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Grupo Modelo S.A.B. de C.V. Grupo Modelo. a brewery out of Mexico that exports s

ID: 2762395 • Letter: G

Question

Grupo Modelo S.A.B. de C.V. Grupo Modelo. a brewery out of Mexico that exports such well-known varieties as Corona. Modelo. and Pacifico. is Mexican by incorporation. However, the company evaluates all business results, including financing costs, in U S. dollars. The company needs to borrow $30,000,000 or the foreign currency equivalent for four years. For all issues, interest is payable once per year, at the end of the year. Available alternatives are as follows: Sell Japanese yen bonds at par yielding 3.50% per annum. The current exchange rate is 107.00/$, and the yen is expected to strengthen against the dollar by 2.3% per annum. What is the effective cost of the yen-denominated loan for Grupo Modelo? Sell euro-denominated bonds at par yielding 6.60% per annum. The current exchange rate is $1.1990/and the euro is expected to weaken against the dollar by 2.3% per annum. What is the effective cost of the euro-denominated loan for Grupo Modelo? Sell U.S. dollar bonds at par yielding 5.10% per annum. What is the effective cost of the dollar-denominated loan for Grupo Modelo? Which course of action do you recommend Grupo Modelo take and why?

Explanation / Answer

a. Effective cost of funding = (1 + 3.50%) * (1 + 2.3%) -1

= 5.88%

b. Effective cost of funding = (1 + 6.60%) * (1 - 2.3%) -1

= 4.15%

c. Effective cost of funding = 5.10%

d. Euro-denominated loan is best due to lowest effective cost of funding.