financing options available: a loan in Peso, a guaranteed dollar loan, an unguaranteed dollar loan, or a guaranteed medium-term maturity debt note (MTN).

Our analysis yields four comparative tables, containing forecasted figures on the fours different scenarios. The comparison of the four financing options entails a common approach to the analytical problem and it is based on calculating the final after-tax cost of each scenario. Exhibit 9 serves as a basis for the inputs regarding the average amount of outstanding debt, the choice of interest rates, the size of the devaluation effect, and the applicable tax rate. The pretax cost of debt is simply the sum of the interest expense, the structuring fee, and the devaluation effect. The applicable tax rate amounts to 10% social contribution together with 35% income tax, a total of 45%. The inflationary component tax (ICT) is calculated as the tax rate times estimated inflation rate times average outstanding debt. The ICT stems from the