The Procter & Gamble Company
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 three years in order to expand and modernize its Mexican subsidiary. As four financing alternatives are currently available to the company, our analysis focuses on the several factors that could affect P&G’s final decision. Both the lowest cost of raising capital and an acceptable level of risk are at the basis of P&G Mexico’s rationale. Market factors include different interest rate levels, the Mexican tax law, devaluation probability and returns in Mexican money-market investments. Country-specific factors include the Mexican economic and political environment. Given that interest rates in US dollars are significantly lower than in Mexican pesos, we compare the four financing options by also taking into consideration the positive returns provided by Mexican economic policy regarding domestic investments in monetary assets. We conclude with a sensitivity analysis of our assumptions by highlighting the prominent role played by estimated devaluation and the decline in Mexican interest rates.
1. Mexican economic conditions
a. Change in Mexican economic and political conditions during the 1970s and 1980s
Mexico continued its trend of significant economic growth and prosperity throughout most of the 1970s. Now, as opposed
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 three years in order to expand and modernize its Mexican subsidiary. As four financing alternatives are currently available to the company, our analysis focuses on the several factors that could affect P&G’s final decision. Both the lowest cost of raising capital and an acceptable level of risk are at the basis of P&G Mexico’s rationale. Market factors include different interest rate levels, the Mexican tax law, devaluation probability and returns in Mexican money-market investments. Country-specific factors include the Mexican economic and political environment. Given that interest rates in US dollars are significantly lower than in Mexican pesos, we compare the four financing options by also taking into consideration the positive returns provided by Mexican economic policy regarding domestic investments in monetary assets. We conclude with a sensitivity analysis of our assumptions by highlighting the prominent role played by estimated devaluation and the decline in Mexican interest rates.
1. Mexican economic conditions
a. Change in Mexican economic and political conditions during the 1970s and 1980s
Mexico continued its trend of significant economic growth and prosperity throughout most of the 1970s. Now, as opposed
References: Books: Robert Looney (1985): Economic Policy Making in Mexico: Factors Underlying the 1982 Crisis Duke Univerity Press Hodrick, Robert J. and Bekaert, Geert (2009): International Financial Management Pearson Prentice Hall Internet: http://www.mongabay.com/reference/country_studies/mexico/ECONOMY.html 20.09 14:03 http://www.banxico.org.mx/portal-inflacion/inflation.html 20.09 15:11 http://www.naftanow.org/about/default_en.asp 20.09 15:29